Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C. 20549**

 

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**FORM 20-F**

 
| **o**      | **REGISTRATION  STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES  EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                                      |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **OR**     |
| ** ** |
| **x**      | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**                                                                                                                                                                                                                                                                                                                     |
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                    |
| ** ** | **For the fiscal year ended December 31, 2008**                                                                                                                                                                                                                                                                                                                                                                          |
| **OR**     |
| ** ** |
| **o**      | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**                                                                                                                                                                                                                                                                                                                 |
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                    |
| ** ** | **For the transition period from                      to                   **                                                                                                                                    |
| **OR**     |
| ** ** |
| **o**      | **SHELL  COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                                                   |
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                    |
| ** ** | **Date of event requiring this shell company  report**                                                                                                                                                                                                                                                                                                                                                                        |
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                    |
| ** ** | **For the transition period from                              to                                     ** |

 

**Commission file number 033-51000**

** **

**VIDEOTRON****LTD. / VIDÉOTRON LTÉE**

(Exact name of Registrant asspecified in its charter)

 

**Provinceof Québec, Canada**

(Jurisdiction ofincorporation or organization)

 

**612 St. Jacques Street**

**Montréal, Québec, Canada  H3C 4M8**

(Address of principalexecutive offices)

 

Securities registered or to be registeredpursuant to Section 12(b) of the Act.

 

| **Title of each class** | ** ** | **Name of each exchange on which registered** |
|-------------------------|------------|-----------------------------------------------|
| **None**                | ** ** | **None**                                      |

 

Securities registered or to be registeredpursuant to Section 12(g) of the Act.

 

**None**

(Title of Class)

 

Securities for which there is a reportingobligation pursuant to Section 15(d) of the Act.

 

**6****7****/****8****%Senior Notes due January 15, 2014**

**6****3****/****8****%Senior Notes due December 15, 2015**

(Title of Class)

 

Indicate the number of outstanding shares ofeach of the issuer’s classes of capital or common stock as of the close of theperiod covered by the annual report.

 

**2,515,277Class “A” Common Shares**

** **

Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 
| o  |  Yes | x  |  No |
|---------|-----------|---------|----------|

 

If this report is an annualor transition report, indicate by check mark if the registrant is not requiredto file reports pursuant to Section 13 or 15(d) of the SecuritiesExchange Act of 1934.

 
| o  |  Yes | x  |  No |
|---------|-----------|---------|----------|

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) ofthe Securities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past90 days.

 
| x  |  Yes | o  |  No |
|---------|-----------|---------|----------|

 

Indicate by check mark whether the registrantis a large accelerated filer, an accelerated filer, or a non-accelerated filer.See definition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act. (Check one):

 
| Large accelerated filer | o | Accelerated filer | o | Non-accelerated filer |  x |
|-------------------------|---|-------------------|---|-----------------------|---------|

 

Indicate by check mark whichbasis of accounting the registrant has used to prepare the financial statementsincluded in this filing:

 

| U.S. GAAP | o | International Financial  Reporting Standards as issued  by the International Accounting Standards Board |   o | Other  |  x |
|-----------|---|---------------------------------------------------------------------------------------------------------|---------------|-------------|---------|

 

If “Other” has been checked in response to theprevious question, indicate by check mark which financial statement item theregistrant has elected to follow.

 
| x  |  Item 17 | o  |  Item 18 |
|---------|---------------|---------|---------------|

 

If this is an annual report, indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).

 
| o  |  Yes | x  |  No |
|---------|-----------|---------|----------|

 

 

 

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Table of Contents

 

**TABLE OFCONTENTS**

** **

** **
|                                                                                    | **Page** |
|-----------------------------------------------------------------------------------------|----------|
|                                                                                    |     |
| Explanatory  Notes                                                                      | 1        |
| presentation of financial information                                                   | 1        |
| Industry  And Market Data                                                               | 2        |
| Exchange  Rate Information                                                              | 2        |
| Cautionary statement regarding Forward-Looking Statements                               | 3        |
|                                                                                    |     |
| **PART I**                                                                              |     |
| ** **                                                                              |     |
| Item 1 - Identity Of Directors, Senior Management And Advisers                          | 4        |
| Item 2 - Offer Statistics And Expected Timetable                                        | 4        |
| Item  3 - Key Information                                                               | 4        |
| Item 4 -  Information On The Company                                                    | 26       |
| Item 4A -  Unresolved Staff Comments                                                    | 54       |
| Item 5 -  Operating and Financial Review and Prospects                                  | 55       |
| Item 6 -  Directors, Senior Management And Employees                                    | 77       |
| Item 7 - Major  Shareholders And Related Party Transactions                             | 86       |
| Item 8 -  Financial Information                                                         | 89       |
| Item 9 - The Offer And Listing                                                          | 90       |
| Item 10 -  Additional Information                                                       | 91       |
| Item 11 -  Quantitative And Qualitative Disclosures About Market Risk                   | 110      |
| Item 12 -  Description Of Securities Other Than Equity Securities                       | 112      |
|                                                                                    |     |
| **PART II**                                                                             |     |
| ** **                                                                              |     |
| Item 13 -  Defaults, Dividend Arrearages And Delinquencies                              | 113      |
| Item 14 -  Material Modifications To The Rights Of Security Holders And Use Of Proceeds | 113      |
| Item 15 - Controls And Procedures                                                       | 113      |
| Item 16 - [Reserved]                                                                    | 114      |
| Item 16A -  Audit Committee Financial Expert                                            | 114      |
| Item 16B - Code of Ethics                                                               | 114      |
| Item 16C -  Principal Accountant Fees and Services                                      | 114      |
| Item 16D -  Exemptions from the Listing Standards for Audit Committees                  | 115      |
| Item 16E -  Purchases of Equity Securities by the Issuer and Affiliated Purchasers      | 115      |
| Item 16F -  Changes in registrant’s certifying accountant                          | 115      |
| Item 16G -  corporate governance                                                        | 116      |
|                                                                                    |     |
| **PART III**                                                                            |     |
| ** **                                                                              |     |
| Item 17 -  Financial Statements                                                         | 116      |
| Item 18 -  Financial Statements                                                         | 117      |
| Item 19 - Exhibits                                                                      | 117      |
| Signature                                                                               | 121      |
| Index to  Consolidated Financial Statements                                             | F1       |

 

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**EXPLANATORY NOTES**

 

All referencesin this annual report to “Videotron” or “our company”, as well as use of theterms “we”, “us”, “our” or similar terms, are references to Videotron Ltd. and,unless the context otherwise requires, its consolidated subsidiaries.  All references in this annual report to “QuebecorMedia” are to our parent company Quebecor Media Inc., and all references to “TVAGroup” are to TVA Group Inc.  In thisannual report, all references to the “CRTC” are references to The CanadianRadio-television and Telecommunications Commission.

 

All referencesin this annual report to our “Senior Notes” are to, collectively, our issuedand outstanding 6 7/8% Senior Notes due January 15,2014, our 6 3/8%Senior Notes due December 15, 2015 and our 9% Senior Notes due 2018.

 

**PRESENTATION OFFINANCIAL INFORMATION**

 

Ourconsolidated financial statements included in this annual report have beenprepared in accordance with accounting principles generally accepted in Canada,or Canadian GAAP. For a discussion of the principal differences betweenCanadian GAAP and accounting principles generally accepted in theUnited States, or U.S. GAAP, as they relate to our financialstatements, see Note 24to our audited consolidated financial statements which are included under “Item17. Financial Statements” in this annual report. We state our financialstatements in Canadian dollars. In this annual report, references to Canadiandollars, Cdn$ or $ are to the currency of Canada and references toU.S. dollars or US$ are to the currency of the United States.

 

We use thesupplemental financial measure operating income to assess our operating resultsand financial performance.  Operatingincome and ratios based on this measure are not required by or recognized underCanadian GAAP or U.S. GAAP.  We defineoperating income, reconciled to net income under Canadian GAAP, as net incomebefore amortization, financial expenses, (gain) loss on valuation andtranslation of derivative instruments, impairment of goodwill and other items,income taxes and non-controlling interest in a subsidiary. Operating incomemargin is operating income as a percentage of operating revenues. Operatingincome, and ratios using this measure, are not intended to be regarded as analternative to other financial operating performance measures, or to thestatement of cash flows as a measure of liquidity. Operating income is notintended to represent funds available for debt service, reinvestment,distributions of dividends, or other discretionary uses, and should not beconsidered in isolation from, or as a substitute for, our financial informationreported under Canadian GAAP and U.S. GAAP. We believe that operating income isa meaningful measure of performance because operating income excludes, amongother things, certain non-cash items and items that are not readily comparablefrom year to year. Operating income is also commonly used in the sector inwhich we operate, as well as by the investment community to analyze and comparecompanies in our field of activities. Operating income has limitations as ananalytical tool, including:

 

·                  althoughamortization is a non-cash charge, the assets being amortized will often haveto be replaced in the future, and operating income does not reflect cashrequirements for such capital expenditures;

 

·                  it does notreflect income tax expense or the cash necessary to pay income taxes; and

 

·                  it does notreflect financial expenses or the cash necessary to pay financial expenses.

 

You should note our definitionof operating income may not be identical to similarly titled measures reportedby other companies, limiting its usefulness as a comparative measure.  We provide a reconciliation of operatingincome to net income (loss) under Canadian GAAP and U.S. GAAP infootnote 9 under “Item3. Key Information — Selected Financial Data”.

 

In this annual report, we alsouse the measure long-term debt, excluding QMI subordinated loans, as asupplemental measure of our indebtedness. Long-term debt, excluding QMI subordinated loans, is not a measure thatis required by or recognized under Canadian GAAP or U.S. GAAP.  We define long-term debt, excluding QMIsubordinated loans, as our long-term debt excluding subordinated loans that weenter into with our parent, Quebecor Media. We believe that long-term debt, excluding QMI subordinated loans, is,from the perspective of a holder of our Senior Notes, a meaningful measure ofour long-term debt because the QMI subordinated loans are subordinated in rightof payment to the prior payment in full of our senior indebtedness, includingthe Senior Notes, and because the proceeds

 

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of our QMI subordinated loans were invested in retractablepreferred shares of Quebecor Media as part of back-to-back transactions toreduce our income tax obligations. Long-term debt, excluding QMI subordinatedloans, is not intended to be, and should not be, regarded as an alternative toother financial reporting measures, and it should not be considered inisolation as a substitute for measures of liabilities prepared in accordancewith Canadian GAAP or U.S. GAAP. We provide a reconciliation of long-termdebt, excluding QMI subordinated loans, to long-term debt under Canadian GAAPand U.S. GAAP in footnote 8 under “Item 3. Key Information —Selected Financial Data”.

 

Unlessotherwise indicated, information provided in this annual report, including alloperating data, is as of December 31, 2008.

 

**INDUSTRYAND MARKET DATA**

 

Industrystatistics and market data used throughout this annual report were obtainedfrom internal surveys, market research, publicly available information andindustry publications, including the CRTC, as a source of Canadian data, andNCTA, A.C. Nielsen Media Research and Kagan Research LLC, as sources of U.S.data.  Industry publications generallystate that the information they contain has been obtained from sources believedto be reliable, but that the accuracy and completeness of this information isnot guaranteed. Penetration and market share data contained in this annualreport is generally based on sources published in the fourth quarter of 2008.

 

**EXCHANGE RATEINFORMATION**

 

The followingtable sets forth, for the periods indicated, the average, high, low and end ofperiod noon rates published by the Bank of Canada.  Such rates are set forth as U.S. dollarsper Cdn$1.00 and are the rates published by the Bank of Canada for Canadiandollars per US$1.00. On March 3, 2009, the noon rate was Cdn$1.00 equalsUS$0.7729.  We do not make anyrepresentation that Canadian dollars could have been converted into U.S.dollars at the rates shown or at any other rate.

 
| **Year Ended:**   | ** ** | **Average(1)** | ** ** | **High** | ** ** | **Low** | ** ** | **Period End** | ** ** |
|------------------------|------------|----------------|------------|----------|------------|---------|------------|---------------------|------------|
|                   |       |           |       |     |       |    |       |                |       |
| December 31, 2008 |       | 0.9381         |       | 1.0289   |       | 0.7711  |       | 0.8166              |       |
| December 31, 2007 |       | 0.9304         |       | 1.0905   |       | 0.8437  |       | 1.0120              |       |
| December 31, 2006 |       | 0.8817         |       | 0.9099   |       | 0.8528  |       | 0.8581              |       |
| December 31, 2005 |       | 0.8254         |       | 0.8690   |       | 0.7872  |       | 0.8577              |       |
| December 31, 2004 |       | 0.7683         |       | 0.8493   |       | 0.7159  |       | 0.8308              |       |

 
| **Month Ended:**                         | ** ** | **Average(2)** | ** ** | **High**   | ** ** | **Low**    | ** ** | **Period End** | ** ** |
|-----------------------------------------------|------------|----------------|------------|------------|------------|------------|------------|---------------------|------------|
|                                          |       |           |       |       |       |       |       |                |       |
| March 2009 (through March 3,  2009) |       | 0.7744         |       | 0.7758     |       | 0.7729     |       | 0.7729              |       |
| February 28, 2009                        |       | 0.8021         |       | 0.8**202** | ** ** | **0.7758** | ** ** | **0.7870**          | ** ** |
| January 31, 2009                         |       | 0.8150         |       | 0.8458     |       | 0.7849     |       | 0.8088              |       |
| December 31, 2008                        |       | 0.8100         |       | 0.8358     |       | 0.7711     |       | 0.8166              |       |
| November 30, 2008                        |       | 0.8203         |       | 0.8696     |       | 0.7779     |       | 0.8083              |       |
| October 31, 2008                         |       | 0.8441         |       | 0.9426     |       | 0.7726     |       | 0.8220              |       |
| September 30, 2008                       |       | 0.9449         |       | 0.9673     |       | 0.9263     |       | 0.9435              |       |

 

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(1)                                  The average of the exchange rates for all days during the applicableyear.

(2)                                  The average of the exchange rates for all daysduring the applicable month.

 

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**CAUTIONARYSTATEMENT REGARDING FORWARD-LOOKING STATEMENTS**

 

This annual report containsforward-looking statements with respect to our financial condition, results ofoperations, business and certain of our plans and objectives. These forward-lookingstatements are made pursuant to the “Safe Harbor” provisions of the UnitedStates Private Securities Litigation Reform Act of 1995. These forward-lookingstatements are based on current expectations, estimates, forecasts andprojections about the industries in which we operate as well as beliefs andassumptions made by our management. Such statements include, in particular,statements about our plans, prospects, financial position and businessstrategies. Words such as “may”, “will”, “expect”, “continue”, “intend”, “estimate”,“anticipate”, “plan”, “foresee”, “believe” or “seek” or the negatives of theseterms or variations of them or similar terminology are intended to identifysuch forward-looking statements. Although we believe that the expectationsreflected in these forward-looking statements are reasonable, these statements,by their nature, involve risks and uncertainties and are not guarantees offuture performance. Such statements are also subject to assumptions concerning,among other things: our anticipated business strategies; anticipated trends inour business; and our ability to continue to control costs. We can give noassurance that these estimates and expectations will prove to have beencorrect. Actual outcomes and results may, and often do, differ from what isexpressed, implied or projected in such forward-looking statements, and suchdifferences may be material. Some important factors that could cause actualresults to differ materially from those expressed in these forward-lookingstatements include, but are not limited to:

 

·                  our ability tosuccessfully build and deploy our new wireless services network on the timelinewe are targeting and to implement successfully our strategy of becoming afacilities-based wireless provider;

** **

·                  generaleconomic, financial or market conditions;

 

·                  the intensity ofcompetitive activity in the industries in which we operate, includingcompetition from alternative means of programs and content transmission;

 

·                  unanticipatedhigher capital spending required to address continued development ofcompetitive alternative technologies or the inability to obtain additionalcapital to continue the development of our business;

 

·                  our ability toimplement successfully our business and operating strategies and manage ourgrowth and expansion;

 

·                  disruptions tothe network through which we provide our digital television, Internet accessand telephony services, and our ability to protect such services from piracy;

 

·                  labour disputesor strikes;

 

·                  changes in ourability to obtain services and equipment critical to our operations;

 

·                  changes in lawsand regulations, or in their interpretations, which could result, among otherthings, in the loss (or reduction in value) of our licenses or markets or in anincrease in competition, compliance costs or capital expenditures;

 

·                  our substantial indebtedness, thetightening of credit markets, and the restrictions on our business imposed bythe terms of our debt;

 

·                  exchange rate fluctuations thataffect our ability to repay our U.S. dollar-denominated debt; and

 

·                  interest rate fluctuations thataffect a portion of our interest payment requirements on long-term debt.

 

We caution youthat the above list of cautionary statements is not exhaustive. These and otherfactors are discussed in further detail elsewhere in this annual report,including under the “Item 3. Key Information — Risk Factors” of this annualreport. Each of these forward-looking statements speaks only as of the date ofthis annual report. We will not update these statements unless the securitieslaws require us to do so. We advise you to consult any documents we may file orfurnish with the U.S. Securities and Exchange Commission, or the SEC, asdescribed under “Item 10. Additional Information — Documents on Display”.

 

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# **PART I**

#  

## **ITEM 1 - IDENTITYOF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS**

##  

Notapplicable.

 

## **ITEM 2 - OFFER STATISTICSAND EXPECTED TIMETABLE**

##  

Notapplicable.

 

## **ITEM 3 - KEYINFORMATION**

##  

**A-**                                   Selected FinancialData

** **

The following table presents selectedconsolidated financial information for our business for each of the years 2004through 2008. We derived this selected financial information from ourconsolidated financial statements. Our consolidated balancesheets as at December 31, 2008 and 2007 and consolidated statements ofincome, comprehensive income, shareholder’s equity and cash flows for each ofthe years in the three-year period ended December 31, 2008 are included inthis annual report. The consolidated financial statements as at December 31,2007 and for the years ended December 31, 2007 and December 31, 2006have been audited by KPMG LLP, an independent registered public accountingfirm. KPMG LLP’s report on these consolidated financial statements is includedin this annual report. The consolidated financial statements as at and for theyear ended December 31, 2008 have been audited by Ernst & YoungLLP, an independent registered public accounting firm.  Ernst & Young LLP’s report on theseconsolidated financial statements is included in this annual report.  The selected consolidated statement of incomedata for the years ended December 31, 2005 and 2004 and the consolidatedbalance sheet data as at December 31, 2006, 2005 and 2004 which arepresented below are derived from our audited consolidated financial statementsaudited by KPMG not included in this annual report. The information presentedbelow the caption “Operating Data” is not derived from our consolidatedfinancial statements and is unaudited. The information presented below the caption “Other Financial Data” isunaudited except for cash flows and capital expenditures for the years ended December 31,2008, 2007, 2006, 2005 and 2004, which have been derived from our consolidatedfinancial statements. All information contained in the following tables shouldbe read in conjunction with our consolidated financial statements, the notesrelated to those financial statements and the section entitled “Item5. Operating and Financial Review and Prospects”. Our historical resultsare not necessarily indicative of our future financial condition or results ofoperations.

 

Ourconsolidated financial statements have been prepared in accordance withCanadian GAAP. For a discussion of the principal differences between CanadianGAAP and U.S. GAAP, see Note 24to our audited consolidated financial statements for the years ended December 31,2008, 2007 and 2006 included under “Item 17. Financial Statements” in thisannual report.

 

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| ** **                                                          | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                          | ** ** | **2008**                                   | ** ** | **2007 (1)** | ** ** | **2006** | ** ** | **2005 (2)** | ** ** | **2004 (2)** | ** ** |
|                                                                |       |                                       |       |   |   |   | ** ** | **(restated)** | ** ** | **(restated)** | ** ** |
| ** **                                                          |       | **(dollars  in thousands )**               | ** ** |
| **AMOUNTS UNDER CANADIAN GAAP**                                     |       |                                       |       |
| **Consolidated Statement of Income Data:**                          |       |                                       |       |   |   |   |   |   |   |   |   |
| Operating revenues:                                                 |       |                                       |       |   |   |   |   |   |   |   |   |
| Cable television                                                    |       | $                                          | 809,891    |   | $ | 735,832 |   | $ | 677,273 |   | $ | 618,346 |   | $ | 576,825 |   |
| Internet                                                            |       | 499,627                                    |       | 422,448 |   | 345,075 |   | 270,791 |   | 222,458 |   |
| Cable telephony                                                     |       | 286,063                                    |       | 195,477 |   | 107,357 |   | 21,088 |   | — |   |
| Wireless telephony                                                  |       | 31,630                                     |       | 17,717 |   | 1,208 |   | — |   | — |   |
| Business solutions                                                  |       | 63,592                                     |       | 70,189 |   | 74,352 |   | 78,409 |   | 66,117 |   |
| Video stores                                                        |       | 57,015                                     |       | 59,956 |   | 55,585 |   | 55,146 |   | 48,058 |   |
| Other                                                               |       | 56,388                                     |       | 50,987 |   | 48,745 |   | 36,626 |   | 24,274 |   |
| Total operating revenues                                            |       | 1,804,206                                  |       | 1,552,606 |   | 1,309,595 |   | 1,080,406 |   | 937,732 |   |
|                                                                |       |                                       |       |   |   |   |   |   |   |   |   |
| Direct cost and operating expenses                                  |       | 1,007,050                                  |       | 909,923 |   | 796,887 |   | 666,793 |   | 573,943 |   |
| Amortization                                                        |       | 214,281                                    |       | 206,083 |   | 185,115 |   | 166,292 |   | 163,862 |   |
| Financial expenses(3)(4)(5)                                         |       | 90,924                                     |       | 76,147 |   | 81,779 |   | 65,796 |   | 60,989 |   |
| Loss (gain) on valuation and translation of  derivative instruments |       | 24,673                                     |       | (9,095 | ) | (2,193 | ) | 8,941 |   | 31,872 |   |
| Impairment of goodwill and other items                              |       | (1,414                                     | )          | 5,425 |   | — |   | — |   | 1,930 |   |
| Income taxes expense (recovery)                                     |       | 73,102                                     |       | 38,258 |   | 64,230 |   | 69,791 |   | (6,661 | ) |
| Non-controlling interest in a subsidiary                            |       | 148                                        |       | 173 |   | 86 |   | 102 |   | 100 |   |
| Net income                                                          |       | $                                          | 395,442    |   | $ | 325,692 |   | $ | 183,691 |   | $ | 102,691 |   | $ | 111,697 |   |
|                                                                |       |                                       |       |   |   |   |   |   |   |   |   |
| **Consolidated Balance Sheet Data (at year  end):**                 |       |                                       |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                           |       | —                                     |       | — |   | — |   | $ | 26,699 |   | $ | 32,411 |   |
| Total assets                                                        |       | $                                          | 5,105,932  |   | $ | 4,152,775 |   | $ | 1,988,032 |   | 1,977,610 |   | 1,895,433 |   |
| Long-term debt, excluding QMI subordinated  loans(6)(7)(8)          |       | 1,807,997                                  |       | 950,988 |   | 1,021,170 |   | 971,697 |   | 990,008 |   |
| QMI subordinated loans(6)(7)(8)                                     |       | 2,055,000                                  |       | 1,995,000 |   | — |   | 150,000 |   | 150,000 |   |
| Share capital                                                       |       | 1                                          |       | 46,177 |   | 345,727 |   | 342,940 |   | 388,593 |   |
| Shareholder’s equity                                           |       | 403,654                                    |       | 259,110 |   | 249,581 |   | 76,363 |   | 229,302 |   |
| Cash dividends declared and reductions of  paid-up capital          |       | 230,000                                    |       | 299,550 |   | 118,749 |   | 255,653 |   | 205,233 |   |

 
| ** **                                      | ** ** | **Year Ended December 31,**                                      | ** ** |
|-------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                                      | ** ** | **2008**                                                                        | ** ** | **2007 (1)** | ** ** | **2006** | ** ** | **2005 (2)** | ** ** | **2004 (2)** | ** ** |
| ** **                                      | ** ** | ** **                                                                      | ** ** | ** ** | ** ** | ** ** | ** ** | **(restated)** | ** ** | **(restated)** | ** ** |
| ** **                                      | ** ** | **(dollars in thousands, except ARPU and ratio)** |
| **Other Financial Data**                        |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Operating income (unaudited)(9)                 |       | $                                                                               | 797,156    |   | $ | 642,683 |   | $ | 512,708 |   | $ | 413,613 |   | $ | 363,789 |   |
| Operating income margin (unaudited)(9)          |       | 44.2                                                                            | %          | 41.4 | % | 39.2 | % | 38.3 | % | 38.8 | % |
| Cash flows from operating activities            |       | 711,534                                                                         |       | 552,923 |   | 440,619 |   | 387,205 |   | 329,433 |   |
| Cash flows used in investing activities         |       | (1,043,220                                                                      | )          | (2,338,164 | ) | (265,101 | ) | (274,977 | ) | (111,093 | ) |
| Cash flows from (used in) financing  activities |       | 331,686                                                                         |       | 1,785,241 |   | (202,217 | ) | (117,940 | ) | (215,652 | ) |
| Capital expenditures(10)                        |       | 404,759                                                                         |       | 330,075 |   | 302,629 |   | 219,865 |   | 144,453 |   |
|                                            |       |                                                                            |       |   |   |   |   |   |   |   |   |
| **Operating Data (unaudited):**                 |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Homes passed(11)                                |       | 2,542,859                                                                       |       | 2,497,403 |   | 2,457,213 |   | 2,419,335 |   | 2,383,443 |   |
| Basic cable customers(12)                       |       | 1,715,616                                                                       |       | 1,638,097 |   | 1,572,411 |   | 1,506,113 |   | 1,452,554 |   |
| Basic cable penetration(13)                     |       | 67.5                                                                            | %          | 65.6 | % | 64.0 | % | 62.3 | % | 60.9 | % |
| Digital customers                               |       | 927,322                                                                         |       | 768,211 |   | 623,646 |   | 474,629 |   | 333,664 |   |
| Digital penetration(14)                         |       | 54.1                                                                            | %          | 46.9 | % | 39.7 | % | 31.5 | % | 23.0 | % |
| Cable Internet customers                        |       | 1,063,847                                                                       |       | 932,989 |   | 791,966 |   | 637,971 |   | 502,630 |   |
| Cable Internet penetration(13)                  |       | 41.8                                                                            | %          | 37.4 | % | 32.2 | % | 26.4 | % | 21.1 | % |
| Cable telephony customers                       |       | 851,987                                                                         |       | 636,352 |   | 397,830 |   | 162,979 |   | 2,135 |   |
| Cable telephony penetration(13)                 |       | 33.5                                                                            | %          | 25.5 | % | 16.2 | % | 6.7 | % | 0.1 | % |
| ARPU(15)                                        |       | $                                                                               | 81.17      |   | $ | 71.52 |   | $ | 61.43 |   | $ | 51.86 |   | $ | 46.50 |   |
| Ratio of earnings to fixed charges(16)          |       | 4.6                                                                             | x          | 5.2 | x | 3.9 | x | 3.8 | x | 2.6 | x |

 

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| ** **                                                          | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                          | ** ** | **2008**                                   | ** ** | **2007 (1)** | ** ** | **2006** | ** ** | **2005 (2)** | ** ** | **2004 (2)** | ** ** |
| ** **                                                          | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | **(restated)** | ** ** | **(restated)** | ** ** |
| ** **                                                          |       | **(dollars  in thousands )**               |
| **AMOUNTS UNDER U.S. GAAP**                                    |       |                                       |
| **Consolidated Statement of Income Data:**                          |       |                                       |       |   |   |   |   |   |   |   |   |
| Operating revenues:                                                 |       |                                       |       |   |   |   |   |   |   |   |   |
| Cable television                                                    |       | $                                          | 810,131    |   | $ | 736,179 |   | $ | 677,970 |   | $ | 621,493 |   | $ | 584,187 |   |
| Internet                                                            |       | 499,712                                    |       | 422,585 |   | 345,112 |   | 272,926 |   | 224,450 |   |
| Cable telephony                                                     |       | 286,195                                    |       | 195,587 |   | 109,293 |   | 21,983 |   | — |   |
| Wireless telephony                                                  |       | 31,630                                     |       | 17,717 |   | 1,208 |   | — |   | — |   |
| Business solutions                                                  |       | 63,592                                     |       | 70,189 |   | 74,352 |   | 78,409 |   | 66,117 |   |
| Video stores                                                        |       | 57,015                                     |       | 59,956 |   | 55,585 |   | 55,146 |   | 48,058 |   |
| Other                                                               |       | 56,388                                     |       | 50,987 |   | 48,745 |   | 36,626 |   | 24,274 |   |
| Total operating revenues                                            |       | 1,804,663                                  |       | 1,553,200 |   | 1,312,265 |   | 1,086,583 |   | 947,086 |   |
|                                                                |       |                                       |       |   |   |   |   |   |   |   |   |
| Direct cost and operating expenses                                  |       | 1,004,982                                  |       | 912,811 |   | 803,235 |   | 674,798 |   | 584,876 |   |
| Amortization                                                        |       | 225,587                                    |       | 216,711 |   | 196,335 |   | 177,415 |   | 175,743 |   |
| Financial expenses(3)(4)(5)                                         |       | 90,924                                     |       | 76,147 |   | 81,779 |   | 65,796 |   | 60,989 |   |
| Loss (gain) on valuation and translation of  derivative instruments |       | 30,105                                     |       | (14,101 | ) | 5,992 |   | 9,361 |   | 24,183 |   |
| Impairment of goodwill and other items                              |       | 586                                        |       | 5,425 |   | — |   | — |   | 1,930 |   |
| Income taxes expenses (recovery)                                    |       | 77,293                                     |       | 32,317 |   | 56,073 |   | 60,408 |   | (1,208 | ) |
| Non-controlling interest in a subsidiary                            |       | 148                                        |       | 173 |   | 86 |   | 102 |   | 100 |   |
| Net income                                                          |       | $                                          | 375,038    |   | $ | 323,717 |   | $ | 168,765 |   | $ | 98,703 |   | $ | 100,473 |   |
|                                                                |       |                                       |       |   |   |   |   |   |   |   |   |
| **Consolidated Balance Sheet Data (at year  end):**                 | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash and cash equivalents                                           |       |                                       |       | — |   | — |   | $ | 26,699 |   | $ | 32,411 |   |
| Total assets                                                        |       | $                                          | 7,311,724  |   | $ | 6,371,695 |   | $ | 4,222,810 |   | 4,225,866 |   | 4,162,179 |   |
| Long-term debt, excluding QMI subordinated  loans (6)(7)(8)         |       | 1,804,003                                  |       | 946,236 |   | 1,007,557 |   | 958,433 |   | 991,280 |   |
| QMI subordinated loans(6)(7)(8)                                     |       | 2,055,000                                  |       | 1,995,000 |   | — |   | 150,000 |   | 150,000 |   |
| Share capital                                                       |       | 1                                          |       | 46,177 |   | 345,727 |   | 342,940 |   | 388,593 |   |
| Shareholder’s equity                                           |       | 2,626,594                                  |       | 2,475,853 |   | 2,429,137 |   | 2,273,593 |   | 2,437,970 |   |
| Cash dividends declared and reductions of  paid-up capital          |       | 230,000                                    |       | $ | 299,550 |   | $ | 118,749 |   | $ | 255,653 |   | $ | 205,233 |   |
|                                                                     |            |                                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                      | ** ** | **Year Ended December 31,**                   | ** ** |
|-------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                      | ** ** | **2008**                                                     | ** ** | **2007 (1)** | ** ** | **2006** | ** ** | **2005 (2)** | ** ** | **2004 (2)** | ** ** |
| ** **                                      | ** ** | ** **                                                   | ** ** | ** ** | ** ** | ** ** | ** ** | **(restated)** | ** ** | **(restated)** | ** ** |
| ** **                                      | ** ** | **(dollars in thousands, except ratio)** | ** ** |
| **Other Financial Data:**                       |       |                                                         |       |   |   |   |   |   |   |   |   |
| Operating income (unaudited)(9)                 |       | $                                                            | 799,681    |   | $ | 640,389 |   | $ | 509,030 |   | $ | 411,785 |   | $ | 362,210 |   |
| Operating income margin (unaudited)(9)          |       | 44.3                                                         | %          | 41.2 | % | 38.8 | % | 37.9 | % | 38.2 | % |
| Cash flows from operating activities            |       | 712,259                                                      |       | 552,529 |   | 437,841 |   | 385,377 |   | 327,854 |   |
| Cash flows used in investing activities         |       | (1,043,945                                                   | )          | (2,337,770 | ) | (262,323 | ) | (273,149 | ) | (109,514 | ) |
| Cash flows from (used in) financing  activities |       | 331,686                                                      |       | 1,785,241 |   | (202,217 | ) | (117,940 | ) | (215,652 | ) |
| Capital expenditures(10)                        |       | 404,759                                                      |       | 330,075 |   | 302,629 |   | 219,865 |   | 144,453 |   |
| Ratio of earnings to fixed charges(16)          |       | 4.4                                                          | x          | 5.1 | x | 3.6 | x | 3.6 | x  | 2.5 | x |
|                                                 |            |                                                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)                                   Effective January 1, 2007, Videotronadopted new financial instruments, hedges and comprehensive income standardspursuant to Canadian GAAP. See Note 1 to our consolidated financialstatements included under Item 17 of this annual report.

 

(2)                                   On January 1, 2006, a company undercommon control, Videotron Telecom Ltd., merged with the Company.  On July 1, 2006, the Company also mergedwith its parent, 9101-0827 Québec inc. Those transactions have been accounted for using the continuity ofinterest method, and the results of operations and financial position ofVideotron Telecom Ltd. and 9101-0827 Québec inc. have been included in theseconsolidated financial statements as if the three companies had always been combined.  Comparative figures have been restated fromstatements previously presented.  Inrespect of U.S. GAAP financial data, see also Note 24 “Significant differencesbetween generally accepted accounting principles (GAAP) in Canada and theUnited States” to our consolidated financial statements included underItem 17 of this annual report.

 

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(3)                                   Inthe first quarter of 2004, our wholly-owned subsidiary, Vidéotron (1998) ltée,entered into a back-to-back transaction with Quebecor Media. With respect tothis back-to-back transaction, we made cash interest payments of$108.5 million to Quebecor Media in the year ended December 31, 2004,but we received $111.1 million in dividends from Quebecor Media in thatsame year. See “Item 5. Operating and Financial Review andProspects — Liquidity and Capital Resources — Purchase of Shares ofQuebecor Media and Service of Subsidiary Subordinated Loan”.

 

(4)                                   OnJanuary 3, 2007, May 31, 2007 and January 4, 2008, we enteredinto back-to-back transactions with Quebecor Media and 9101-0835 Québec Inc., asubsidiary of Quebecor Media Inc. With respect to these back-to-backtransactions, we recorded an interest expense of $238.9 million in theyear ended December 31, 2008 and $157.7 million in the year ended December 31,2007, but we recorded $246.9 million and $162.9 million in dividendsfrom Quebecor Media in 2008 and 2007, respectively. See “Item 5. Operatingand Financial Review and Prospects — Liquidity and CapitalResources — Purchase of Shares of Quebecor Media and Service of SubsidiarySubordinated Loan”.

 

(5)                                   On May 31 2007 and January 4, 2008,CF Cable TV inc., a wholly-owned subsidiary of Videotron, entered intoback-to-back transactions with Quebecor Media and 9101-0835 Québec Inc.  Withrespect to these back-to-back transactions, we recorded interest expense of$30.9 million in the year ended December 31, 2008 and$7.7 million in the year ended December 31, 2007, but we recorded$31.9 million and $8.0 million in dividends from Quebecor Media in2008 and 2007 respectively. See “Item 5. Operating and FinancialReview and Prospects — Liquidity and Capital Resources — Purchase of Shares of Quebecor Media andService of Subsidiary Subordinated Loan”.

 

(6)                                   Forthe years ended December 31, 2007 and 2008, the term “QMI subordinatedloans” refers to the $1.0 billion and $870.0 million subordinated loansdue in 2022 we entered into in 2007 in favor of Quebecor Media (partly redeemedfor $525.0 million in 2008), the $415.0 million subordinated loan due in2023, entered into in 2008, also in favor of Quebecor Media,  the $125.0 million subordinated loan duein 2022 our subsidiary CF Cable TV Inc., entered into in 2007 in favor ofQuebecor Media and the $170.0 million subordinated loan due in 2023 oursubsidiary CF Cable TV Inc., entered into in 2008 in favor of Quebecor Media..  Interest on the subordinated loanthroughout its term is payable in cash at our option. The QMI subordinatedloans are reflected as long-term debt on our consolidated balance sheet. SeeItem 5. Operating and Financial Review and Prospects — OperatingResults — Liquidity and Capital Resources — Purchase of Shares ofQuebecor Media and Service of Subsidiary Subordinated Loan”.

 

(7)                                   Forthe years ended December 31, 2004 and 2005, the term “QMI subordinatedloans” refers to the $150.0 million subordinated loan due 2015 we enteredinto in favor of Quebecor Media and the $1.1 billion subordinated loan due2019 by our subsidiary Vidéotron (1998) ltée, which is a guarantor of ourSenior Notes, entered into on January 16, 2004 in favor of Quebecor Media.Interest on the $150.0 million subordinated loan throughout its term ispayable in cash at our option. The QMI subordinated loans have been excludedfrom long-term debt because under the terms of our Senior Notes, all paymentson the $150.0 million subordinated loan are restricted payments treated inthe same manner as dividends on our common shares (excluding QMI subordinatedloans entered into as part of a back-to-back transaction), and the proceeds ofour $1.1 billion subordinated loan has been invested in retractablepreferred shares of Quebecor Media as part of a back-to-back transaction toreduce our income tax obligations. On December 16, 2004, Quebecor Mediaredeemed its $1.1 billion of retractable preferred shares, and we used theproceeds to repay our $1.1 billion subordinated loan. On January 17,2006, we reimbursed the $150.0 million subordinated loan due 2015 and allinterest owed at that date for a total consideration of $168.0 million.

 

(8)                                   Webelieve that long-term debt, excluding QMI subordinated loans, is, from theperspective of a holder of our issued and outstanding Senior Notes, ameaningful measure of our long-term debt because the QMI subordinated loans aresubordinated in right of payment to the prior payment in full of our seniorindebtedness, including our Senior Notes, and because the proceeds of our QMI subordinatedloans due 2022 and 2023 were invested in retractable preferred shares ofQuebecor Media as part of back-to-back transactions to reduce our income taxobligations. Consequently, we disclose long-term debt, excluding QMIsubordinated loans, as a supplemental measure of our indebtedness in thisannual report. Long-term debt, excluding QMI subordinated loans, is notintended to be, and should not be, regarded as an alternative to otherfinancial reporting measures, and it should not be considered in isolation as asubstitute for measures of liabilities prepared in accordance with CanadianGAAP or U.S. GAAP. Long-term debt, excluding QMI subordinated loans, iscalculated from and reconciled to long-term debt as follows:

 

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| ** **                                                    | ** ** | **At December 31,**                                  | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                    | ** ** | **2008**                                                       | ** ** | **2007****(1)** | ** ** | **2006** | ** ** | **2005 (2)** | ** ** | **2004 (2)** | ** ** |
| ** **                                                    | ** ** | ** **                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | **(restated)** | ** ** | **(restated)** | ** ** |
| ** **                                                    | ** ** | **(Canadian dollars in millions)  (unaudited)** | ** ** |
| **AMOUNTS UNDER CANADIAN GAAP**                          |       |                                                           |       |   |   |   |   |   |   |   |   |
| Long-term debt                                                |       | $                                                              | 3,863.0    |   | $ | 2,946.0 |   | $ | 1,021.2 |   | $ | 1,121.7 |   | $ | 1,140.0 |   |
| QMI subordinated loans                                        |       | (2,055.0                                                       | )          | (1,995.0 | ) | — |   | (150.0 | ) | (150.0 | ) |
| Long-term debt, excluding QMI subordinated  loans, as defined |       | $                                                              | 1,808.0    |   | $ | 951.0 |   | $ | 1,021.2 |   | $ | 971.7 |   | $ | 990.0 |   |
|                                                          |       |                                                           |       |   |   |   |   |   |   |   |   |
| **AMOUNTS UNDER U.S. GAAP**                              |       |                                                           |       |   |   |   |   |   |   |   |   |
| Long-term debt                                                |       | $                                                              | 3,859.0    |   | $ | 2,941.2 |   | $ | 1,007.6 |   | $ | 1,108.4 |   | $ | 1141.3 |   |
| QMI subordinated loans                                        |       | (2,055.0                                                       | )          | (1,995.0 | ) | — |   | (150.0 | ) | (150.0 | ) |
| Long-term debt, excluding QMI subordinated  loans, as defined |       | $                                                              | 1,804.0    |   | $ | 946.2 |   | $ | 1,007.6 |   | $ | 958.4 |   | $ | 991.3 |   |

 

(9)                                   We use the supplemental financial measureoperating income to assess our operating results and financialperformance.  Operating income and ratiosbased on this measure are not required by or recognized under Canadian GAAP orU.S. GAAP.  We define operating income,reconciled to net income under Canadian GAAP, as net income beforeamortization, financial expenses, loss (gain) on valuation and translation ofderivative instruments, impairment of goodwill and other items, income taxesand non-controlling interest in a subsidiary. Operating income margin isoperating income as a percentage of operating revenues. Operating income, andratios using this measure, are not intended to be regarded as an alternative toother financial operating performance measures, or to the statement of cashflows as a measure of liquidity. Operating income is not intended to representfunds available for debt service, reinvestment, distributions of dividends, orother discretionary uses, and should not be considered in isolation from, or asa substitute for, our financial information reported under Canadian GAAP and U.S. GAAP. We believe that operating income is a meaningfulmeasure of performance because operating income excludes, among other things,certain non-cash items and items that are not readily comparable from year toyear. Operating income is also commonly used in the sector in which we operate,as well as by the investment community to analyze and compare companies. Youshould note our definition of operating income may not be identical tosimilarly titled measures reported by other companies, limiting its usefulnessas a comparative measure.  Our operatingincome is calculated from and reconciled to net income (loss) as follows:

 
| ** **                                                          | ** ** | **Year Ended December 31,**                     | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                          | ** ** | **2008**                                                       | ** ** | **2007 (1)** | ** ** | **2006** | ** ** | **2005 (2)** | ** ** | **2004 (2)** | ** ** |
| ** **                                                          | ** ** | ** **                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | **(restated)** | ** ** | **(restated)** | ** ** |
| ** **                                                          | ** ** | **(Canadian dollars in millions)  (unaudited)** | ** ** |
| **AMOUNTS UNDER CANADIAN GAAP**                                |       |                                                           |       |   |   |   |   |   |   |   |   |
| Net income                                                          |       | $                                                              | 395.4      |   | $ | 325.7 |   | $ | 183.7 |   | $ | 102.7 |   | $ | 111.7 |   |
| Amortization                                                        |       | 214.3                                                          |       | 206.1 |   | 185.1 |   | 166.3 |   | 163.9 |   |
| Financial expenses                                                  |       | 90.9                                                           |       | 76.1 |   | 81.8 |   | 65.8 |   | 61.0 |   |
| Loss (gain) on valuation and translation of  derivative instruments |       | 24.7                                                           |       | (9.1 | ) | (2.2 | ) | 8.9 |   | 31.9 |   |
| Impairment of goodwill and other items                              |       | (1.4                                                           | )          | 5.4 |   | — |   | — |   | 1.9 |   |
| Income taxes expense (recovery)                                     |       | 73.1                                                           |       | 38.3 |   | 64.2 |   | 69.8 |   | (6.7 | ) |
| Non-controlling interest                                            |       | 0.2                                                            |       | 0.2 |   | 0.1 |   | 0.1 |   | 0.1 |   |
| Operating income as defined                                         |       | $                                                              | 797.2      |   | $ | 642.7 |   | $ | 512.7 |   | $ | 413.6 |   | $ | 363.8 |   |
|                                                                |       |                                                           |       |   |   |   |   |   |   |   |   |
| **AMOUNTS UNDER U.S. GAAP**                                    |       |                                                           |       |   |   |   |   |   |   |   |   |
| Net income                                                          |       | $                                                              | 375.0      |   | $ | 323.7 |   | $ | 168.8 |   | $ | 98.7 |   | $ | 100.5 |   |
| Amortization                                                        |       | 225.6                                                          |       | 216.7 |   | 196.3 |   | 177.4 |   | 175.7 |   |
| Financial expenses                                                  |       | 90.9                                                           |       | 76.1 |   | 81.8 |   | 65.8 |   | 61.0 |   |
| Loss (gain) on valuation and translation of  derivative instruments |       | 30.1                                                           |       | (14.1 | ) | 6.0 |   | 9.4 |   | 24.2 |   |
| Impairment of goodwill and other items                              |       | 0.6                                                            |       | 5.4 |   | — |   | — |   | 1.9 |   |
| Income taxes expense (recovery)                                     |       | 77.3                                                           |       | 32.3 |   | 56.1 |   | 60.4 |   | (1.2 | ) |
| Non-controlling interest                                            |       | 0.2                                                            |       | 0.2 |   | 0.1 |   | 0.1 |   | 0.1 |   |
| Operating income as defined                                         |       | $                                                              | 799.7      |   | $ | 640.4 |   | $ | 509.0 |   | $ | 411.8 |   | $ | 362.2 |   |

 

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(10)                             Capital expenditures are comprised ofacquisitions of fixed assets.

 

(11)                             “Homespassed” means the number of residential premises, such as single dwelling unitsor multiple dwelling units, and commercial premises passed by the cabletelevision distribution network in a given cable system service area in whichthe programming services are offered.

 

(12)                             “Basiccable customers” are customers who receive basic cable television service ineither analog or digital mode.

 

(13)                             Represents customers as a percentage of total homespassed.

 

(14)                             Represents customers as a percentage of basic customers.

 

(15)                             Average monthly revenue per user, or ARPU, is anindustry metric that we use to measure our average cable, Internet, and cable andwireless telephony revenues per month per basic cable customer. ARPU is not ameasurement that is required by or recognized under Canadian GAAP or U.S. GAAP,and our definition and calculation of ARPU may not be the same as similarlytitled measurements reported by other companies.  We calculate ARPU by dividing our combinedcable television, Internet-access, and cable and wireless telephony revenues bythe average number of our basic cable customers during the applicable period,and then dividing that result by the number of months in the applicable period.

 

(16)                             For the purpose of calculating the ratio ofearnings to fixed charges, (i) earnings consist of net (loss) income plusnon-controlling interest in a subsidiary, income taxes, fixed charges, amortized capitalized interest, lessinterest capitalized, and (ii) fixed charges consist of interest expensedand capitalized, excluding interest on QMI subordinated loans, plus amortizedpremiums, discounts and capitalized expenses relating to indebtedness and anestimate of the interest within rental expense.

** **

**B-**                                   Capitalization andIndebtedness

** **

Notapplicable.

 

**C-**                                   Reasons for theOffer and Use of Proceeds

** **

Notapplicable.

 

**D-**                                   Risk Factors

** **

*Thissection describes some of the risks that could materially affect our business,revenues, results of operations and financial condition, as well as the marketvalue of our Senior Notes. The factors below should be considered in connectionwith any forward-looking statements in this document and with the cautionarystatements contained in the section “Cautionary Statement RegardingForward-Looking Statements” at the forepart of this annual report. The risksbelow are not the only ones that we face. Some risks may not yet be known to usand some that we do not currently believe to be material could later turn outto be material.*

* *

**Risks Relatingto Our Business**

** **

***We operate inhighly competitive industries with emerging technological developments, and ourinability to compete successfully could have a material adverse effect on ourbusiness, prospects, revenues, financial condition and results of operations.***

*** ***

We operate inhighly competitive industries. In our cable operations, we compete againstdirect broadcast satellite providers, or DBS (which is also called DTH inCanada, for “direct-to-home” satellite), multi-channel multipoint distributionsystems, or MDS, satellite master antenna television systems and over-the-airtelevision broadcasters. In addition, we compete against incumbent localexchange carriers (or “ILECs”) which have secured licenses to launch videodistribution services using video digital subscriber line, or VDSL, technology.The CRTC has approved a regional license for the main ILEC in our market toprovide terrestrial broadcasting distribution in Montréal and several othercommunities in the Province of Québec. The same ILEC has also acquired a cablenetwork in our main service area. We also face competition from illegalproviders of cable television services and illegal access to non-Canadian DBS(also called grey market piracy) as well as from signal theft of DBS thatenables customers to access programming services

 

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from U.S. and Canadian DBS without paying any fees (also called blackmarket piracy). Competitors in the video business also include the video storesindustry (rental & sale) and other alternative entertainment media. Inaddition, the Internet, as well as distribution over mobile devices, may becomecompetitive broadcast distribution platforms in the future.

 

In ourInternet access business, we compete against other Internet service providers,or ISPs, offering residential and commercial Internet access services as wellas open Wi-Fi networks in some cities. The CRTC also requires us to offeraccess to our high speed Internet system to our ISP competitors and severalthird party ISPs have access or have requested access to our network. CRTC rules alsorequire that we allow third party ISPs to provide voice or telephonyapplications in addition to retail Internet access services.

 

OurVoice-over-IP (or “VoIP”) telephony service has numerous competitors, includingILECs, competitive local exchange carriers, or CLECs, wireless telephoneservice operators and other providers of telephony services, and competitorsthat are not facilities-based and therefore have a much lower infrastructurecost. Competition from ILECs is expected to increase, particularly as a resultof the Canadian federal government’s decision in 2007 to lift winbackrestrictions on ILECs and to change the criteria for forbearance fromregulation of local exchange services. Since this decision, the CRTC hasapproved numerous applications for local forbearance submitted by Bell Aliant,Bell Canada, Télébec and TELUS-Québec, in both the residential and businesslocal exchange markets.  As a result,Videotron’s incumbent local service competitors are now free from regulation oflocal exchange services in the vast majority of residential markets in whichVideotron competes, as well as in a large number of business markets, includingall of the largest metropolitan markets in Quebec. These rulings granting theILECs’ forbearance applications enable ILECs to adjust their local exchangeservice prices for the approved exchanges without approval from the CRTC. Suchprice flexibility for local exchange services could have an adverse effect onour ability to compete successfully with ILECs in the local telephony market.

 

With ourcurrent Mobile Virtual Network Operator (or “MVNO”)-based wireless telephonyservice, we compete against a mix of corporations, some of them being active insome or all the products we offer, while others only offer mobile wireless telephonyservices in our market. In addition, users of wireless voice and data systemsmay find their communications needs satisfied by other current or developingtechnologies, such as Wi-Fi, WiMax, “hotspots” or trunk radio systems, whichhave the technical capability to handle wireless data communication and mobiletelephone calls.  There can be noassurance that current or future competitors will not provide servicescomparable or superior to those we provide or may in the future provide, or atlower prices, adapt more quickly to evolving industry trends or changing marketrequirements, or introduce competing services. The cost of implementing orcompeting against future technological innovations may be prohibitive to us,and we may lose customers if we fail to keep pace with these changes.  Any of these factors could adversely affectour ability to operate our MVNO-based wireless business successfully andprofitably.

 

We may not beable to compete successfully in the future against existing or potentialcompetitors, and increased competition could have a material adverse effect onour business, prospects, revenues, financial condition and results ofoperations.

 

***Delays in thelaunch of our facilities-based wireless services, including due to issues relatingto infrastructure buildout and tower-sharing requirements, could impair ourability to gain market share and could adversely affect our ability to deployand operate our wireless operations successfully and profitably.***

*** ***

In July 2008,under Canada’s spectrum auction for third generation AWS, our parent company,Quebecor Media, acquired spectrum licenses for AWS covering all regions of theprovince of Québec and certain areas of Ontario.  Quebecor Media was the successful bidder for40 MHz spectrum licenses in all parts of the Province of Québec, except theOutaouais region where it obtained 20 MHz spectrum licenses and certain regionsof Québec where it obtained 50 MHz spectrum licenses.  Quebecor Media also acquired 20 MHz spectrumlicenses in Eastern Ontario and 10 MHz spectrum licenses in the city ofToronto.  These licenses, the control ofwhich was transferred from Quebecor Media to Videotron subsequent to thecompletion of the auction, were issued by Industry Canada on December 23,2008. The spectrum enables us to pursue the

 

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buildout of a network infrastructure and to become a facilities-basedprovider offering advanced wireless telephony services, including high-speedInternet, mobile television and a variety of other advanced functions that canbe accessed through mobile devices referred to as smartphones.

 

We are a new entrant in thewireless business in Canada, and, recently, most of the incumbent carriers havelaunched lower cost services in order to acquire additional market share andincrease the wireless telephony penetration rate in our territory.  Any delay in the launch of our wirelessservices could result in a more challenging market to penetrate.  Any such delays could therefore also requireus to deploy additional efforts and marketing expenses to meet our customeracquisition objectives, and there is a risk that we will be unable to meet ourcustomer acquisition objectives on the timeline that we are targeting or atall.

 

Under Industry Canada’s newpolicy concerning mandatory roaming and antenna site and tower sharing, partiesare required to consider tower-sharing arrangements in respect of existingtowers prior to proposing the construction of new antenna towerstructures.  We are therefore dependenton the participation of incumbent operators to satisfy this requirement.Although incumbent carriers are required to respond to tower-sharing requests,there can be no assurance that they will accede to such requests or otherwisenegotiate tower-sharing rates and terms that are economically ortechnologically acceptable to new entrants, such as Videotron. Industry Canadahas established an arbitration process to encourage commercially reasonableoutcomes, but such a process may prove lengthy and burdensome, and could delaythe launch of our wireless services network, which could adversely affect ourability to operate our wireless business successfully and profitably.

 

In addition, Industry Canada’snew policy concerning antenna site and tower sharing includes requirements withrespect to land-use authority and public consultation regarding proposed towerinstallations or modifications. We must therefore undertake public notificationand address local and neighborhood concerns before building a new towerstructure. These procedures could lead to delays in acquiring and developingnew sites for cellular towers and could make it more costly to pursue ourstrategy of building an AWS network, which could adversely affect our abilityto deploy and operate our wireless operations successfully and profitably.

 

In order to build our wirelessnetwork infrastructure in a timely manner Videotron has entered into commercialrelationships with certain key suppliers. The inability of our key suppliers to meet our procurement and timingrequirements could result in delays in the launch of our wireless network andin additional expenses, which could adversely affect our ability to deploy andoperate our wireless business successfully and profitably.

 

***We mayencounter difficulties in reaching out-of-territory and in-territory roamingagreements with incumbent wireless operators.***

*** ***

Under Industry Canada’s newpolicy concerning mandatory roaming and antenna site and tower sharing,incumbent wireless operators are required, for a period of up to 10 years fromthe effective date of new entrants’ wireless licenses (December 23, 2008,in the case of Videotron), to permit new wireless entrants’ customers to roamon their networks outside the regions where such entrants won licenses in the2008 AWS auction.  Incumbents are alsorequired to permit new entrants’ customers to roam on their networks within theregions where such new entrants have won licenses for a period of 5 years (aperiod that could be extended to 10 years in certain circumstances). However,the rates and terms for such roaming are not prescribed and will be determinedby negotiation between new entrants, such as Videotron, and theincumbents.  There can be no assurancethat incumbents will advance these negotiations rapidly or that they willpropose rates and other terms which are economically or technologicallyacceptable to new entrants. Industry Canada has established an arbitrationprocess to encourage commercially reasonable outcomes, but such a process islengthy and burdensome, and could further delay the launch of our wirelessservices, which could adversely affect our ability to operate our wirelessbusiness successfully and profitably.

 

In addition, various aspects ofwireless communications operations, including the ability of wireless providersto enter into interconnection agreements with traditional wireline telephonecompanies, are subject to regulation by the CRTC. The government agencieshaving jurisdiction over any wireless business that we may develop could adopt

 

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regulations or take other actions that could adversely affect ourwireless business and operations, including actions that could increasecompetition or that could increase our costs.

 

***We are using anew technology for which only a limited number of handsets might be availableat the time of commercial launch.***

*** ***

AWS in the2GHz range is a spectrum that has not been broadly used until recently formobile telephony.  While certain wirelessdevice suppliers in the United States have recently begun to offer theirproducts on the AWS technology, there are still a limited number of handsetsavailable.  As a result, the handsetportfolio for AWS we will offer at the time of the commercial launch of ourwireless services may not be as broad as that of certain other providers and wecould potentially incur higher costs of customer acquisition due to a smallermarket for this type of technology, which could adversely affect our ability to operate our wirelessbusiness profitably.

 

***We areregularly required to make capital expenditures to remain technologically andeconomically competitive. We may not be able to obtain additional capital toimplement our business strategies and make certain capital expenditures.***

*** ***

Our strategy of maintaining a leadership position in the suite ofproducts and services we offer and launching new products and services requirescapital investments in our network and infrastructure to support growth in ourcustomer base and demands for increased bandwidth capacity and other services.  In this regard, we have in the past requiredsubstantial capital for the upgrade, expansion and maintenance of our networkand the launch and expansion of new or additional services, and we expectadditional capital expenditures in the short and medium term to expand andmaintain our systems and services, including our expenditures relating toadvancements in Internet access and high definition television, or HDTV, aswell as the cost of our wireless services infrastructure buildout.  In October 2008, we and Quebecor Mediaannounced our intention to invest between $800 million and $1.0 billion overthe next four years to roll out our own AWS network.  This amount includes the cost of the acquiredspectrum and operating licenses (which has already been paid), the cost ofnetwork buildout and initial operating costs (but excludes any capitalizedinterest).  There can be no assurancethat we will be able to obtain the funds necessary to finance our capitalimprovement programs, new strategies and services or other capital expenditurerequirements, whether through internally generated funds, additional borrowingsor other sources.  If we are unable toobtain financing on acceptable terms, we may not be able to implement our businessstrategies and effect capital expenditures required to maintain our leadershipposition, and our business, financial condition, results of operations,reputation and prospects could be materially adversely affected. Even if we areable to obtain adequate funding, the period of time required to upgrade ournetwork could have a material adverse effect on our ability to successfullycompete in the future.

 

See also thefollowing risk factors in this section: “— We operate in highly competitiveindustries with emerging technological developments, and our inability tocompete successfully could have a material adverse effect on our business,prospects, revenues, financial condition and results of operations”, “—Delaysin the launch of our wireless services, including due to issues relating to infrastructurebuildout and tower-sharing requirements, could impair our ability to gainmarket share and could adversely affect our ability to deploy and operate ourwireless operations successfully and profitably”, “— We compete, and willcontinue to compete, with alternative technologies, and we may be required toinvest a significant amount of capital to address continuing technologicalevolution and development” and “— We may need to refinance certain of ourindebtedness. Our inability to do so on favourable terms, or at all, could havea material adverse effect on us”.

 

***If theworld-wide financial crisis continues, the volatility and disruptions in thecapital and credit markets could adversely affect our business, includingaffecting the cost of new capital, our ability to refinance our scheduled debtmaturities and meet our other obligations as they come due.***

*** ***

The capitaland credit markets have been experiencing extreme volatility and disruption. Inthe fourth quarter of 2008, the volatility and disruption reached unprecedentedlevels. The markets have exerted extreme downward pressure

 

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on stock prices and upward pressure on the cost of new debt capital andhave severely restricted credit availability for most issuers.

 

Thedisruptions in the capital and credit markets have also resulted in higherinterest rates on issuance of debt securities and increased costs under creditfacilities. Continuation of these disruptions could increase our interestexpense, adversely affecting our results of operations and financial position.

 

Our access tofunds under our senior secured credit facilities is dependent on the ability ofthe financial institutions that are parties to those facilities to meet theirfunding commitments. Those financial institutions may not be able to meet theirfunding commitments if they experience shortages of capital and liquidity or ifthey experience excessive volumes of borrowing requests within a short periodof time. Moreover, the obligations of the financial institutions under oursenior secured credit facilities are several and not joint and, as a result, afunding default by one or more institutions does not need to be made up by theothers.

 

Longer termvolatility and continued disruptions in the capital and credit markets as aresult of uncertainty, changing or increased regulation of financialinstitutions, reduced alternatives or failures of significant financialinstitutions could adversely affect our access to the liquidity needed for ourbusinesses in the longer term. Such disruptions could require us to takemeasures to conserve cash until the markets stabilize or until alternative creditarrangements or other funding for our business needs can be arranged.

 

Continuedmarket disruptions could cause broader economic downturns, which may lead tolower demand for certain of our products and increased incidence of customers’inability to pay or timely pay for the services we provide. Events such asthese adversely impact our results of operations, cash flows and financialposition.

 

***We compete,and will continue to compete, with alternative technologies, and we may berequired to invest a significant amount of capital to address continuingtechnological evolution and development.***

*** ***

The media industry isexperiencing rapid and significant technological changes, which has resulted inalternative means of program and content transmission. The continued growth ofthe Internet has presented alternative content distribution options thatcompete with traditional media. Furthermore, in each of our broadcastingmarkets, industry regulators have authorized DTH, microwave services and VDSLservices and may authorize other alternative methods of transmitting televisionand other content with improved speed and quality. We may not be able tosuccessfully compete with existing or newly developed alternative technologies,such as digital television over Internet Protocol connections (IPTV), or we maybe required to acquire, develop or integrate new technologies ourselves.  The cost of the acquisition, development orimplementation of new technologies could be significant and our ability to fundsuch implementation may be limited and could have a material adverse effect onour ability to successfully compete in the future. Any such difficulty orinability to compete could have a material adverse effect on our business,reputation, prospects, financial condition or results of operations.

 

***We may notsuccessfully implement our business and operating strategies.***

*** ***

Our businessstrategies are based on leveraging an integrated platform of media assets. Ourstrategies include launching and deploying additional value-added products andservices such as AWS, pursuing cross-promotional opportunities, maintaining ouradvanced broadband network, leveraging geographic clustering, furtherintegrating our operations within the Quebecor Media group of companies andmaximizing customer satisfaction. We may not be able to implement thesestrategies fully or realize their anticipated results without incurringsignificant costs or at all.  Inaddition, our ability to successfully implement these strategies could beadversely affected by a number of factors beyond our control, includingoperating difficulties, regulatory developments, general or local economicconditions, increased competition, technological change and the other factorsdescribed in this “Risk Factors” section. We may also be required to makecapital expenditures in addition to those originally planned for the buildoutof our AWS operations which may affect our ability to implement our businessstrategy should we not be able to secure additional financing on acceptable termsor generate sufficient internally generated funds to cover these requirements.Any material failure to

 

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implement our strategies could have a material adverse effect on ourreputation, business, financial condition, prospects and results of operationsand on our ability to meet our obligations, including our ability to serviceour indebtedness.

*** ***

***We have grownrapidly and are seeking to continue our growth. This rapid growth presentssignificant strains on our management. If we do not effectively manage ourgrowth, our business, results of operations and financial condition could beadversely affected.***

*** ***

We have experiencedsubstantial growth in our business and have significantly expanded ouroperations in recent years. We have in the past and may in the future seek tomake opportunistic or strategic acquisitions and further expand the types ofbusinesses in which we participate, such as our expansion into facilities-basedwireless telephony operations, under appropriate conditions. This growth hasplaced, and will continue to place, a significant demand on our management. Wecan provide no assurance that we will be successful in either developing orfulfilling the objectives of any such acquisition or business expansion.  In addition, our expansion and acquisitionsmay require us to incur significant costs or divert significant resources, andmay limit our ability to pursue other strategic and business initiatives, whichcould have an adverse effect on our business, financial condition, prospects orresults of operations.  Furthermore, ifwe are not successful in managing and integrating any acquired businesses, orif we are required to incur significant or unforeseen costs, our business,results of operations and financial condition could be adversely affected.

 

***We depend onkey personnel.***

*** ***

Our successdepends to a large extent upon the continued services of our senior managementand our ability to retain skilled employees. There is intense competition forqualified management and skilled employees, and our failure to recruit, trainand retain such employees could have a material adverse effect on our business,financial condition or operating results. In addition, to implement and manageour businesses and operating strategies effectively, we must maintain a highlevel of efficiency and performance, continue to enhance our operational andmanagement systems, and continue to effectively attract, train, motivate andmanage our employees. In connection with our current expansion as afacilities-based wireless services provider, we currently anticipate anear-term need to attract and train a substantial number of new employees,including many skilled employees, to staff this operation.  If we are not successful in these efforts, itmay have a material adverse effect on our business, prospects, results ofoperations and financial condition.

 

***Our financialperformance could be materially adversely affected if we cannot continue todistribute a wide range of television programming on reasonable terms.***

*** ***

The financialperformance of our cable service business depends in large part on our abilityto distribute a wide range of appealing, conveniently-scheduled televisionprogramming at reasonable rates. We obtain television programming fromsuppliers pursuant to programming contracts. The quality and amount oftelevision programming offered by us affect the attractiveness of our servicesto customers and, accordingly, the rates we can charge. We may be unable tomaintain key programming contracts at commercially reasonable rates fortelevision programming. Loss of programming contracts, or our inability toobtain programming at reasonable rates, or our inability to pass on rateincreases to our customers could have a material adverse effect on ourbusiness, financial condition and results of operations.

 

Our ability todistribute television programming at a reasonable cost is also linked to therisk of being imposed a carriage fee for over-the-air television.  In November 2007, the CRTC agreed,pursuant to a request made by over-the-air television stations (OTAs), torevisit the concept of a subscriber fee that would be payable for the carriageof the signals of OTAs.  In October 2008,the CRTC once again denied this request, although it is possible that the CRTCmay re-examine the issue in the future.

 

In addition,our ability to attract and retain cable customers depends, to a certain extent,upon our capacity to offer quality content and a variety of programming choicesand packages. If the number of specialty channels being offered decreasessignificantly or if the content offered on such channels does not receiveaudience acceptance, it may have a significant negative impact on revenues fromour cable operations.

 

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***We provide ourdigital television, Internet access and cable telephony services through asingle clustered network, which may be more vulnerable to widespreaddisruption.***

*** ***

We provide our digitaltelevision, Internet access and telephony services through a primary headendand our analog television services through twelve additional regional headendsin our single clustered network. This characteristic means that a failure inour primary headend could prevent us from delivering some of our products andservices throughout our network until we have resolved the failure, which mayresult in significant customer dissatisfaction.

 

***We aredependent upon our information technology systems and those of certainthird-parties and the inability to enhance our systems, or to protect them froma security breach or disaster, could have an adverse impact on our financialresults and operations.***

*** ***

The day-to-dayoperation of our business is highly dependent on information technologysystems, including those of certain third-party suppliers. An inability tomaintain and enhance our existing information technology systems or obtain newsystems to accommodate additional customer growth or to support new productsand services could have an adverse impact on our ability to acquire newsubscribers, retain existing customers, produce accurate and timely billing,generate revenue growth and manage operating expenses, all of which couldadversely impact our financial results and position. In addition, although weuse industry standard network and information technology security andsurvivability/disaster recovery practices, a security breach or disaster couldhave a material adverse effect on our reputation, business, prospects,financial condition and results of operations.

 

***We may not beable to protect our services from piracy, which may have an adverse effect onour customer base and lead to a possible decline in revenues.***

*** ***

In our cable,Internet access and telephony operations, we may not be able to protect ourservices from piracy. We may be unable to prevent unauthorized access to ouranalog and digital programming, as well as our Internet access services. We useencryption technology to protect our cable signals from unauthorized access andto control programming access based on subscription packages. We may not beable to develop or acquire adequate technology to prevent unauthorized accessto our services, which may have an adverse effect on our customer base and leadto a possible decline in our revenues.

 

***Malicious andabusive Internet practices could impair our cable data services.***

*** ***

Our cable datacustomers utilize our network to access the Internet and, as a consequence, weor they may become victim of common malicious and abusive Internet activities,such as unsolicited mass advertising (or spam) and dissemination ofviruses, worms and other destructive or disruptive software. These activitiescould have adverse consequences on our network and our customers, includingdegradation of service, excessive call volume to call centers and damage to ourcustomers’ equipment and data or ours. Significant incidents could lead tocustomer dissatisfaction and, ultimately, loss of customers or revenue, inaddition to increased costs to us to service our customers and protect ournetwork. Any significant loss of cable data customers or revenue or significantincrease in costs of serving those customers could adversely affect our growth,financial condition and results of operations.

 

***We depend onthird-party suppliers and providers for services and other items critical toour operations.***

*** ***

We depend onthird-party suppliers and providers for certain services and other items thatare critical to our operations, particularly our cable, telephony and wirelessoperations.  These materials and servicesinclude set-top boxes, cable and telephony modems, servers and routers,fiber-optic cable, telephony switches, inter-city links, support structures,software, the “backbone” telecommunications network for our Internet access andtelephony service, and construction services for expansion and upgrades of ournetwork. These services and equipment are available from a limited number ofsuppliers. If no supplier can provide us with the equipment or services that werequire or that comply with evolving Internet and telecommunications standardsor that are compatible with our other equipment and software, our business,financial condition and results of operations could be materially adverselyaffected. In addition, if we are

 

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unable to obtain critical equipment, software, services or other itemson a timely basis and at an acceptable cost, our ability to offer our productsand services and roll out our advanced services may be delayed, and ourbusiness, financial condition and results of operations could be materiallyadversely affected. See also the risk factor “— Delays in the launch of ourwireless services, including due to issues relating to infrastructure buildoutand tower-sharing requirements, could impair our ability to gain market shareand could adversely affect our ability to deploy and operate our wirelessoperations successfully and profitably” above.

 

***We may beadversely affected by litigation and other claims.***

*** ***

In the normalcourse, we are involved in various legal proceedings and other claims relatingto the conduct of our business. Although, in the opinion of our management, the outcome of currentpending claims and other litigation is not expected to have a material adverseeffect on our reputation, results of operations, liquidity or financialposition, a negative outcome in respect of any such claim or litigation couldhave such an adverse effect. Moreover, the cost of defending against lawsuitsand diversion of management’s attention could be significant.  See also “Item 8. Financial Information —Legal Proceedings” in this annual report.

 

***We may beadversely affected by strikes and other labour protests.***

*** ***

As of December 31,2008, approximately 60% of our employees are unionized, and the terms of theiremployment are governed by one of our five regional collective bargainingagreements.  Our two most importantcollective bargaining agreements, covering our unionized employees in theMontréal and Québec City regions, have terms extending to December 31,2009. We are also party to two collective bargaining agreements covering ourunionized employees in the Chicoutimi and Hull regions, with terms runningthrough January 31, 2010 and August 31, 2011, respectively, and oneother collective bargaining agreement covering 39 employees of our SETTEinc. subsidiary, which expired on December 31, 2007. Negotiationsregarding this collective bargaining agreement began in 2008 and are ongoing.

 

We have in thepast experienced labour disputes, which have disrupted our operations, resultedin damage to our network or our equipment and impaired our growth and operatingresults. We cannot predict the outcome of any current or future negotiations relatingto labour disputes, union representation or the renewal of our collectivebargaining agreements, nor can we assure you that we will not experience workstoppages, strikes, property damage or other forms of labour protests pendingthe outcome of any current or future negotiations. If our unionized workersengage in a strike or if there is any other form of work stoppage, we couldexperience a significant disruption of our operations, damages to our propertyand/or service interruption, which could adversely affect our business, assets,financial position and results of operations. Even if we do not experience strikes or other forms of labour protests,the outcome of labour negotiations could adversely affect our business andoperating results, including if current or future labour negotiations orcontracts were to restrict our ability to maximize the efficiency of ouroperations.  In addition, our ability tomake short-term adjustments to control compensation and benefits costs islimited by the terms of our collective bargaining agreements.

 

***Our auditorsare not required to issue a report on our internal control over financialreporting in this annual report.***

*** ***

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, ourmanagement is responsible for establishing and maintaining adequate internalcontrol structures and procedures for financial reporting, and to prepare areport which contains an assessment of the effectiveness of our internalcontrol over financial reporting. Management’s report on our internal controlsover financial reporting is included in “Item 15. Controls and Procedures” ofthis annual report. Pursuant to Section 404 of the Sarbanes-Oxley Act of2002 and related temporary SEC rules, this annual report does not include areport of the Company’s registered public accounting firm on our internalcontrol over financial reporting.

 

While we haveconcluded that our internal control over financial reporting was effective asof December 31, 2008, we cannot be certain that, when our auditors arerequired to perform an audit of our internal control over financial reporting,they will deliver their report without identifying areas for further attentionor improvement, including material weaknesses.

 

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***We will adoptnew accounting standards in 2011, and this adoption may have a material impacton our financial statements.***

*** ***

In February 2008,Canada’s Accounting Standards Board confirmed that Canadian GAAP, as used bypublicly accountable enterprises, will be fully converged to InternationalFinancial Reporting Standards (“IFRS”), as issued by the InternationalAccounting Standards Board.  For our 2011interim and annual financial statements, we will be required to report underIFRS and to provide IFRS comparative information for the 2010 fiscal year.

 

IFRS uses aconceptual framework similar to Canadian GAAP, but there are significantdifferences in recognition, measurement and disclosures.  In order to prepare for the transition toIFRS, we have established an IFRS implementation team which includes seniorlevels of management from all relevant departments and subsidiaries, and haveengaged an external expert advisor.

 

We havecompleted a diagnostic impact assessment, including a high-level analysis ofpotential consequences to financial reporting, business processes, internalcontrols, and information systems. Initial training has been provided to keyemployees and further investment in training and resources will be madethroughout the transition to facilitate a timely and efficient changeover toIFRS.  We continue to monitor and assessthe impact of evolving differences between Canadian GAAP and IFRS.  At this time, the impact of this changeoveron our future financial position and results of operations is not yetdeterminable.

 

The adoptionwill result in changes to our reported financial position and results ofoperations, and these changes may be material. Moreover, the restatement of our2010 financial statements for comparative purposes may be significant.  In addition, IFRS could have an effect on thecomputation of our debt covenants and of certain other contractual obligations.In particular, although the adoption IFRS will not change our actual cashflows, our covenants linked to balance sheet ratios may be affected by theadoption of IFRS in ways that are difficult to predict at this time.

 

**Risks Relatingto Our Industry**

** **

***We are subjectto extensive government regulation. Changes in government regulation couldadversely affect our business, financial condition, prospects and results ofoperations.***

*** ***

Broadcastingoperations in Canada are subject to extensive government regulation.  Laws and regulations govern the issuance,amendment, renewal, transfer, suspension, revocation and ownership of broadcastprogramming and distribution licenses. With respect to distribution,regulations govern, among other things, the distribution of Canadian andnon-Canadian programming services and the maximum fees to be charged to thepublic in certain circumstances. In addition, there are significantrestrictions on the ability of non-Canadian entities to own or controlbroadcasting licenses in Canada.  Changesto the laws, regulations and policies governing broadcast television anddistribution through cable or alternate means, the introduction of new laws,regulations, policies or terms of license could have a material adverse effecton our business, financial condition, prospects and results of operations.  We outline certain elements of thisregulatory framework below.  For a morecomplete description of the regulatory environment affecting our business, see “Item4. Information on the Company —Regulation”.

 

Ourbroadcasting distribution and telecommunications operations (including Internetaccess service) are regulated respectively by the *Broadcasting Act* (Canada) and the *Telecommunications Act* (Canada) and regulations thereunder.The CRTC, which administers the *BroadcastingAct* and the *TelecommunicationsAct*, has the power to grant, amend, suspend, revoke and renewbroadcasting licenses, approve certain changes in corporate ownership andcontrol, and make regulations and policies in accordance with the *Broadcasting Act* and the *Telecommunications Act*, subject to certaindirections from the Federal Cabinet. Our cable operations are also subject totechnical requirements and performance standards under the *Radiocommunication Act* (Canada)administered by Industry Canada. Furthermore, the Federal Government introduceda bill in a previous session of Parliament which would permit the CompetitionBureau, under the *Competition Act* (Canada), toimpose fines of up to $15 million on telecommunications companies that do not

 

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comply with this law. We do not know whether this bill will bere-introduced in Parliament or whether it will become law.

 

The issuanceof licenses for the use of radiofrequency spectrum in Canada is administered byIndustry Canada under the *Radiocommunication Act*.  Use of spectrum is governed by conditions oflicense which address such matters as license term, transferability anddivisibility, technical compliance, lawful interception, research anddevelopment requirements, and requirements related to antenna site sharing andmandatory roaming.

 

At the presenttime, the CRTC, through an exemption order, does not regulate the content ofthe Internet or interactive television and does not regulate broadcastdistribution via the Internet. However, the CRTC has a policy of reviewing anyof its exemption orders periodically. Broadcasting of programs and distributionof programs on the Internet and on wireless devices had been exempted fromregulation since exemption orders issued in 1999 and 2007 respectively. On October 15,2008, the CRTC announced that it will hold a public hearing beginning on February 17,2009 to consider issues relating to broadcasting in the new media and thefollowing six main themes: (i) defining broadcasting in new media; (ii) thesignificance of broadcasting in new media and its impact on the Canadianbroadcasting system;  (iii) areincentives or regulatory measures necessary or desirable for the creation andpromotion of Canadian broadcasting content in new media?; (iv) are thereissues concerning access to broadcasting content in new media?; (v) otherbroadcasting or public policy objectives; and (vi) the appropriateness ofthe new media exemption order. Subject to the outcome of these hearings, it ispossible that the CRTC may impose a tax on cable and telecommunicationscompanies in order to create a national fund that would finance Canadianprogramming.

 

On November 20,2008, the CRTC initiated a public proceeding to consider Internet trafficmanagement practices for both wholesale and retail Internet services.  Among the issues to be considered in thisproceeding are trends in traffic growth and network congestion, technical andeconomic solutions to address network congestion, the end user impacts of thesesolutions, notification requirements, and the potential for unjustdiscrimination toward Internet content or application providers.  A decision is expected in November 2009.  Any restrictions the CRTC might impose on thetraffic management practices of Internet service providers could limit ourability to recover the costs of our access network.

 

On January 15,2008, the CRTC issued its determination in Broadcasting Public Notice CRTC2008-4, entitled “*Diversity of Voices*.”  In this public notice, the CRTC introducednew policies with respect to cross-media ownership; the common ownership oftelevision services, including pay and specialty services; and the commonownership of broadcasting distribution undertakings.  See “Item 4. Information on the Company —Regulation — Ownership and Control of Canadian Broadcast Undertakings —Diversity of Voices”.

 

On July 5,2007, the CRTC announced a review of the regulatory frameworks for broadcastingdistribution undertakings and discretionary programming services (BroadcastingNotice of Public Hearing CRTC 2007-10). As part of this review, the CRTC wasconsidering reducing the amount of regulation for broadcasting distributionundertakings and discretionary programming services to the minimum essential toachieve the objectives under the *BroadcastingAct*, relying instead on market forces wherever possible. As a resultof this review, on October 30, 2008, the CRTC issued a new distributionregulatory framework entitled “*Regulatory frameworks forbroadcasting distribution undertakings and discretionary programming services*”.Pursuant to this new regulatory framework, the CRTC announced various changesto the regulatory frameworks for broadcasting distribution undertakings anddiscretionary programming services, the majority of which will be implementedvia amendments to the *Broadcasting DistributionRegulations* and will take effect on August 31, 2011.  See “Item 4. Information on the Company —Regulation — Canadian Broadcasting Distribution (Cable Television) —Distribution of Canadian Content and Broadcasting Distribution Regulations”.

 

On December 18,2006, the federal government issued a policy direction to the CRTC whichrequires the CRTC to now take a more market-based approach to implementing the *Telecommunications Act*. This policydirection applies prospectively to the wide-variety oftelecommunications-related regulatory issues that the CRTC handles. Applicationof this policy could result in future material changes to telecommunicationsregulation.

 

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As describedmore fully under the “Item 4. Information on the Company — Regulation —Canadian Broadcasting Distribution (Cable Television) — Licensing ofCanadian Broadcasting Distribution Undertakings”, the CRTC has approved, since August 2007,the applications of a number of ILECs for forbearance from regulation ofresidential and business local exchange services affecting a large portion ofthe market in which Videotron operates. These rulings allow ILECs the right toadjust their prices for local exchange services in the approved exchangeswithout the need for CRTC approval. Such price flexibility by our ILECcompetitors for local exchange services could have an adverse impact on ourability to compete successfully with them in the local telephony market.

 

On December 20,2007, the CRTC granted conditional approval to a new telecommunicationsconsumer agency, to which we had previously adhered voluntarily. The majorCanadian cable operators, including Videotron, challenged certain elements ofthis ruling, and the CRTC issued a revised decision on May 30, 2008.  Among other things, the CRTC ruled that alltelecommunications service providers with annual revenues in excess of$10 million must become members of the agency for a period of three years.  Videotron remains a member in good standingof the agency.

 

***The CRTC maynot renew our existing distribution licenses or grant us new licenses onacceptable terms, or at all.***

*** ***

Our CRTCdistribution licenses must be renewed from time to time, typically every sevenyears, and cannot be transferred without regulatory approval.

 

While CRTCregulations and policies do not require CRTC approval before a broadcasterpurchases an unregulated media entity, such as a newspaper, the CRTC mayconsider the issue of our cross-media ownership at license renewal proceedings,and may also consider the issue in deciding whether to grant new licenses tous. The CRTC further has the power to prevent or address the emergence of unduecompetitive advantage on behalf of one licensee where it is found to exist.

 

The CRTC mayrequire us to take measures which could have a material adverse effect on theintegration of our assets, our employees and our ability to realize certain ofthe anticipated benefits of our acquisitions. Our inability to renew any of ourlicenses or acquire new interests or licenses on acceptable terms, or at all,could have a material adverse effect on our business, financial condition orresults of operations.

 

***IndustryCanada may not renew our AWS licenses on acceptable terms, or at all.***

*** ***

Our AWSlicenses were issued on December 23, 2008, for a term of ten years.  At a minimum of two years before the end ofthis term, and any subsequent terms, we may apply for license renewal for anadditional license term of up to ten years. AWS license renewal, including whether license fees should apply for asubsequent license term, will be subject to a public consultation processinitiated in year eight.

 

***We arerequired to provide third-party Internet service providers with access to ourcable systems, which may result in increased competition.***

*** ***

The fourlargest cable operators in Canada, including Vidéotron, have been required bythe CRTC to provide third-party Internet service providers with access to theircable systems at mandated cost-based rates. The CRTC has further directed us tofile, at the same time we offer any new retail Internet service speed, proposedrevisions to our third-party internet access (or “TPIA”) tariff to include thisnew speed offering. TPIA tariff items have been filed and approved for allVideotron Internet service speeds. Several third-party Internet service providers are now interconnected toour cable network and are thereby providing retail Internet access services.

 

The CRTC also requires large cable carriers, such as us, to allowthird-party Internet service providers to provide voice or telephonyapplications in addition to retail Internet access services.

 

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As a result ofthese requirements, we may experience increased competition for retail cableInternet and residential telephony customers. In addition, because ourthird-party Internet access rates are regulated by the CRTC, we could belimited in our ability to recover our costs associated with providing thisaccess.

 

On March 3,2008, the CRTC released a decision affirming that cable TPIA services are not ‘essentialservices’, yet mandated that they continue to be provided at cost-based ratesuntil such time as it has been demonstrated that a functionally equivalent,practical and feasible wholesale alternative exists.

 

***We may need tosupport increasing costs in securing access to support structures needed forour cable network.***

*** ***

We requireaccess to the support structures of hydro-electric and telephone utilities andto municipal rights of way to deploy our cable network. Where access to thestructures of telephone utilities cannot be secured, we may apply to the CRTCto obtain a right of access under the *Telecommunications Act*(Canada).

 

We haveentered into comprehensive support structure access agreements with all of themajor hydro-electric  companies and allof the major telecommunications companies in our service territory. Ouragreement with Hydro-Québec, by far the largest of the hydro-electriccompanies, expires in December 2010.

 

On October 30,2008, TELUS filed an application with the CRTC seeking an order to direct theILECs to file new costs, terms and conditions for support structureservice.  TELUS further requested thatcurrent telecommunications support structure rates be declared interim, andthat monthly rental rates be adjusted retroactively to the date of itsapplication to reflect any revised rates once a new tariff receives finalapproval.  The major Canadian cableoperators, including Videotron, have opposed TELUS’ application, whereas BellCanada and its affiliates have supported it. If a review of monthly rental rates does proceed and if it results in anincrease in rates, it may have a significant impact on Videotron’s network coststructure.

 

***Long-DistanceEqual Access could adversely affect our revenues.***

*** ***

The CRTC’s current three-year “Work Plan” includes a review of theregulatory treatment of Wireless Service Providers (WSPs), which couldencompass a review of the issue of long-distance equal access for WSPs.  Equal access would permit wirelesscustomers to choose their long distance provider rather than relying on thelong distance services of their contracted wireless carrier.  This could result in lower revenues forlong-distance services, which could adversely affect the profitability of our wireless telephonybusiness.

 

***We are subject to a variety ofenvironmental laws and regulations.***

*** ***

We are subjectto a variety of environmental laws and regulations. Certain of our facilitiesare subject to federal, provincial, state and municipal laws and regulationsconcerning, among other things, emissions to the air, water and sewerdischarge, the handling and disposal of hazardous materials and waste,recycling, the soil remediation of contaminated sites, or otherwise relating tothe protection of the environment. In addition, laws and regulations relatingto workplace safety and worker health, which, among other things, regulateemployee exposure to hazardous substances in the workplace, also govern ouroperations. Failure to comply with present or future laws or regulations couldresult in substantial liability to us. Environmental laws and regulations and theirinterpretation have changed rapidly in recent years and may continue to do soin the future. Our properties, as well as areas surrounding those properties,particularly those in areas of long-term industrial use, may have had historicuses, or may have current uses, in the case of surrounding properties, whichmay affect our properties and require further study or remedial measures. Weare not currently conducting or planning any material study or remedialmeasure, and none has been required by regulatory authorities. However, wecannot provide assurance that all environmental liabilities have beendetermined, that any prior owner of our properties did not create a materialenvironmental condition not known to us, that a material environmental conditiondoes not otherwise exist as to any such property, or that expenditure will notbe required to deal with known or unknown contamination.

 

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**Risks Relating to our Senior Notes andCapital Structure**

** **

***Ourindebtedness and significant interest payment requirements could adverselyaffect our financial condition and therefore make it more difficult for us tofulfill our obligations, including our obligations under our outstanding SeniorNotes.***

*** ***

We currentlyhave a substantial amount of debt and significant interest paymentrequirements. As of December 31, 2008, we had $1.8 billion ofconsolidated long-term debt (excluding Quebecor Media subordinated loans) andwe had $367.3 million availablefor additional borrowings under our senior secured credit facilities. Oursubstantial indebtedness could have significant consequences, includingthe following:

 

·                  increase our vulnerability to generaladverse economic and industry conditions;

 

·                  require us to dedicate a substantialportion of our cash flow from operations to making interest and principalpayments on our indebtedness, reducing the availability of our cash flow tofund capital expenditures, working capital and other general corporatepurposes;

 

·                  limit our flexibility in planningfor, or reacting to, changes in our business and the industry in which weoperate;

 

·                  place us at a competitivedisadvantage compared to our competitors that have less debt or greaterfinancial resources; and

 

·                  limit, along with the financial andother restrictive covenants in our indebtedness, among other things, ourability to borrow additional funds on commercially reasonable terms, if at all.

 

Our seniorsecured credit facilities and the indentures governing our outstanding notespermit us to incur additional indebtedness in the future.  If we incur additional debt, the risks we nowface as a result of our leverage could intensify. For more informationregarding our long-term debt, see Note 14to our audited consolidated financial statements for the year ended December 31,2008 included under “Item 17. Financial Statements” of this annual report.

 

***Restrictivecovenants in our outstanding debt instruments may reduce our operating andfinancial flexibility, which may prevent us from capitalizing on certainbusiness opportunities.***

*** ***

The terms of our senior secured credit facilities and the respectiveindentures governing our Senior Notes contain a number of operating andfinancial covenants restricting our ability to, among other things:

 

·                  incur additional debt, includingguarantees by our restricted subsidiaries;

 

·                  pay dividends and make otherrestricted payments;

 

·                  create or permit certain liens;

 

·                  use the proceeds from sales of assetsand subsidiary stock;

 

·                  create or permit restrictions on theability of our restricted subsidiaries, if any, to pay dividends or make otherdistributions;

 

·                  engage in certain transactions withaffiliates;

 

·                  enter into sale and leasebacktransactions; and

 

·                  enter into mergers, consolidationsand transfers of all or substantially all of our assets.

 

Our failure tocomply with these covenants could result in an event of default which could, ifnot cured or waived, result in an acceleration of our debt and causecross-defaults under our other debt. If our indebtedness is accelerated, we maynot be able to repay our indebtedness or borrow sufficient funds to refinanceit, and any such prepayment or refinancing could adversely affect our financialcondition.  In addition, if we incuradditional debt in the future, we may be subject to additional covenants, whichmay be more restrictive than those to which we are currently

 

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subject. Even if we are able to comply with all applicable covenants,the restrictions on our ability to manage our business in our sole discretioncould adversely affect our business by, among other things, limiting ourability to take advantage of financings, mergers, acquisitions and othercorporate opportunities that we believe would be beneficial to us.

 

***We may not beable to finance an offer to purchase our Senior Notes following a change ofcontrol as required by each of the indentures governing our Senior Notesbecause we may not have sufficient funds at the time of the change of controlor our senior secured credit facilities may not allow the repurchases.***

*** ***

If weexperience a change of control, as that term is defined in each of therespective indentures governing our Senior Notes, or if we dispose ofsignificant assets under specified circumstances, we may be required to make anoffer to repurchase all of our Senior Notes prior to maturity. We cannot assureyou that we will have sufficient funds or be able to arrange for additionalfinancing at the time of the change of control to make the required repurchaseof the Senior Notes.  There is no sinkingfund with respect to our outstanding Senior Notes.

 

In addition,under our senior secured credit facilities, a change of control would be anevent of default. Any future credit agreement or other agreements relating toour senior indebtedness to which we become a party may contain similarprovisions. Our failure to repurchase our Senior Notes upon a change of controlwould constitute an event of default under each of our indentures.  Any such default could, in turn, constitutean event of default under future senior indebtedness, any of which may causethe related debt to be accelerated after the expiry of any applicable notice orgrace periods. If debt were to be accelerated, we may not have sufficient fundsto repurchase our Senior Notes and repay the debt.

 

***Wemay need to refinance certain of our indebtedness. Our inability to do so onfavourable terms, or at all, could have a material adverse effect on us.***

 

We may need to refinance certain of our existing debt instruments attheir term. Our ability to obtain additional financing to repay our existingdebt at maturity will depend upon a number of factors, including prevailingmarket conditions and our operating performance.  The tightening of credit availability and thewell-publicized challenges affecting global capital markets could also limitour ability to refinance our existing maturities.  There can be no assurance that any suchfinancing will be available to us on favourable terms or at all.  See also the risk factor “—Risks Relating toOur Business—If the world-wide financial crisis continues, the volatility anddisruptions in the capital and credit markets could adversely affect ourbusiness, including affecting the cost of new capital, our ability to refinanceour scheduled debt maturities and meet our other obligations as they come due”above.

 

***We may beadversely affected by exchange rate fluctuations.***

*** ***

Most of ourrevenues and expenses are received or denominated in Canadian dollars. However,certain expenditures, such as the purchase of set-top boxes and cable modemsand certain capital expenditures, including certain costs related to thebuildout of our wireless network, are paid in U.S. dollars. Also, a substantialportion of our debt is denominated in U.S. dollars, and interest,principal and premium, if any, thereon is payable in U.S. dollars. For thepurposes of financial reporting, any change in the value of the Canadian dollaragainst the U.S. dollar during a given financial reporting period wouldresult in a foreign exchange gain or loss on the translation of any unhedgedU.S. dollar-denominated debt into Canadian dollars. Consequently, ourreported earnings and debt could fluctuate materially as a result of foreignexchange gains or losses. Although we have entered into transactions to hedgethe exchange rate risk with respect to 100% of our U.S. dollar-denominateddebt outstanding at December 31, 2008, and we intend in the future toenter into such transactions for new U.S. dollar-denominated debt, thesehedging transactions could, in certain circumstances, prove economicallyineffective and may not be successful in protecting us against exchange ratefluctuations, or we may in the future be required to provide cash and othercollateral to secure our obligations with respect to such hedging transactions,or we may in the future be unable to enter into such transactions on favorableterms or at all.  In addition, certaincross-currency interest rate swaps that we have entered into include an optionthat allows each party to unwind the transaction on a specific date at thethen-fair value.

 

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The fair valueof the derivative financial instruments we are party to is estimated usingperiod-end market rates and reflect the amount Videotron would receive or payif the instruments were terminated and settled at those dates, as adjusted forcounterparties’ non-performance risk. At December 31, 2008, the netaggregate fair value of our cross-currency interest rate swaps and forwardforeign exchange swap agreements was $78.5 million. See also “Item 11.Quantitative and Qualitative Disclosures About Market Risk” of this annualreport.

*** ***

***Canadianbankruptcy and insolvency laws may impair the trustees’ ability to enforceremedies under our Senior Notes.***

*** ***

The rights ofthe trustees who represent the holders of our Senior Notes to enforce remediescould be delayed by the restructuring provisions of applicable Canadian federalbankruptcy, insolvency and other restructuring legislation if the benefit ofsuch legislation is sought with respect to us. For example, both the *Bankruptcy and Insolvency Act* (Canada) and the *Companies’ Creditors Arrangement Act* (Canada) containprovisions enabling an insolvent person to obtain a stay of proceedings againstits creditors and to file a proposal to be voted on by the various classesof its affected creditors. A restructuring proposal, if accepted by therequisite majorities of each affected class of creditors, and if approved bythe relevant Canadian court, would be binding on all creditors within eachaffected class, including those creditors that did not vote to accept theproposal. Moreover, this legislation, in certain instances, permits theinsolvent debtor to retain possession and administration of its property,subject to court oversight, even though it may be in default under theapplicable debt instrument, during the period that the stay against proceedingsremains in place.

 

The powers ofthe court under the *Bankruptcy and InsolvencyAct* (Canada), and particularly under the *Companies’Creditors Arrangement Act* (Canada), have been interpreted andexercised broadly so as to protect a restructuring entity from actions taken bycreditors and other parties. Accordingly, we cannot predict whether paymentsunder our outstanding notes would be made during any proceedings in bankruptcy,insolvency or other restructuring, whether or when the trustees could exercisetheir respective rights under the respective indentures governing our SeniorNotes or whether and to what extent holders of our Senior Notes would becompensated for any delays in payment, if any, of principal, interest andcosts, including the fees and disbursements of the respective trustees.

 

***Applicablestatutes allow courts, under specific circumstances, to void the guarantees ofour Senior Notes provided by certain of our subsidiaries.***

*** ***

Our creditorsor the creditors of one or more guarantors of our Senior Notes could challengethe guarantees as fraudulent transfers, conveyances or preferences or on othergrounds under applicable U.S. federal or state law or applicable Canadianfederal or provincial law. While the relevant laws vary from one jurisdictionto another, the entering into of the guarantees by certain of our subsidiariescould be found to be a fraudulent transfer, conveyance or preference orotherwise void if a court was to determine that:

 

·                  a guarantor delivered its guaranteewith the intent to defeat, hinder, delay or defraud its existing or futurecreditors;

 

·                  the guarantor did not receive fairconsideration for the delivery of the guarantee; or

 

·                  the guarantor was insolvent at thetime it delivered the guarantee.

 

To the extenta court voids a guarantee as a fraudulent transfer, preference or conveyance orholds it unenforceable for any other reason, holders of notes would cease tohave any direct claim against the guarantor that delivered a guarantee. If acourt were to take this action, the guarantor’s assets would be applied firstto satisfy the guarantor’s liabilities, including trade payables and preferredstock claims, if any, before any portion of its assets could be distributed tous to be applied to the payment of our Senior Notes. We cannot assure you thata guarantor’s remaining assets would be sufficient to satisfy the claims of theholders of notes relating to any voided portions of the guarantees.

 

In addition,the corporate statutes governing the guarantors of our Senior Notes may alsohave provisions that serve to protect each guarantor’s creditors fromimpairment of its capital from financial assistance given to its corporateinsiders where there are reasonable grounds to believe that, as a consequenceof this financial assistance, the guarantor

 

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would be insolvent or the book value, or in some cases the realizablevalue, of its assets would be less than the sum of its liabilities and itsissued and paid-up share capital. While the applicable corporate laws may notprohibit financial assistance transactions and a corporation is generallypermitted flexibility in its financial dealings, the applicable corporate lawsmay place restrictions on each guarantor’s ability to give financial assistancein certain circumstances.

 

***There is nopublic market for our Senior Notes.***

*** ***

There iscurrently no established trading market for our Senior Notes and we do notintend to apply for listing of any of our Senior Notes on any securitiesexchange or on any automated dealer quotation system. No assurance can be givenas to the prices or liquidity of, or trading markets for, any series of ourSenior Notes. The liquidity of any market for our Senior Notes will depend uponthe number of holders of our Senior Notes, the interest of securities dealersin making a market in our Senior Notes, prevailing interest rates, the marketfor similar securities and other factors, including general economicconditions, our financial condition and performance, and our prospects.  The absence of an active market for ourSenior Notes could adversely affect the market price and liquidity of ourSenior Notes.

 

In addition,the market for non-investment grade debt has historically been subject todisruptions that caused volatility in prices. It is possible that the marketfor our Senior Notes will be subject to disruptions. Any such disruptions mayhave a negative effect on your ability to sell our Senior Notes regardless ofour prospects and financial performance.

 

***Non-U.S.holders of our Senior Notes are subject to restrictions on the transfer orresale of our Senior Notes.***

*** ***

We did not,and we do not intend to, qualify our Senior Notes by prospectus in Canada, and,accordingly, the Senior Notes remain subject to restrictions on resale andtransfer in Canada. In addition, non-U.S. holders remain subject torestrictions imposed by the jurisdiction in which the holder is resident.

 

***U.S. investorsin our Senior Notes may have difficulties enforcing civil liabilities.***

*** ***

We areincorporated under the laws of the Province of Québec. Substantially all of ourdirectors, controlling persons and officers are residents of Canada or otherjurisdictions outside the United States and all or a substantial portionof their assets and substantially all of our assets are located outside theUnited States. We have agreed, under the terms of the respectiveindentures governing our Senior Notes, to accept service of process in anysuit, action or proceeding with respect to the indentures or the Senior Notesbrought in any federal or state court located in New York City by an agentdesignated for such purpose, and to submit to the jurisdiction of such courtsin connection with such suits, actions or proceedings.  Nevertheless, it may be difficult for holdersof our outstanding notes to effect service of process upon us or such personswithin the United States or to enforce against us or them in theUnited States, judgments of courts of the United States predicatedupon the civil liability provisions of the U.S. federal or statesecurities laws or other laws of the United States. In addition, there isdoubt as to the enforceability in Canada of liabilities predicated solely uponU.S. federal or state securities law against us and our directors,controlling persons and officers who are not residents of theUnited States, in original actions or in actions for enforcement ofjudgments of U.S. courts.

 

***We arecontrolled by Quebecor Media.***

*** ***

All of ourissued and outstanding common shares are held by Quebecor Media. As aresult, Quebecor Media controls our policies and operations. The interestsof Quebecor Media, as our sole common shareholder, may conflict with theinterests of the holders of our outstanding notes. In addition, actions takenby Quebecor Media, as well as its financial condition, matters over which wehave no control, may affect us.

 

Also,Quebecor Media is a holding company with no significant assets other thanits equity interests in its subsidiaries. Its principal source of cash neededto pay its own obligations is the cash that we and other subsidiaries generatefrom operations and borrowings. We have the ability to pay significantdividends under the terms of our indebtedness and applicable law and currentlyexpect to make distributions to our shareholder in the future, subject to the

 

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terms of our indebtedness and applicable law.  See “Item 8. Financial Information —Dividend Policy” elsewhere in this annual report.

 

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## **ITEM 4 -INFORMATION ON THE COMPANY**

##  

**A-**                                   History andDevelopment of the Company

** **

We werefounded on September 1, 1989 as part of the amalgamation of our two predecessorcompanies, namely Videotron Ltd. and Télé-Câble St-Damien inc., under Part IAof the *Companies Act* (Québec). In October 2000,our parent company, Le Groupe Vidéotron ltée, was acquired byQuebecor Media. At the time of this acquisition, the assets of Le GroupeVidéotron ltée included all of our shares. In December 2002, LeGroupe Vidéotron ltée was liquidated into its sole shareholder, Quebecor Media.

 

Our registeredoffice is located at 612 St. Jacques Street, Montréal, Québec,Canada H3C 4M8, and our telephone number is (514) 281-1232. Ourcorporate website may be accessed through the URL *http://www.videotron.com*.The information found on our corporate website does not, however, form part ofthis annual report and is not incorporated by reference herein. Our agent forservice of process in the United States with respect to our Senior Notesis CT Corporation System, 111 Eighth Avenue, New York, New York10011.

 

On January 1,2005, our subsidiary Vidéotron TVN Inc., or Vidéotron TVN, was liquidated intous, and on December 31, 2004, our subsidiary Vidéotron (1998) ltée wasliquidated into us. These transactions had no impact on our consolidatedfinancial statements.

 

On January 1, 2006,Vidéotron (Régional) ltée was merged with and into CF Cable TV Inc. Thistransaction has no impact on our consolidated financial statements.

 

On January 1, 2006,Videotron Telecom, which was a wholly-owned indirect subsidiary of QuebecorMedia, was merged with and into us, pursuant to an amalgamation under Part IAof the *Companies Act* (Québec).  On July 1, 2006, we also merged with ourparent, 9101-0827 Québec inc, pursuant to an amalgamation under Part IA ofthe *Companies Act* (Québec).  Both transactions have been accounted forusing the continuity of interest method and, accordingly, the previous periodshave been restated to include the results of operations and the financialposition of the companies as if they had always been combined.

 

On September 23,2008, Videotron completed the acquisition of all of the issued and outstandingcommon shares of 9193-2962 Québec Inc. (“Spectrumco”) from Quebecor Media.Spectrumco currently holds the recently obtained spectrum licenses for AWS.

 

For adescription, including the amount invested, of our principal capitalexpenditures since January 1, 2006, see “Item 5. Operating andFinancial Review and Prospects — Liquidity and Capital Resources —Uses of Liquidity and Capital Resources— Capital Expenditures”.

 

**B-**                                   Business Overview

** **

**Overview**

** **

We are thelargest cable operator in the Province of Québec and the third largest inCanada, in each case based on the number of cable customers, a major Internetservice provider and a provider of telephony services in the Province ofQuébec. We offer pay television, Internet access, cable telephony and mobilewireless telephony services. Our cable network covers approximately 80% ofQuébec’s approximately 3.1 million residential and commercial premisespassed by cable. Our cable licenses include licenses for the greater Montréalarea, the second largest urban area in Canada. The greater Montréal arearepresents one of the largest contiguous clusters in Canada and is among thelargest in North America as measured by the number of cable customers. Thisconcentration provides us with improved operating efficiencies and is a keyelement in the development and launch of our bundled service offerings.

 

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As of December 31,2008, we had over 1.7 million basic cable customers (which we define ascustomers receiving basic cable service, including analog and digitalcustomers), representing a basic penetration rate of 67.5%. Through ourextensive broadband coverage, we also offer digital television and cableInternet access services to approximately 99% of our total homes passed. Wehave rapidly grown our digital customer base in recent years, and at December 31,2008, we had 927,332 digital customers, representing 54.1% of our basiccustomers and 36.5% of our total homes passed. We have also rapidly grown ourcable Internet access customer base, and as of December 31, 2008, we had1,063,847 cable Internet access customers, representing 62.0% of our basiccustomers and 41.8% of our total homes passed. We believe that the continuedincrease in the penetration rate of our digital television, cable Internetaccess, telephony and wireless voice and data services will result in increasedaverage revenue per customer (ARPU).

 

Ourbi-directional hybrid fiber coaxial (HFC) network also allows us to offer atelephony service using VoIP technology to our residential and commercialcustomers.  As of December 31, 2008,we had 851,987 cable telephony customers, representing 49.7% of our basiccustomers and 33.5% of our total homes passed. In addition, as of December 31, 2008, approximately 99% of all ofour cable customers were in areas in which our cable telephony service wasavailable.

 

We alsocurrently offer MVNO-based mobile wireless telephony services utilizing theGSM/GPRS network of Rogers Wireless Inc. (“Rogers Wireless”), a subsidiary ofRogers Communications Inc. As of December 31, 2008, 63,402 lines hadbeen activated.  On March 31, 2008,our parent company, Quebecor Media, qualified as a new market entrant in thespectrum auction for third generation Advanced Wireless Services.  In July 2008, our parent company,Quebecor Media, acquired spectrum licenses for AWS covering all regions of theprovince of Québec and certain areas of Ontario.  Quebecor Media was the successful bidder for40 MHz spectrum licenses in all parts of the Province of Québec, except theOutaouais region where it obtained 20 MHz spectrum licenses and certain regionsof Québec where it obtained 50 MHz spectrum licenses.  Quebecor Media also acquired 20 MHz spectrumlicenses in Eastern Ontario and 10 MHz spectrum licenses in the city ofToronto.  These licenses, the control ofwhich was transferred from Quebecor Media to Videotron subsequent to thecompletion of the auction, were issued by Industry Canada on December 23,2008.  These spectrum licenses enable usto pursue the buildout of a network infrastructure and become afacilities-based provider offering advanced wireless telephony services,including high-speed Internet, mobile television and a variety of otheradvanced functions that can be accessed through mobile devices referred to assmartphones.

 

In October 2008,we and Quebecor Media announced our intention to invest between $800 millionand $1.0 billion over the next four years to roll out our own AWS network.  This amount includes the cost of the acquiredspectrum and operating licenses (which has already been paid), the cost ofnetwork buildout and initial operating costs (but excludes any capitalizedinterest).  We plan to fund futureinvestments in AWS through cash flow generation and available creditfacilities.  We currently anticipate thatour new High Speed Packet Access (HSPA) network will be operational in 9 to 15months.

 

We offer ouradvanced products and services, which include video-on-demand and selectedinteractive television services, as a bundled package that is unique among thecompetitors in our market. We differentiate our services by offering a higherspeed Internet access product, the widest range of French-language programmingin Canada and exclusive content on our video-on-demand service. We believe thatour bundled packages of products and services, together with our focus oncustomer service and the breadth of our French-language offerings, haveresulted in improved customer satisfaction, increased use of our services andhigher customer retention.

 

Through LeSuperClub Vidéotron, we also operate the largest chain of video and video gamerental stores in Québec and among the largest of such chains in Canada, with atotal of 246 retail locations (of which 208 are franchised).

 

For the yearended December 31, 2008, Videotron generated revenues of $1.80 billion and operating income of $797.2 million. For the year ended December, 31,2007, Videotron generated revenues of $1.55 billion and operating incomeof $642.7 million.

 

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**CompetitiveStrengths**

** **

*Leading Market**Positions. *Weare the largest cable operator in Québec and the third largest in Canada. Webelieve that our strong market position has enabled us to more effectivelylaunch and deploy new products and services. For example, since theintroduction of our cable Internet access service, we estimate that we havebecome the largest provider of such service in the areas we serve. In addition,we operate the largest chain of video stores in Québec through ourLe SuperClub Vidéotron subsidiary. We believe that our proprietary andthird-party retail distribution network of 717 stores and points of sale,including the Le SuperClub Vidéotron stores, assists us in marketing anddistributing our advanced services, such as cable Internet access and digitaltelevision, on a large scale basis.

 

*Single, Highly-Contiguous Cluster. *We serve our customer base through a single HFCclustered network that covers approximately 80% of Québec’s total addressablemarket and five of the province’s top six urban areas. This network representsone of the largest contiguous clusters in Canada and among the largest in NorthAmerica as measured by the number of cable customers. We serve all of our cablecustomers through one primary headend and twelve regional headends. We believethat our single cluster network architecture provide us with several benefits,including:

 

·                  ahigher quality and more reliable network;

 

·                  theability to launch and deploy new products and services rapidly and efficiently;and

 

·                  alower cost structure through reduced maintenance and technical support costs.

 

*Differentiated, Bundled Service Offerings.*Throughour technologically advanced network, we offer a differentiated, bundled suiteof entertainment, information and communication services and products,including digital television, cable Internet access, video-on-demand and otherinteractive television services, as well as residential and commercial cabletelephony services using VoIP technology, and mobile wireless telephonyservices.  In addition, we deliverhigh-quality services and products, including, for example, our standard cableInternet access service that enables our customers to download data at a higherspeed than that currently offered by standard digital subscriber line, or DSL,technology, we offer the widest range of French-language programmingin Canada, and we offer exclusive content on our video-on-demand service.

 

*Advanced Broadband Network.*We have anadvanced network, 99% of which is bi-directional, which allows us to offer awide range of advanced services on the same media, such as digital television,video-on-demand, cable Internet access and cable telephony services. We arecommitted to maintaining and upgrading our network capacity and, to that end,we currently anticipate that future capital expenditures over the next fiveyears will be required to accommodate the evolution of our products andservices and to meet the demand for increased capacity resulting from thegrowth of our telephony service and the offering of our other advanced productsand services.

 

*Strong, Market-Focused Management Team.*Wehave a strong market-focused management team that has extensive experience andexpertise in a range of areas, including marketing, finance, telecommunicationsand technology. Under the leadership of our senior management team, we have,despite intense competition, successfully increased sales of our digitaltelevision products, improved penetration of our high-speed Internet access andcable products and successfully launched our VoIP telephony services.

 

**CableTelevision Industry Overview**

** **

Cabletelevision has been available in Canada for more than 50 years and is awell developed market. Competition in the cable industry was first introducedin Canada in 1997. As of August 31, 2007, the most recent date for whichdata is available, there were approximately 7.6 million cable televisioncustomers in Canada, representing a basic cable penetration rate ofapproximately 55.9% of homes passed. For the twelve months ended August 31,2007 (the most recent data available), total industry revenue was estimated tobe over $7.1 billion and is expected to grow in the future becauseCanadian cable operators have aggressively upgraded their networks and havebegun launching and deploying

 

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new products and services, such as cable Internet access, digitaltelevision services and, more recently, telephony services. The following tablesummarizes the most recent available annual key statistics for the Canadian andU.S. cable television industries.

 
| ** **            | ** ** | **Twelve Months Ended August 31,**                         | ** ** |
|-----------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **            | ** ** | **CAGR(1)**                                                                    | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **            | ** ** | **(Homes passed and basic cable customers in  millions, dollars in billions)** | ** ** |
|                  |       |                                                                           |       |   |   |   |   |   |   |   |   |   |   |
| **Canada**            |       |                                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Industry Revenue      |       | 12.7                                                                           | %          | $ | 7.1 |   | $ | 6.1 |   | $ | 5.0 |   | $ | 4.7 |   | $ | 4.4 |   |
| Homes Passed(2)       |       | 5.7                                                                            | %          | 13.6 |   | 13.0 |   | 11.2 |   | 10.5 |   | 10.9 |   |
| Basic Cable Customers |       | 1.7                                                                            | %          | 7.6 |   | 7.5 |   | 6.9 |   | 6.9 |   | 7.1 |   |
| Basic Penetration     |       | (3.8                                                                           | )%         | 55.9 | % | 57.7 | % | 61.6 | % | 65.7 | % | 65.1 | % |
|                       |            |                                                                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **            | ** ** | **Twelve Months Ended December 31,**                                                                        | ** ** |
|-----------------------|------------|---------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **            | ** ** | **CAGR(3)**                                                                                                                     | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **            | ** ** | **(Homes passed and basic cable customers in millions, dollars in billions)** | ** ** |
|                  |       |                                                                                                                            |       |   |   |   |   |   |   |   |   |   |   |
| **U.S.**              |       |                                                                                                                            |       |   |   |   |   |   |   |   |   |   |   |
| Industry Revenue      |       | 7.1                                                                                                                             | %          | US$ | 81.3 |   | US$ | 74.7 |   | US$ | 68.2 |   | US$ | 62.3 |   | US$ | 57.6 |   |
| Homes Passed(2)       |       | 2.8                                                                                                                             | %          | 124.2 |   | 123.0 |   | 111.6 |   | 110.8 |   | 108.2 |   |
| Basic Cable Customers |       | (0.2                                                                                                                            | )%         | 64.7 |   | 65.1 |   | 65.6 |   | 65.4 |   | 65.4 |   |
| Basic Penetration     |       | (2.9                                                                                                                            | )%         | 52.1 | % | 52.9 | % | 58.8 | % | 59.0 | % | 60.4 | % |
|                       |            |                                                                                                                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

*Source of Canadian data: CRTC.*

*Source of U.S. data: NCTA, A.C. Nielsen Media Research and SNLKagan.*

* *

(1)            Compounded annual growth rate from 2003through 2007.

(2)            “Homes passed” means the number of residentialpremises, such as single dwelling units or multiple dwelling units, andcommercial premises passed by the cable television distribution network in agiven cable system service area in which the programming services are offered.

(3)            Compounded annual growth rate from 2004through 2008.

 

Thetraditional cable business, which is the delivery of video via hybrid fibercoaxial network, is fundamentally similar in the U.S. and Canada. Differenteconomic and regulatory conditions, however, have given rise to importantdifferences between the two markets. Canadian operators have more limitedrevenue sources than U.S. operators due to Canadian regulations whichprevent cable operators from generating revenue from local advertising.However, the lack of local advertising revenues allows Canadian cable operatorsto benefit from lower programming costs as compared to U.S. cableoperators.

 

A significantportion of Canada’s cable television customers are based in Québec. As of August 31,2008, Québec is home to approximately 23.3% of Canada’s population andapproximately 23.9% of its basic cable customers. Based on the CRTC statistics,basic cable penetration in Québec, which was approximately 53.9% as of August 31,2008, has traditionally been lower than in other provinces in Canada,principally due to the higher concentration of French-speaking Canadians inQuébec. It is estimated that over 80% of Québec’s population isFrench-speaking. Contrary to the English-speaking provinces of Canada, whereprogramming in English comes from all over North America, programming in Frenchis available over-the-air in most of Québec’s French-speaking communities. Thearrival of a variety of French-language specialty channels not availableover-the-air and, more recently, the introduction of HD content, contributed toa penetration increase.

 

***Expansion ofDigital Distribution and Programming***

*** ***

In order tocompete with the direct broadcast satellite offerings, the cable industry begandeploying digital technology, which allows for a large number of programmingchannels and advanced services to be offered.

 

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In addition,in recent years, the choice and range of television programming has expandedsubstantially in Canada. In November 2000, the CRTC released its decisionson the applications for new digital pay and specialty television channels. Intotal, the CRTC approved 21 Category One licenses (16 English-language and fiveFrench-language) and 262 Category Two licenses, as well as two pay-per-view andfour video-on-demand licenses. Cable service providers using digital technologyare required to carry all of the approved Category One services appropriate totheir markets while Category Two licensees who do not have guaranteeddistribution rights must negotiate with cable service providers for access.Since then, the CRTC has licensed dozens of Category Two additional programminglicenses. The increase in programming content as a result of the launch ofapproximately 50 of these programming services is believed to be a key factorin driving increases in digital cable penetration in Canada.

 

Manyprogramming services have announced their intention to convert tohigh-definition format. We believe that the availability of HDTV programmingwill increase significantly in the coming years and will result in a higherpenetration level of digital distribution.

 

In recentyears, digital cable has significantly expanded the range of services that maybe offered to our customers. We are now offering to our digital cable customersmore than 340 channels, including 161 English-language channels,55 French-language channels, 35 HDTV channels, 10 time-shiftingchannels and 63 radio/music channels.

 

Our strategy,in the coming years, will be to try to continue the expansion in our offeringand maintain the quality of our programming. Our cable television servicedepends in large part on our ability to distribute a wide range of appealing,conveniently-scheduled television programming at reasonable rates and will bean important factor in our success to maintain the attractiveness of ourservices to customers.

 

**Products andServices**

** **

We currentlyoffer our customers analog cable television services and programming as well asnew and advanced high-bandwidth products and services such as cable Internetaccess, digital television, premium programming and selected interactivetelevision services. We continue to focus on our cable Internet access, digitaltelevision and telephony services, which are increasingly desired by customers.With our advanced broadband network, our objective is to increase penetrationof value-added services such as video-on-demand, high-definition television,personal video recorders, as well as interactive programming and advertising.

 

We offer cabletelephony service in Québec, a product that leverages our customer base withwhat was at the time Videotron Telecom’s telecommunications network andexpertise. We integrated Videotron Telecom’s operations within our ownoperations pursuant to the merger of Videotron Telecom with and into Videotronon January 1, 2006.

 

***TraditionalCable Television Services***

*** ***

Customerssubscribing to our traditional analog “basic” and analog “extended basic”services generally receive a line-up of 44 channels of televisionprogramming, depending on the bandwidth capacity of their local cable system.Customers who pay additional amounts can also subscribe to additional channels,either individually or in packages.  Weaim to tailor our channel packages to satisfy the specific needs of thedifferent customer segments we serve.

 

Our analogcable television service offerings include the following:

 

·                  *Basic Service. *All ofour customers receive a package of basic programming, consisting of localbroadcast television stations, the four U.S. commercial networks and PBS,selected Canadian specialty programming services, and local and regionalcommunity programming. Our basic service customers generally receive26 channels on basic cable.

 

·                  *Extended Basic Service. *Thisexpanded programming level of services, which is generally comprised ofapproximately 18 channels, includes a package of French- and English-languagespecialty television programming and U.S. cable channels in addition tothe basic service channel line-up described above.

 

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Branded as “Telemax”, thisservice was introduced in almost all of our markets largely to satisfy customerdemand for greater flexibility and choice.

* *

***AdvancedCable-Based Products and Services***

*** ***

Cable’s largebandwidth is a key factor in the successful delivery of advanced products andservices. Several emerging technologies and increasing Internet usage by ourcustomer base have presented us with significant opportunities to expand oursources of revenue.  We currently offer avariety of advanced products and services, including cable Internet access,digital television, cable telephony and selected interactive services. Weintend to continue to develop and deploy additional services to further broadenour service offering.

 

·                  *Cable Internet Access. *Leveragingour advanced cable infrastructure, we offer cable Internet access to ourresidential customers primarily via cable modems attached to personalcomputers. We provide this service at speeds of up to 360 times the speedof a conventional telephone modem.  In2008, we also launched and effected a gradual roll-out of our Widebandservices, which offer speeds of up to 900 times the speed of aconventional telephone modem.  Wecurrently plan to continue extending the coverage of this service in 2009.  As of December 31, 2008, we had1,063,847 cable Internet access customers, representing 62.0% of our basiccustomers and 41.8% of our total homes passed. Based on internal estimates, weare the largest provider of Internet access services in the areas we serve withan estimated market share of 53.9% as of September 30, 2008.

 

·                  *Digital Television. *Wehave installed headend equipment *capable* ofdelivering digitally encoded transmissions to a two-way digital-capable set-topbox in the customer’s home. This digital connection provides significantadvantages. In particular, it increases channel capacity, which allows us toincrease both programming and service offerings while providing increasedflexibility in packaging our services. Our basic digital package includes25 television channels, 45 audio services providing CD-quality music,16 AM/FM radio channels, an interactive programming guide as well astelevision-based e-mail capability. Our extended digital basic televisionoffering, branded as “*à la carte*” (*i.e.*, individual channel selections), offers customers theability to select more than 200 additional channels of their choice,including U.S. super-stations and other special entertainment programs,allowing them to customize their choices. This also offers customerssignificant programming flexibility including the option of French-languageonly, English-language only or a combination of French- andEnglish-language programming, as well as many foreign-language channels. Wealso offer pre-packaged themed service tiers in the areas of news, sports anddiscovery. Customers who purchase basic service and one customized package canalso purchase channels on an *à la carte*basis at a specified cost per channel per month. As part of our digital serviceoffering, customers can also purchase near-video-on-demand services on aper-event basis. As of December 31, 2008, we had 927,322 customersfor our digital television service, representing 54.1% of our basic customersand 36.5% of our total homes passed. Our customers currently have the option topurchase or lease the digital set-top boxes required for digital service. Webelieve that the sale of equipment to customers improves customer retention,and, as of December 31, 2008, we had 1,209,595 set-top boxes deployed, ofwhich approximately 97% were owned by customers and 3% were leased.

* *

·                  *Cable Telephony*.  In January 2005,we launched our cable telephony service using VoIP technology in selected areasof the Province of Québec, and since then we have been progressivelyrolling-out this offering among our other residential and commercial customersin the Province of Québec. As of December 31, 2008, our cable telephonyservice is available to 99% of our homes passed. Our cable telephony serviceincludes both local and long-distance calling, and permits all of our telephonycustomers, both residential and commercial, to access all service featuresmandated by CRTC Decision 97-8 and other regulatory decisions and orders,including: enhanced 911 Emergency service; number portability from and to anylocal exchange carrier; a message relay service allowing subscribers tocommunicate with the hearing impaired; and a variety of personal privacyfeatures including universal call tracing. We also offer free basic listings inlocal telephone directories, as well as full operator assistance, including: operator-assistedcalls; collect and third-party calls; local, national and

 

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international directoryassistance; person-to-person calls; and busy-line verification. Finally, weoffer as part of our telephony service a host of convenient, optional features,including: name and number caller ID; call waiting with long-distancedistinctive ring and audible indicator tone; name and number caller ID on callwaiting; visual indicator of a full voice mail box and audible message waitingindicators; automatic call forwarding; three-way conference calling; automaticrecalling; and last incoming call identification and recall. VoIP allows us todeliver new cutting-edge features, such as voice-mail to e-mail functionality,which allows customers to access their voice-mail via e-mail in the form ofaudio-file attachments. In keeping with our competitive strength of providingdifferentiated, bundled service offerings, we offer free installation of ourtelephony service to existing cable television and/or Internet customers and tonew bundled customers. We also offer discounts to our bundled customers, whencompared to the sum of the prices of the individual services provided to thesecustomers.  In addition, we offerdiscounts for a second telephone line subscription. On October 24, 2007,we launched our Softphone service, our new computer-based service providingusers with more flexibility when traveling, the ability to make local callsanywhere in the world, and new communications management capabilities. As of December 31,2008, we had 851,987 subscribers to our cable telephony service,representing a penetration rate of 49.7% of our basic cable subscribers and33.5% of our homes passed.

 

·                  *Video-On-Demand. *Video-on-demandservice enables digital cable customers to rent from a library of movies,documentaries and other programming through their digital set-top box. Ourdigital cable customers are able to rent their video-on-demand selections for aperiod of 24 hours, which they are then able to watch at their conveniencewith full stop, rewind, fast forward, pause and replay functionality duringthat period. Our video-on-demand service is available to 99% of the homespassed by us. We sometimes group movies, events or TV programs available onvideo-on-demand and offer them on a weekly basis. Regulations prevent us fromoffering such blocks of programs for a longer period. We also offer paytelevision channels on a subscription basis that permits our customers toaccess and watch most of the movies available on the linear Pay TV channelsthese clients subscribe to.

* *

·                  *Other Products and Services.* To maintain and enhance our market position, we are focused on *increasing* penetration of high-definition television andpersonal video recorders, as well as other high-value products and services.

 

***WirelessTelephony***

*** ***

On August 10,2006, we launched our MVNO-based mobile wireless telephony services in theQuébec City area, utilizing the Rogers Wireless GSM/GPRS network. Since then,the service has been completely rolled out throughout the Province of Québec.Through our strategic relationship with Rogers Wireless, we offer Québecconsumers a quadruple play of television, broadband Internet, cable telephonyand Videotron branded mobile wireless telephony services.  Our services include international roamingand popular options such as voicemail, call waiting, call display, callforwarding, text messaging and conference calling. We are responsible foracquiring and billing customers, as well as for providing customer supportunder our own brand. As of December 31, 2008, 63,402 lines had beenactivated.

 

Following ourparticipation in Canada’s spectrum auction for third generation AWS, we arecurrently pursuing the buildout of a network infrastructure to become afacilities-based provider offering advanced wireless telephony services.Videotron’s objective is to bring consumers and small businesses an offering ofadvanced wireless telecommunications services that is based on effective,reliable technology, diverse and convergent content and unambiguous businesspolicies.  See “— Business Overview —Overview.”

 

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***CustomerStatistics Summary***

 

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

 
| ** **                      | ** ** | **As of December 31,** | ** ** |
|---------------------------------|------------|---------------------------------------|------------|
| ** **                      | ** ** | **2008**                              | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|                            |       |                                  |       |   |   |   |   |   |   |   |   |
| Homes passed(1)                 |       | 2,542,859                             |       | 2,497,403 |   | 2,457,213 |   | 2,419,335 |   | 2,383,443 |   |
| ***Cable***                     |       |                                  |       |   |   |   |   |   |   |   |   |
| Basic customers(2)              |       | 1,715,616                             |       | 1,638,097 |   | 1,572,411 |   | 1,506,113 |   | 1,452,554 |   |
| Penetration(3)                  |       | 67.5                                  | %          | 65.6 | % | 64.0 | % | 62.3 | % | 60.9 | % |
| Digital customers               |       | 927,322                               |       | 768,211 |   | 623,646 |   | 474,629 |   | 333,664 |   |
| Penetration(4)                  |       | 54.1                                  | %          | 46.9 | % | 39.7 | % | 31.5 | % | 23.0 | % |
| Number of digital set-top boxes |       | 1,209,595                             |       | 953,393 |   | 738,530 |   | 537,364 |   | 362,053 |   |
| ***Dial-up Internet Access***   |       |                                  |       |   |   |   |   |   |   |   |   |
| Dial-up customers               |       | 6,533                                 |       | 9,052 |   | 13,426 |   | 18,034 |   | 23,973 |   |
| ***Cable Internet Access***     |       |                                  |       |   |   |   |   |   |   |   |   |
| Cable modem customers           |       | 1,063,847                             |       | 932,989 |   | 791,966 |   | 637,971 |   | 502,630 |   |
| Penetration(3)                  |       | 41.8                                  | %          | 37.4 | % | 32.2 | % | 26.4 | % | 21.1 | % |
| ***Telephony Services***        |       |                                  |       |   |   |   |   |   |   |   |   |
| Cable telephony customers       |       | 851,987                               |       | 636,352 |   | 397,860 |   | 162,979 |   | 2,135 |   |
| Penetration(3)                  |       | 33.5                                  | %          | 25.5 | % | 16.2 | % | 6.7 | % | 0.1 | % |
| Wireless telephony lines        |       | 63,402                                |       | 45,077 |   | 11,826 |   | — |   | — |   |

 

----

(1)                                  “Homes passed” means the number of residentialpremises, such as single dwelling units or multiple dwelling units, andcommercial premises passed by the cable television distribution network in agiven cable system service area in which the programming services are offered.

 

(2)                                  Basic customers are customers who receivebasic cable service in either the analog or digital mode.

 

(3)                                  Represents customers as a percentage of totalhomes passed.

 

(4)                                  Represents customers for the digital serviceas a percentage of basic customers.

 

In the yearended December 31, 2008, we recorded a net increase of 77,519 basiccable customers. During the same period, we also recorded net additions of:130,858 subscribers to our cable Internet access service;159,111 customers to our digital television service, the latter of whichincludes customers who have upgraded from our analog cable service; and215,635 customers to our cable telephony services.  In 2008, we activated 18,325 lines forour mobile wireless telephony services.

 

***Business Telecommunications Ser***vices

*** ***

We integratedVideotron Telecom’s operations within our own operations pursuant to the mergerof Videotron Telecom with and into us on January 1, 2006.  Our Business Telecommunications segmentprovides a wide range of network solutions, Internet services,application/server hosting, local and long-distance telephone service, andstudio-quality audio-video services to large and medium-sized businesses, ISPs,application service providers (“ASP”), broadcasters and carriers in both Québecand Ontario.

 

***Video Stores***

*** ***

Through LeSuperClub Vidéotron, we also operate the largest chain of video and video gamerental stores in Québec and among the largest of such chains in Canada, with atotal of 246 retail locations (of which 208 are franchised). With 140****retail locations offering our suite of services andproducts, Le SuperClub Vidéotron is both a showcase and a valuable andcost-effective distribution network for Videotron’s growing array of advancedproducts and services, such

 

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as cable Internet access, digital television and mobile wirelesstelephony. Le SuperClub Vidéotron announced in 2008 its intention to franchisemost of its remaining corporate locations and is currently in the process ofdoing so.

 

***Pricing of ourProducts and Services***

*** ***

Our revenuesare derived principally from the monthly fees our customers pay for cableservices. The rates we charge vary based on the market served and the level ofservice selected. Rates are usually adjusted annually. We also offer discountsto our bundled customers, when compared to the sum of the prices of theindividual services provided to these customers. As of December 31, 2008,the average monthly fees for basic and extended basic service were $24.57 and$38.49, respectively, and the average monthly fees for basic and extended basicdigital service were $14.00 and $42.75, respectively. A one-time installationfee, which may be waived in part during certain promotional periods, is chargedto new customers. Monthly fees for rented equipment, such as set-top boxes andcable modems, are also charged to customers.

 

The CRTC onlyregulates rates for basic cable service. Fees for extended cable service (overand above basic cable service rates), pay-television and pay-per-view services,and rentals for set-top boxes are priced by us on a commercial, free-marketbasis and are not regulated by the CRTC.

 

Although ourservice offerings vary by market, because of differences in the bandwidthcapacity of the cable systems in each of our markets and competitive and otherfactors, our services are typically offered at monthly price ranges, whichreflect discounts for bundled service offerings, as follows:

 
| **Service**                               | ** ** | **Price Range**      | ** ** |
|-------------------------------------------|------------|---------------------------|------------|
|                                      |       |                      |       |
| Basic analog cable                        |       | $15.07 – $29.88      |       |
| Extended basic analog cable               |       | $28.50 – $42.19      |       |
| Basic digital cable                       |       | $13.98 – $15.98      |       |
| Extended basic digital cable              |       | $27.98 – $76.98      |       |
| Pay-television                            |       | $ 3.99 – $29.99 |       |
| Pay-per-view (per movie or event)    |       | $ 3.99 – $54.99 |       |
| Video-on-demand (per movie or event) |       | $ 4.49 – $64.99 |       |
| Dial-up Internet access                   |       | $ 9.95 – $19.95 |       |
| Cable Internet access                     |       | $27.95 – $89.95      |       |
| Cable telephony                           |       | $16.95 – $22.95      |       |
| Mobile wireless telephony                 |       | $22.65 – $78.35      |       |

*** ***

***Our NetworkTechnology***

*** ***

As of December 31, 2008,our cable systems consisted of 19,331 km of fiber optic cable and36,740 km of coaxial cable, passing approximately 2.5 million homesand serving approximately 1.9 million customers. Our network is thelargest broadband network in Québec covering approximately 80% of cable homespassed and, according to our estimates, more than80% of the businesses located in the major metropolitan areas of each of Québecand Ontario. Our extensive network supports direct connectivity with networksin Ontario, Eastern Québec, the Maritimes and the United States.

 

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The following table summarizes the current technological state of oursystems, based on the percentage of our customers who have access to thebandwidths listed below and two-way (or “bi-directional”) capability:

 
| ** **             | ** ** | **450 MHz  and Under** | ** ** | **480 to  625 MHz** | ** ** | **750 to  860 MHz** | ** ** | **Two-Way  Capability** | ** ** |
|------------------------|------------|----------------------------------|------------|-------------------------------|------------|-------------------------------|------------|-------------------------|------------|
|                   |       |                             |       |                          |       |                          |       |                    |       |
| December 31, 2004 |       | 3                                | %          | 23                            | %          | 74                            | %          | 97                      | %          |
| December 31, 2005 |       | 2                                | %          | 23                            | %          | 75                            | %          | 98                      | %          |
| December 31, 2006 |       | 2                                | %          | 23                            | %          | 75                            | %          | 98                      | %          |
| December 31, 2007 |       | 1                                | %          | 2                             | %          | 97                            | %          | 99                      | %          |
| December 31, 2008 |       | 1                                | %          | 0                             | %          | 99                            | %          | 99                      | %          |

 

Our cable television networks are comprisedof four distinct parts including signal acquisition networks, main headends,distribution networks and subscriber drops. The signal acquisition networkpicks up a wide variety of television, radio and multimedia signals. Thesesignals and services originate from either a local source or content provideror are picked up from distant sites chosen for satellite or over-the-airreception quality and transmitted to the main headends by way of over-the-airlinks, coaxial links or fiber optic relay systems. Each main headend processes,modulates, scrambles and combines the signals in order to distribute themthroughout the network. Each main headend is connected to the primary headendin order to receive the digital MPEG2 signals and the IP Backbone for theInternet services. The first stage of this distribution consists of a fiberoptic linkwhich distributes the signals to distributionor secondary headends. After that, the signal uses the hybrid fiber coaxialcable network made of wide-band opticalnodes, amplifiers and coaxial cables capable of serving up to 30 km inradius from the distribution or secondary headends to the subscriber drops. Thesubscriber drop brings the signal into the customer’s television set directlyor, depending on the area or the services selected, through various types ofcustomer equipment including set top boxes and cable modems.

 

We have adopted the hybrid fiber coaxial(HFC) network architecture as the standard for our ongoing system upgrades.Hybrid fiber coaxial network architecture combines the use of fiber optic cablewith coaxial cable. Fiber optic cable has excellent broadband frequencycharacteristics, noise immunity and physical durability and can carry hundredsof video and data channels over extended distances. Coaxial cable is lessexpensive and requires greater signal amplification in order to obtain thedesired transmission levels for delivering channels. In most systems, wedeliver our signals via fiber optic cable from the headend to a group of nodesto the homes passed served by that node. Our system design provides for cellsof approximately 570 homes each to be served by fiber optic cable. To allow forthis configuration, secondary headends were put into operation in the greaterMontréal area and in the greater Québec City area. Remote secondary headendsmust also be connected with fiber optic links. The loop structure of thetwo-way networks brings reliability through redundancy, the cell size improvesflexibility and capacity, while the reduced number of amplifiers separating thehome from the headend improves signal quality and reliability. Our networkdesign provides us with significant flexibility to offer customized programmingto individual cells of approximately 570 homes, which is critical to ouradvanced services, such as video-on-demand, Switched Digital Video Broadcast andthe continued expansion of our interactive services.  Our network design also allows for furthersegmentation from 500 to 250 or125 homes where cable, Internetand telephony service penetration requires higher network capacity. We alsobelieve that our network design provides high capacity and superior signalquality that will enable us to provide to our current and future customers newadvanced products and services in addition to those currently offered by us.

 

Our strategy of maintaining aleadership position in respect of the suite of products and services that weoffer and launching new products and services requires investments in ournetwork to support growth in our customer base and increases in bandwidthrequirements.  Approximately 99% of ournetwork in Québec has been upgraded to a bandwidth of 750 MHz or greater.  Also, in light of the greater availability ofHDTV programming, the ever increasing speed of Internet access and increasingdemand for our cable telephony service, further investment in the network willbe required.

 

In October 2008,we and Quebecor Media announced our intention to invest between $800 millionand $1.0 billion over the next four years to roll out our own AWS network.  This amount includes the cost of the acquiredspectrum and operating licenses (which has already been paid), the cost ofnetwork buildout and initial operating costs

 

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(but excludes any capitalized interest).  We plan to fund future investments in AWSthrough cash flow generation and available credit facilities.  We currently anticipate that our new HighSpeed Packet Access (HSPA) network will be operational in 9 to 15 months.

 

***Marketing andCustomer Care***

*** ***

Our long termmarketing objective is to increase our cash flow through deeper marketpenetration of our services and continued growth in revenue per customer. Webelieve that customers will come to view their cable connection as the bestdistribution channel to the home for a multitude of services. To achieve thisobjective, we are pursuing the following strategies:

 

·                  continueto rapidly deploy advanced products and services such as cable Internet access,digital television, cable telephony and mobile wireless telephony services;

 

·                  designproduct offerings that provide greater opportunity for customer entertainment andinformation choices;

 

·                  targetmarketing opportunities based on demographic data and past purchasing behavior;

 

·                  developtargeted marketing programs to attract former customers, households that havenever subscribed to our services and customers of alternative or competitiveservices;

 

·                  enhancethe relationship between customer service representatives and our customers bytraining and motivating customer service representatives to promote advancedproducts and services;

 

·                  leveragethe retail presence of Le SuperClub Vidéotron and third-party commercialretailers;

 

·                  cross-promotethe wide variety of content and services offered within the Quebecor Mediagroup (including, for example, the content of TVA Group productions and the *1-900* service for audience voting during reality televisionshows popular in Québec) in order to distribute our cable, data transmission,cable telephony and mobile wireless telephony services to our existing andfuture customers;

 

·                  introducenew value-added packages of products and services, which we believe increasesaverage revenue per user, or ARPU, and improves customer retention; and

 

·                  leverageour business market, using the Videotron Telecom network and expertise with ourcommercial customer base, which should enable us to offer additional bundledservices to our customers and may result in new business opportunities.

 

We continue toinvest time, effort and financial resources in marketing new and existingservices. To increase both customer penetration and the number of services usedby our customers, we use coordinated marketing techniques, includingdoor-to-door solicitation, telemarketing, media advertising, e-marketing anddirect mail solicitation.

 

Maximizingcustomer satisfaction is a key element of our business strategy. In support ofour commitment to customer satisfaction, we provide a 24-hour customer servicehotline seven days a week for nearly all of our systems, in addition to ourweb-based customer service capabilities. All of our customer service representatives and technical support staffare trained to assist our customers with respect to all products and servicesoffered by us, which in turn allows our customers to be served more efficientlyand seamlessly. Our customer care representatives continue to receive extensivetraining to develop customer contact skills and product knowledge, which arekey contributors to high rates of customer retention as well as to sellingadditional products and services and higher levels of service to our customers.To assist us in our marketing efforts, we utilize surveys, focus groups andother research tools as part of our efforts to determine and proactivelyrespond to customer needs.

 

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**Programming**

** **

We believe that offering a wide variety of conveniently scheduledprogramming is an important factor in influencing a customer’s decision tosubscribe to and retain our cable services. We devote resources to obtainingaccess to a wide range of programming that we believe will appeal to bothexisting and potential customers. We rely on extensive market research,customer demographics and local programming preferences to determine our channeland package offerings. The CRTC currently regulates the distribution of foreigncontent in Canada and, as a result, we are limited in our ability to providesuch programming to our customers. We obtain basic and premium programming froma number of suppliers, including TVA Group.

 

Ourprogramming contracts generally provide for a fixed term of up to seven years,and are subject to negotiated renewal. Programming tends to be made availableto us for a flat fee per customer. Our overall programming costs have increasedin recent years and may continue to increase due to factors including, but notlimited to, additional programming being provided to customers as a result ofsystem rebuilds that increase channel capacity, increased costs to produce orpurchase specialty programming and inflationary or negotiated annual increases.

 

**Competition**

** **

We operate in a competitive business environment in the areas of price,product and service offerings and service reliability. We compete with otherproviders of television signals and other sources of home entertainment. Inaddition, as we expand into additional services such as Internet, cabletelephony and mobile wireless telephony services, we may face additionalcompetition. Our principal competitors include over-the-air television andproviders of other entertainment, direct broadcast satellite, digitalsubscriber line (DSL), private cable, other cable distribution, ILECs andwireless distribution. We also face competition from illegal providers of cabletelevision services and illegal access to both foreign DBS (also called greymarket piracy) as well as from signal theft of DBS that enables customers toaccess programming services from U.S. and Canadian direct broadcast satelliteservices without paying any fee (also called black market piracy).

 

·                  *Over-the-air Television and Providers of Other Entertainment.*  Cable television has long competed withbroadcast television, which consists of television signals that the viewer isable to receive without charge using an over-the-air antenna. The extent ofsuch competition is dependent upon the quality and quantity of broadcastsignals available through over-the-air reception compared to the servicesprovided by the local cable system. Cable systems also face competition fromalternative methods of distributing and receiving television signals and fromother sources of entertainment such as live sporting events, movie theatres andhome video products, including videotape recorders, DVD players and videogames. The extent to which a cable television service is competitive depends insignificant part upon the cable system’s ability to provide a greater varietyof programming, superior technical performance and superior customer servicethan are available over the-air or through competitive alternative deliverysources.

 

·                  *Direct Broadcast Satellite. *Directbroadcast satellite, or DBS, is a significant competitor to cable systems. DBSdelivers programming via signals sent directly to receiving dishes frommedium- and high-powered satellites, as opposed to cable delivery transmissions.This form of distribution generally provides more channels than some of ourtelevision systems and is fully digital. DBS service can be received virtuallyanywhere in Canada through the installation of a small rooftop or side-mountedantenna. Like digital cable distribution, DBS systems use video compressiontechnology to increase channel capacity and digital technology to improve thequality of the signals transmitted to their customers.

 

·                  *DSL. *The deploymentof digital subscriber line technology, known as DSL, provides customers withInternet access at data transmission speeds greater than that available overconventional telephone lines. DSL service is comparable to cable-modem Internetaccess over cable systems. We also face competition from other providers of DSLservice.

 

·                  *VDSL. *The CRTC andIndustry Canada have authorized video digital subscriber line, or VDSL,services. VDSL technology increases the capacity of DSL lines available, whichpermits the distribution of digital

 

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video. We expect that we willsoon face competition from incumbent local exchange carriers, which have beengranted licenses to launch video distribution services using this technology.ILECs are currently installing this new technology, which operates over thecopper lines in phone lines, in our markets. This technology can achieve speedsas high as 52 Mbps upstream, but VDSL can only operate over a shortdistance of about 4,000 feet (1,200 metres). As a result, telephonecompanies are replacing many of their main feeds with fibre-optic cable. Byplacing a VDSL transceiver, a VDSL gateway, in larger multiple dwelling units,the distance limitation is overcome. Further, as a result of such improvementsin broadband speeds over DSL and the evolution of compression technology,incumbent telephone carriers in our service areas may be in a position toenable delivery of digital television over their cable Internet connections(IPTV) in the coming years. Advanced trials are underway in Canada and in othercountries. Tests in our service markets are still being performed. If successful,IPTV may provide telecommunications carriers with a way to offer servicessimilar to those offered by cable operators in the consumer market.

 

·                  *Private Cable. *Additionalcompetition is posed by satellite master antenna television systems known as “SMATVsystems” serving multi-dwelling units, such as condominiums, apartmentcomplexes, and private residential communities.

 

·                  *Other Cable Distribution. *Currently,a cable operator offering television distribution and providing cable-modemInternet access service is serving the greater Montréal area. This cableoperator is owned by the regional ILEC.

 

·                  *Wireless Distribution. *Cabletelevision systems also compete with wireless program distribution servicessuch as multi-channel multipoint distribution systems, or MDS. This technologyuses microwave links to transmit signals from multiple transmission sites toline-of-sight antennas located within the customer’s premises.

 

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

 

·                  *Telephony Service. *Ourcable telephony service competes against other telephone companies, includingboth the incumbent telephone service provider in Québec, which controls asignificant portion of the telephony market in Québec, as well as other VoIPtelephony service providers and mobile wireless telephone service providers.

 

·                  *Mobile wireless telephony services.*  Our mobile wireless telephony servicecompetes against a mix of competitors, some of them being active in all theproducts we offer, while others only offer mobile wireless telephony servicesin our market.  As a facilities-basedwireless provider, we will compete primarily with established incumbentwireless service providers and MVNOs, and could in the future compete withother new entrant companies, including other MVNOs.  In addition, users of wireless voice and datasystems may find their communications needs satisfied by other current ordeveloping technologies, such as Wi-Fi, WiMax, “hotspots” or trunk radiosystems, which have the technical capability to handle wireless datacommunication and mobile telephone calls. Our wireless business will alsocompete with rivals for dealers and retail distribution outlets.

 

·                  *Other Internet Service Providers. *In the Internet access business,cable operators compete against other Internet service providers offeringresidential and commercial Internet access services. The CRTC requires thelarge Canadian incumbent cable operators to offer access to their high speedInternet system to competitive Internet service providers at mandated rates.

 

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**C-**                                   Regulation

** **

**ForeignOwnership Restrictions Applicable under the *Telecommunications Act*(Canada) and the *Broadcasting Act* (Canada)**

** **

In November 2002,the Canadian federal Minister of Industry initiated a review of the existingforeign ownership restrictions applicable to telecommunications carriers. TheHouse of Commons Standing Committee on Industry, Science and Technology issueda report on April 28, 2003 recommending the removal of foreign ownershiprestrictions in the telecommunications industry and that any changes made tothe Canadian ownership and control requirements applicable totelecommunications common carriers be applied equally to broadcastingdistribution undertakings. However, in June 2003, the House of CommonsStanding Committee on Canadian Heritage instead recommended the status quoregarding foreign ownership levels for broadcasting and telecommunicationscompanies. On April 4, 2005, the Canadian government released a responseto the report of the latter committee wherein it stated, among other things,that “the Government wishes to indicate that it is not prepared to modifyforeign ownership limits on broadcasting or content more generally.” However,it acknowledged the appointment by Industry Canada of an independent panel ofexperts, the Telecommunications Policy Review Panel, to review Canada’stelecommunications policy and regulation of telecommunications, includingconsideration of Canada’s foreign investment restrictions in telecommunicationsand whether those restrictions should be removed.

 

In March of2006, the Telecommunications Policy Review Panel filed with Canada’s IndustryMinister its report regarding its review of the existing foreign ownershiprestrictions applicable to telecommunications carriers. In the *Afterword* of the Report, the Panel proposed that thegovernment adopt a phased and flexible approach to liberalization ofrestrictions on foreign investment in telecommunications service providers tothe extent that they are not subject to the Broadcasting Act. Ownership andcontrol of Canadian telecommunications common carriers should be liberalized intwo phases:

 

·                  Inthe first phase, the Telecommunications Act should be amended to give thefederal Cabinet authority to waive the foreign ownership and controlrestrictions on Canadian telecommunications common carriers when it deems aforeign investment or class of investments to be in the public interest. Duringthe first phase, there should be a presumption that investments in any newstart-up telecommunications investment or in any telecommunications commoncarrier with less than 10% of the revenues in any telecommunications servicemarket are in the public interest. This presumption could be rebutted byevidence related to a particular investor or investment. The presumption shouldapply to all investments in fixed or mobile wireless telephony markets as wellas to investments in new entrants and smaller players (*i.e*.,those below the 10% limit). To encourage longer-term investment, foreigninvestors should remain exempt from the foreign investment restrictions if theyare successful in growing the market share of their businesses beyond 10%.

 

·                  Thesecond phase of liberalization should be undertaken after completion of thereview of broadcasting policy proposed by the Panel. At that time, there shouldbe a broader liberalization of the foreign investment rules in a mannerthat treats all telecommunications common carriers including the cabletelecommunications industry in a fair and competitively neutral manner. Theproposed liberalization should apply to the “carriage” business of BDUs, andnew broadcasting policies should focus any necessary Canadian ownershiprestrictions on broadcasting “content” businesses. The Cabinet should retainthe authority to screen significant investments in the Canadiantelecommunications carriage business to ensure that they are consistent withthe public interest.

 

On July 12,2007, the Canadian Minister of Industry announced the creation of a CompetitionPolicy Review Panel.  This Panel has beenmandated to review key elements of Canada’s competition and investment policiesto ensure that they function effectively. The fundamental task of the Panel’s review is to provide recommendationsto the Government on how to enhance Canadian productivity andcompetitiveness.  Foreign ownershiprestrictions on broadcasting and telecommunications undertakings have been identifiedas an important issue.  Quebecor Media,on behalf of itself and Videotron, like several other interested parties, hasfiled a submission.  In June 2008,the Panel filed

 

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its report. This report recommends that the federal government adopt atwo-phased approach to foreign participation in the telecommunications andbroadcast industry. In the first phase, it is suggested that the Minister ofIndustry seek an amendment to the *Telecommunications Act*to allow foreign companies to establish a new telecommunications business inCanada or to acquire an existing telecommunications company with a market shareof up to 10% of the telecommunications market in Canada.  In the second phase, it is recommended that,following a review of broadcasting and cultural policies (including foreigninvestment), telecommunications and broadcasting foreign investmentrestrictions be liberalized in a manner that is competitively neutral fortelecommunications and broadcasting companies. The Prime Minister has indicated that the current government does notintend to change the existing ownership rules.

** **

**Ownership and Control of Canadian Broadcast Undertakings**

** **

Subject to anydirections issued by the Governor in Council (effectively the Federal Cabinet),the CRTC regulates and supervises all aspects of the Canadian broadcastingsystem.

 

The Governorin Council, through an Order-in-Council referred to as the Direction to theCRTC (*Ineligibility of Non-Canadians*), hasdirected the CRTC not to issue, amend or renew a broadcasting license to anapplicant that is a non-Canadian. Canadian, a defined term in the Direction,means, among other things, a citizen or a permanent resident of Canada, aqualified corporation, a Canadian government, a non-share capital corporationof which a majority of the directors are appointed or designated by statute,regulation or specified governmental authorities, or a qualified mutualinsurance company, qualified pension fund society or qualified cooperative ofwhich not less than 80% of the directors or members are Canadian. A qualifiedcorporation is one incorporated or continued in Canada, of which the chiefexecutive officer (or if there is no chief executive officer, the personperforming functions similar to those performed by a chief executive officer)and not less than 80% of the directors are Canadian, and not less than 80% ofthe issued and outstanding voting shares and not less than 80% of the votes arebeneficially owned and controlled, directly or indirectly, by Canadians. Inaddition to the above requirements, Canadians must beneficially own andcontrol, directly or indirectly, not less than 66.6% of the issued andoutstanding voting shares and not less than 66.6% of the votes of the parentcompany that controls the subsidiary, and neither the parent company nor itsdirectors may exercise control or influence over any programming decisions ofthe subsidiary if Canadians beneficially own and control less than 80% of theissued and outstanding shares and votes of the parent corporation, if the chiefexecutive officer of the parent corporation is a non-Canadian or if less than80% of the parent corporation’s directors are Canadian. There are no specificrestrictions on the number of non-voting shares which may be owned bynon-Canadians. Finally, an applicant seeking to acquire, amend or renew abroadcasting license must not otherwise be controlled in fact by non-Canadians,a question of fact which may be determined by the CRTC in its discretion.Control is defined broadly in the Direction to mean control in any manner thatresults in control in fact, whether directly through the ownership ofsecurities or indirectly through a trust, agreement or arrangement, theownership of a corporation or otherwise. Videotron is a qualified Canadiancorporation.

 

Regulationsmade under the *Broadcasting Act* (Canada) requirethe prior approval of the CRTC for any transaction that directly or indirectlyresults in (i) a change in effective control of the licensee of abroadcasting distribution undertaking or a television programming undertaking(such as a conventional television station, network or pay or specialtyundertaking service), (ii) a person or a person and its associatesacquiring control of 30% or more of the voting interests of a licensee or of aperson who has, directly or indirectly, effective control of a licensee, or (iii) aperson or a person and its associates acquiring 50% or more of the issuedcommon shares of the licensee or of a person who has direct or indirecteffective control of a licensee. In addition, if any act, agreement ortransaction results in a person or a person and its associates acquiringcontrol of at least 20% but less than 30% of the voting interests of alicensee, or of a person who has, directly or indirectly, effective control ofthe licensee, the CRTC must be notified of the transaction. Similarly, if anyact, agreement or transaction results in a person or a person and itsassociates acquiring control of 40% or more but less than 50% of the votinginterests of a licensee, or a person who has directly or indirectly effectivecontrol of the licensee, the CRTC must be notified.

 

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***“Diversity of Voices”***

*** ***

On April 13,2007, in response to consolidation in the Canadian broadcasting industry, theCRTC launched a public proceeding (Broadcasting Notice of Public Hearing CRTC2007-5) to review various issues relating to the ownership of Canadianbroadcasting companies and other issues related to the diversity of voices inCanada. As part of the review, the CRTC was examining issues relating to, amongother things, concentration of ownership, common ownership of broadcastingdistribution undertakings, cross-media ownership, vertical integration and theCRTC’s relationship with the Competition Bureau. A public hearing on thismatter was held in mid-September 2007. On January 15, 2008, the CRTCissued its determination in Broadcasting Public Notice CRTC 2008-4, entitled “*Diversity of Voices.*” In this public notice, the CRTCintroduced new policies with respect to cross-media ownership; the commonownership of television services, including pay and specialty services; and thecommon ownership of broadcasting distribution undertakings.  The CRTC’s existing policies with respect tothe common ownership of over-the-air television and radio undertakings remainin effect. The CRTC will generally permit ownership by one person of no morethan one conventional television station in one language in a given market. TheCRTC, as a general rule, will not approve applications for a change in theeffective control of broadcasting undertakings that would result in theownership or control, by one person, of a local radio station, a localtelevision station and a local newspaper serving the same market. Where aperson that controls a local radio station and a local television stationacquires a local newspaper serving the same market, the CRTC will, at theearliest opportunity, require the licensee to explain why, in light of thispolicy, its radio or television license(s) should be renewed. The CRTC, asa general rule, will not approve applications for a change in effective controlthat would result in the control, by one person, of a dominant position in thedelivery of television services to Canadians that would impact on the diversityof programming available to television audiences.  Specifically, as a general rule, the CRTCwill not approve transactions that would result in the control by one person ofmore than 45% of the total television audience share — including audiences toboth discretionary and OTA services. The CRTC will carefully examinetransactions that would result in the control by one person of between 35% and45% of the total television audience share — including audiences to bothdiscretionary and OTA services. Barring other policy concerns, the CRTC willprocess expeditiously transactions that would result in the control by oneperson of less than 35% of the total television audience share — includingaudiences to both discretionary and OTA services.  In terms of broadcasting distributionundertakings (BDUs), the CRTC, as a general rule, will not approve applicationsfor a change in the effective control of BDUs in a market that would result inone person being in a position to effectively control the delivery of programmingservices in that market. The CRTC is not prepared to allow one person tocontrol all BDUs in any given market.

 

**Jurisdiction Over Canadian Broadcast Undertakings**

** **

Our cabledistribution undertakings are subject to the *BroadcastingAct* (Canada) and regulations made under the *BroadcastingAct* (Canada) that empower the CRTC, subject to directions from theGovernor in Council, to regulate and supervise all aspects of the Canadianbroadcasting system in order to implement the policy set out in that Act. Certainof our undertakings are also subject to the *Radiocommunication Act*(Canada), which empowers Industry Canada to establish and administer thetechnical standards that networks and transmission must respect, namely,maintaining the technical quality of signals.

 

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

 

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**CanadianBroadcasting Distribution (Cable Television)**

** **

***Licensing ofCanadian Broadcasting Distribution Undertakings***

*** ***

A cabledistribution undertaking distributes broadcasting services to customerspredominantly over closed transmission paths. A license to operate a cabledistribution undertaking gives the cable television operator the right todistribute television programming services in its licensed service area.Broadcasting licenses may be issued for periods not exceeding seven years andare usually renewed, except in particular circumstances or in cases of aserious breach of the conditions attached to the license or the regulations ofthe CRTC. The CRTC is required to hold a public hearing in connection with theissuance, suspension or revocation of a license. We operate 52 cable systemspursuant either to the issuance of a license or of an order that exemptscertain network operations from the obligation to hold a license.

 

Cable systemswith 2,000 customers or fewer and operating their own local headend areexempted from the obligation to hold a license pursuant to exemption ordersissued by the CRTC. These cable systems are required to comply with a number ofprogramming carriage requirements set out in the exemption order and complywith the Canadian ownership and control requirements in the Direction to theCRTC. We operate 17 of these exempted cable systems. On October 30, 2008,the CRTC issued a new distribution regulatory framework in which it announcedthat it determines to exempt, under a single exemption order, all terrestrialdistribution systems with fewer than 20,000 subscribers and to introduce asingle class of license for those BDUs that not eligible for exemption. By April 2009,the CRTC will issue for comment a proposed revised exemption order that willcontain what it considers to be the minimum necessary terms and conditions forBDUs with fewer than 20,000 subscribers. We and our affiliate cable companies will apply to have our respectiverelevant cable systems exempted during 2009.

 

In November 2003,the CRTC finalized the regulatory framework that will govern the distributionof digital signals by over-the-air television stations (Broadcasting PublicNotice CRTC 2003-61). The CRTC requires broadcasting distribution undertakingsto distribute the primary digital signal of a licensed over-the-air televisionservice in accordance with the priorities that currently apply to the distributionof the analog version of the services. The CRTC expects all broadcastingdistribution undertakings to implement the necessary upgrades. Analog carriagecan be phased-out only once 85% of a particular broadcasting distributionundertaking’s customers have digital receivers or set-top boxes that canconvert digital signals to analog. Exempt undertakings will not be required to duplicate mandatory servicesin digital format.

 

InBroadcasting Public Notice CRTC 2007-53, the CRTC has established August 31,2011, as the deadline for over-the-air television services to transition fromanalog to digital and HD broadcasting, with the possibility of limitedexceptions in northern and remote regions.

 

The DigitalMigration Framework for programming services that do not use airwaves waspublished in February 2006 (Broadcasting Public Notice CRTC 2006-23).  A cable BDU must continue to mirror any givenanalog tier until 85% of subscribers have a digital set-top box or until January 1,2013, whichever occurs first.  Somedistribution priority status (dual and modified dual) is abandoned in thedigital environment but the CRTC considered the possibility that certainspecialty services may still warrant carriage on basic in a digitalenvironment. In decision CRTC 2007-246, the CRTC approved an application by theNational Broadcast Reading Service Inc. for a broadcasting license tooperate a national, English-language digital specialty described videoprogramming undertaking to be known as The Accessible Channel. The CRTC alsoapproved the applicant’s request for this service to be designated formandatory distribution on digital basic by direct-to-home (DTH) satellitedistribution undertakings and by Class 1 and Class 2 broadcastingdistribution undertakings (BDUs), excluding multipoint distribution system(MDS) undertakings. The CRTC approved in part applications for the services CBCNewsworld and *Le Réseau de l’information*to be designated for mandatory distribution on digital basic by DTH satellitedistribution undertakings and by Class 1 and Class 2 BDUs, excludingMDS undertakings that do not currently carry the services. The CRTC approved inpart an application for *Avis de Recherche*to be designated for mandatory distribution on digital basic by DTH satellitedistribution undertakings and by Class 1 and Class 2 BDUs, excludingMDS undertakings. The Commission also approved amendments to the broadcastinglicense for *Avis de*

 

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*Recherche*, asrequested by the applicant. To this effect, the CRTC issued, for theabove-mentioned services, mandatory distribution orders under section 9(1)(h) ofthe *Broadcasting Act*.

 

A furtherframework governing the licensing and distribution of pay and specialtyservices to high definition, or HD, signals was made public in June 2006(Broadcasting Public Notice CRTC 2006-74). The CRTC expects that, over time,all or most pay and specialty services will upgrade their programming to thenew digital HD standard in order to meet the expectations of the marketplace.Under this framework, BDUs will be obliged to distribute those HD pay andspecialty services that offer certain minimum amounts of HD programming(subject to available channel capacity until distribution of analog signalsceases by that BDU entirely). Carriage of programming services in the analogmode, in the standard definition digital mode and in the HD digital modecreates stress on a cable distributor’s capacity to serve the public with asmuch choice as competitors that generally do not have to distribute in theanalog mode.

 

In order toconduct our business, we must maintain our broadcasting distributionundertaking licenses in good standing. Failure to meet the terms of ourlicenses may result in their short-term renewal, suspension, revocation ornon-renewal. We have never failed to obtain a license renewal for any cablesystems.

 

***Distributionof Canadian Content***

*** ***

The *Broadcasting Distribution Regulations*issued by the CRTC pursuant to the *BroadcastingAct* (Canada) mandate the types of Canadian and non-Canadianprogramming services that may be distributed by broadcasting distribution undertakings,or BDUs, including cable television systems. For example, Canadian televisionbroadcasters are subject to “must carry” rules which require terrestrialdistributors, like cable and MDS systems, to carry the signals of localtelevision stations and, in some instances, regional television stations aspart of their basic service. The guaranteed carriage enjoyed by localtelevision broadcasters under the “must carry” rules is designed to ensurethat the signals of local broadcasters reach cable households and enjoyadvantageous channel placement. Furthermore, cable operators, DBS operators andMDS operators must offer their customers more Canadian programming thannon-Canadian programming services. In summary, each cable television system isrequired to distribute all of the Canadian programming services that the CRTChas determined are appropriate for the market it serves, which includes localand regional television stations, certain specialty channels and pay televisionchannels, and a pay-per-view service, but does not include Category Twodigital services and video-on-demand services.

 

The CRTC currently permits the linkage of upto one non-Canadian service for one Canadian specialty service and up to fivenon-Canadian services for every one Canadian pay-television service. On October 30,2008, the CRTC announced that, as of August 31, 2011, the CRTC willeliminate these 1:1 and 5:1 packaging rules and BDUs will be permitted tooffer a package consisting only of non-Canadian services. Most of these tieringand linkage rules will be replaced by rules providing that the numberof Canadian services received by a cable television customer must exceed thetotal number of non-Canadian services received. The CRTC has issued a list of non-Canadian programming services eligiblefor distribution in Canada on a discretionary user-pay basis to be linked alongwith Canadian pay-television services or with Canadian specialty services. Thislist will be revised from time to time. The CRTC decided that it would not be inthe interest of the Canadian broadcasting system to permit the distribution ofcertain non-Canadian pay-television movie channels and specialty programmingservices that could be considered competitive with licensed Canadianpay-television and specialty services. Therefore, pay-television movie channelsand certain specialty programming services available in the United States andother countries are not approved for distribution in Canada. However, on October 30,2008, the CRTC also announced that, with respect to non-Canadian news services,a more open-entry approach should be adopted. Accordingly, absent clearevidence that non-Canadian news service will violate Canadian regulations (suchas those regarding abusive comment), the CRTC will be predisposed to authorizesuch service for distribution in Canada. Following recent CRTC policystatements, most foreign third language (other than English and French)programming services can be eligible for distribution in Canada if approved bythe CRTC and if legacy Canadian services of the same language are distributedas well.

 

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Also importantto broadcasting operations in Canada are the specialty (or thematic)programming service access rules. Cable systems in a French-language market, suchas Videotron’s, with more than 6,000 customers are required to offer eachanalog French-language Canadian specialty and pay television programmingservice licensed, other than religious specialty services, to the extent ofavailable channels. Similarly, DBS satellite operators must, by regulation,distribute all Canadian specialty services other than Category Two digital specialtyservices and religious specialty services. Moreover, all licensed specialtyservices, other than Category Two digital specialty services and religiousspecialty services, as well as at least one pay television service in eachofficial language, must be carried by larger cable operators, such asVideotron, when digital distribution is offered. These rules seek toensure wider carriage for certain Canadian specialty services than mightotherwise be secured through negotiation. However, Category Two digitalspecialty services do not benefit from any regulatory assistance guaranteeingdistribution other than a requirement that a cable operator distribute at leastfive (to be reduced to three as of August 31, 2011) unrelated Category Twodigital specialty services for each Category Two digital specialty servicedistributed by such cable operator in which such cable operator or its affiliatescontrol more than 10% of the total shares. In French-language markets like themarkets we serve, two of each Category Two services must be French-languageservices. Cable systems (not otherwise exempt) and DBS satellite operators arealso subject to distribution and linkage requirements for programming servicesset by the CRTC and amended from time to time which include requirements thatlink the distribution of eligible non-Canadian satellite programming serviceswith Canadian specialty and pay television services.

 

On October 30,2008, as part of its new regulatory framework for BDUs to take effect on August 31,2011, the CRTC has determined to retain access rights for Canadian analog andCategory One pay and specialty services (“Category A Services”) for digitaldistribution only.  The requirement forBDUs to distribute Category A services on a digital basis will apply to eithera standard definition (SD) or high definition (HD) version of the service. BDUswill no longer be required to distribute Category A services on an analog basisafter that date.  To the extent that BDUswish to continue to providing their subscribers with an analog offering, theCRTC will propose rules to cover such offerings when it issues proposedamendments to the regulations governing BDUs.

 

***Broadcasting Distribution Regulations***

*** ***

The *Broadcasting Distribution Regulations* enacted in 1998, alsocalled the 1998 Regulations, apply to distributors of broadcasting services orbroadcasting distribution undertakings in Canada. The 1998 Regulations promotecompetition between broadcasting distribution undertakings and the developmentof new technologies for the distribution of such services while ensuring thatquality Canadian programs are exhibited. The 1998 Regulations introduced importantnew rules, including the following:

 

·                  *Competitionand Carriage Rules. *The 1998Regulations provide equitable opportunities for all distributors ofbroadcasting services. Similar to the signal carriage and substitutionrequirements that are imposed on existing cable television systems, under the1998 Regulations, new broadcasting distribution undertakings are also subjectto carriage and substitution requirements. The 1998 Regulations prohibit adistributor from giving an undue preference to any person, including itself, orsubjecting any person to an undue disadvantage. This gives the CRTC the abilityto address complaints of anti-competitive behavior on the part of certaindistributors.

 

·                  *SignalSubstitution. *A significantaspect of television broadcasting in Canada is simultaneous programsubstitution, or simulcasting, a regulatory requirement under which Canadiandistribution undertakings, such as cable television systems with over 6,000 customers,are required to substitute the foreign programming service, with local Canadiansignal, including Canadian commercials, for broadcasts of identical programs bya U.S. station when both programs are exhibited at the same time. Theserequirements are designed to protect the program rights that Canadianbroadcasters acquire for their respective local markets. The CRTC, however, hassuspended the application of these requirements to DTH satellite operators fora period of time, so long as they undertake certain alternative measures,including monetary compensation to a fund designed to help finance regionaltelevision productions.

 

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·                  *Canadian Programming andCommunity Expression Financing Rules*. All distributors, exceptsystems with fewer than 2,000 customers, are required to contribute atleast 5% of their gross annual broadcast revenues to the creation andpresentation of Canadian programming including community programming. However,the allocation of these contributions between broadcast and communityprogramming can vary depending on the type and size of the distribution systeminvolved. On October 30, 2008, the CRTC issued a new distributionregulatory framework in which it announced that a further 1% will be added tothe 5% contribution in order to finance a new national programming fund.Depending on the final terms of this regulatory framework, Videotron mayinstitute proceedings challenging its validity.

 

·                  *InsideWiring Rules. *The CRTCdetermined that the inside wiring portion of cable networks creates abottleneck facility that could affect competition if open access is notprovided to other distributors. Incumbent cable companies may retain theownership of the inside wiring but must allow usage by competitive undertakingsto which the cable company may charge a just and reasonable fee for the use ofthe inside wire. On September 3, 2002, the CRTC established a fee of $0.52per customer per month for the use of cable inside wire in MDUs.

 

On July 5, 2007, the CRTC announced a review of the regulatoryframework for broadcasting distribution undertakings, as well as the regulatoryframework for discretionary programming services (Broadcasting Notice of PublicHearing CRTC 2007-10). As part of this review, the CRTC is considering reducingthe amount of regulation for broadcasting distribution undertakings anddiscretionary programming services to the minimum essential to achieve theobjectives under the *Broadcasting Act*,relying instead on market forces wherever possible.

 

As a result ofthis review, on October 30, 2008, the CRTC issued a new distributionregulatory framework entitled *“Regulatory frameworks forbroadcasting distribution undertakings and discretionary programming services.*”Pursuant to this new regulatory framework, the CRTC has decided to implementvarious changes to the regulatory frameworks for broadcasting distributionundertakings and discretionary programming services. As described above under “Distributionof Canadian Content”, as of August 31, 2011, this new regulatory frameworkprovides for the CRTC eliminating some of the existing distribution and linkagerules for discretionary programming services carried by broadcastingdistribution undertakings while continuing the existing preponderancerequirement (i.e., that each subscriber receives more than 50% Canadianprogramming services). The CRTC has also decided to introduce competition forthose genres of Category A Services (which have generally licensed on aone-per-genre basis and to be complementary and not compete with one another)where it is convinced that a competitive environment will not significantlyreduce either the diversity of services available to viewers or theircontribution to the creation of Canadian programming. At this time, the CRTChas decided to eliminate the current one per-genre policy for mainstreamnational news and mainstream sports specialty services. Amendments to the BDUregulations to be introduced to take effect August 31, 2011, will requireall licensed BDUs to first obtain the consent of over-the-air Canadiantelevision stations (OTAs) prior to distributing their local stations locatedin a distant market (Canadian distant signals). BDUs operating under anexemption order will not require consent from the broadcaster. These OTAs willbe permitted to negotiate payment from BDUs for the retransmission of theirlocal stations as distant signals. The distribution by BDUs of a second set ofU.S. 4+1 signals to subscribers will be subject to subscribers also receivingat least one signal, originating from the same time zone as the U.S. signals,of each large multi-station Canadian broadcasting group. Finally, all BDUscontribution to Canadian programming will be raised from 5% to 6% as soon aspossible, which may mean in the fourth quarter of 2009 or the first quarter of2010.

 

On October 30,2008, the CRTC also issued two requests for comments, one regarding the salesof advertising in local availabilities (generally two minutes per hour of airtime on non-Canadian cable channels) and the other regarding thevideo-on-demand regulatory framework. We expect, in both cases, relaxation ofthe current rules.

 

***Rates***

*** ***

Our revenuerelated to cable television is derived mainly from (a) monthlysubscription fees for basic cable service; (b) fees for premium servicessuch as specialty services, pay-television, pay-per-view television andvideo-on-demand; and (c) installation and additional outlets charges.

 

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The CRTC doesnot regulate the fees charged by non-cable broadcast distribution undertakingsand does not regulate the fees charged by cable providers for non-basicservices. The basic service fees charged by Class 1 (6,000 customersor more) cable providers are regulated by the CRTC until true competitionexists in a particular service area, which occurs when:

 

(1)                                                    30% or more of the households in the licensedservice area have access to the services of another broadcasting distributionundertaking. The CRTC has advised that as of August 31, 1997, the 30%availability criterion was satisfied for all licensed cable areas; and

 

(2)                                                    the number of customers for basic cable service hasdecreased by at least 5% since the date on which a competitor started offeringits basic cable service in the particular area.

 

For all buttwo service areas, accounting for less than 6% of our subscribers, our basicservice fees for our customers have been deregulated.

 

The CRTCfurther restricts installation fees to an amount that does not exceed theaverage actual cost incurred to install and connect the outlet to a householdsituated in a residential area.

 

Subject tocertain notice and other procedural requirements, for Class 1 cablesystems still regulated, we may increase our basic service rates so as to passthrough to customers increases, if the CRTC has authorized fees to be paid tospecialty programming services distributed on our basic service. However, theCRTC has the authority to suspend or disallow such an increase.

 

In the eventthat distribution services may be compromised as a result of economicdifficulties encountered by a Class 1 cable distributor, a request for arate increase may be submitted to the CRTC. The CRTC may approve an increase ifthe distributor satisfies the criteria then in effect for establishing economicneed. In accordance with the new regulatory framework announced on October 30,2008 and discussed above in the section “— Canadian Broadcasting Distribution(Cable Television) — Broadcasting Distribution Regulations”, all ratesregulation will be eliminated on August 31, 2011.

 

***Other recent changes to regulations which have been announced***

 

On October 21,2008, the CRTC published a new policy regarding disclosure of industry groupfinancial results. Prior to these changes, cable and telecommunicationsoperators such as Videotron had their financial results aggregated with thoseof other similar companies in Canada for the purposes of certain CRTCdisclosures.  On and after November 30,2008, aggregated financial data for each of the following industry sub-groupswill be disclosed by the CRTC: the large broadcasting distributionundertakings, multi-system operators and over-the-air television and radioownership groups.  This financial datafor each broadcasting year (September 1 to August 31) will bepublicly available at: http://www.crtc.gc.ca/dcs/eng/current/dcs4_7.htm.  Subject companies are required to post thesame information on their respective websites. However, the largebroadcasting distribution undertakings, multi-system operators and over-the-airtelevision and radio ownership groups received the CRTC form for reportingaggregated results on October 21, 2008 and are refusing to disclosefigures that would not be prepared according to GAAP and data that is notdisclosed under Canadian and U.S. securities laws and regulations.  On February 6th, 2009, most of the large broadcastingdistribution undertakings, multi-system operators and over-the-air televisionand radio ownership groups requested that the CRTC initiate a new publicconsultation in order to allow the broadcasting industry to express its pointof view on the specific financial data the CRTC would like to see disclosed.

 

On October 15,2008, the CRTC announced that it will hold a public hearing beginning on February 17,2009 to consider issues relating to broadcasting in the new media environmentand the following six main themes: (i) defining broadcasting in newmedia;  (ii) the significance ofbroadcasting in new media and its impact on the Canadian 

 

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broadcasting system;  (iii) areincentives or regulatory measures necessary or desirable for the creation andpromotion of Canadian broadcasting content in new media?; (iv) are thereissues concerning access to broadcasting content in new media?; (v) otherbroadcasting or public policy objectives; and (vi) the appropriateness ofthe new media exemption order. Broadcasting of programs and distribution ofprograms on the Internet and on wireless devices had been exempted fromregulation since exemption orders issued in 1999 and 2007, respectively.  Subject to the outcome of these hearings, itis possible that the CRTC may impose a tax on cable and telecommunicationscompanies in order to create a national fund that would finance Canadianprogramming.

 

On March 25,2008, the CRTC authorized the transfer of the license for the video-on-demandservice “Illico sur demand” from Groupe Archambault Inc., which is asubsidiary of Quebecor Media, to Videotron. Videotron is now the operator ofour video-on-demand service.

 

***Copyright Board Proceedings***

 

Certain copyrights in radio, television, internet and pay audio contentare administered collectively and tariff rates are established by the CopyrightBoard of Canada. Tariffs set by the Copyright Board are generally applicableuntil a public process is held and a decision of the Copyright Board isrendered for a renewed tariff. Renewed tariffs are often applicableretroactively.

 

***Royalties forthe Retransmission of Distant Signals***

 

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

 

Since thislegislative amendment, the *Copyright Act*(Canada) empowers the Copyright Board to quantify the amount of royaltiespayable to retransmit these signals and to allocate them among collective societiesrepresenting the holders of copyright in the works thus retransmitted.Regulated cable television operators cannot automatically recover such paidretransmission royalties from their customers, although such charges might be acomponent of an application for a basic cable service rate increase based oneconomic need.

 

In 2008,distant television signal retransmission royalties varied from $0.35 to $0.85per customer per month depending on the number of customers receiving thesignal and whether the signal was transmitted by a small retransmission system,except in Francophone markets. In Francophone markets, there is a 50% rebate.The same pricing structure, with lower rates, still applies for distant radiosignal transmission.  Most of Videotron’sundertakings operate in Francophone markets.

 

***Royalties forthe Transmission of Pay and Specialty Services***

 

In 1989, the *Copyright Act* (Canada) was amended, in particular, to definecopyright as including the exclusive right to “communicate protected works to thepublic by telecommunication.” Prior to the amendment, it was generally believedthat copyright holders did not have an exclusive right to authorize thetransmission of works carried on radio and television station signals whenthese signals were not broadcast but rather transmitted originally by cabletelevision operators to their customers. In 1996, at the request of the Societyof Composers, Authors and Music Publishers of Canada (SOCAN), the CopyrightBoard approved Tariff 17A, which required the payment of royalties bybroadcasting distribution undertakings, including cable television operators,that transmit musical works to their customers in the course of transmittingtelevision services on a subscription basis. Through a series of industry agreements,this liability was shared with the pay and specialty programming services.

 

In March 2004,the Copyright Board changed the name of this tariff from Tariff 17A toTariff 17 and rendered its decision setting Tariff 17 royalty rates for2001 through 2004. The Copyright Board changed the structure of Tariff 17 tocalculate the royalties based on the revenues of the pay and specialtyprogramming services (affiliation payments only in the case of foreign and payservices, and all revenues in the case of Canadian specialty services) and seta basic royalty 

 

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rate of 1.78% for 2001 and 1.9% for 2002 through 2004.  The basic royalty rate is subject toreductions in certain cases, although there is no Francophone marketdiscount.  SOCAN has agreed, by filingproposed tariffs, that the 2005 to 2008 tariffs will continue on the same basisas in 2004, the royalty rate remaining at 1.9%.

 

***Royalties forPay Audio Services***

 

The CopyrightBoard rendered a decision in March 2002 regarding two new tariffs for theyears 1997-1998 to 2002, which provide for the payment of royalties byprogramming and distribution undertakings that broadcast pay audio services.The tariffs fix the royalties payable to SOCAN and to the Neighbouring RightsCollective of Canada, or NRCC, respectively, during this period at 11.1% and5.3% of the affiliation payments payable during a month by a distributionundertaking for the transmission for private or domestic use of a pay audiosignal. The royalties payable to SOCAN and 

 

NRCC by asmall cable transmission system, an unscrambled low or very low powertelevision station or by equivalent small transmission systems during thisperiod were fixed by the Copyright Board at 5.6% and 2.6%, respectively, of theaffiliation payments payable during a year by the distribution undertaking forthe transmission for private or domestic use of a pay audio signal. Royaltiespayable by a system located in a Francophone market during this period arecalculated at a rate equal to 85.0% of the rate otherwise payable.

 

In February 2005,the Copyright Board rendered its decision setting pay audio services royaltiesfor 2003 through 2006. The Copyright Board fixed the rate of royalties payableto SOCAN and NRCC during this period to 12.3% and 5.9%, respectively, of theaffiliation payments payable during a month by a distribution undertaking forthe transmission for private or domestic use of a pay audio signal. Inaddition, the Copyright Board established the rate of royalties payable toSOCAN and NRCC during this period at 6.2% and 3.0%, respectively, for a smallcable transmission system, an unscrambled low or very low power televisionstation or an equivalent small transmission system. The Copyright Board alsoeliminated the previously effective 15.0% discount to royalties payable by asystem located in a Francophone market. We have made interim royalty paymentsfor 2003 and 2004 based on the lower royalty rate of the 2002 tariffs. Theretroactive royalty obligations to SOCAN and NRCC owed since 2003 were paid in2005.

 

Currently, theroyalties payable by distribution undertakings for the communication to thepublic by telecommunication of musical works in SOCAN’s repertoire inconnection with the transmission of a pay audio signal other than retransmittedsignals are as follows: a monthly fee of 12.35% of the affiliation paymentspayable by a distribution undertaking for the transmission for private ordomestic use of a pay audio signal, or an annual fee of 6.175% of theaffiliation payments payable where the distribution undertaking is a smallcable transmission system, an unscrambled low power or very low powertelevision station or an equivalent small transmission system. SOCAN has fileda proposed Pay Audio Tariff in March 2007 for the year 2008 that proposesto maintain those rates.

 

For its part, NRCC filed a proposed Pay AudioTariff for the period 2007-2011 asking for a monthly fee of 15% of theaffiliation payments payable by a distribution undertaking for the transmissionfor private or domestic use of a pay audio signal, or an annual fee of 7.5% ofthe affiliation payments payable where the distribution undertaking is a smallcable transmission system, an unscrambled low power or very low powertelevision station or an equivalent small transmission system.

 

No dates have yet been announced for theCopyright Board’s hearings regarding these proposed tariffs.

 

***Royalties for Ringtones***

 

In 2003, SOCAN filed a new proposed tariff,Tariff 24, for the communication of musical works incorporated into telephoneor other ringtones.  Since 2006,Videotron sells ringtones directly to cellular phone users.  In June 2006, the Copyright Boardrendered its decision setting a ringtone royalty for 2003 through 2005.  The Copyright Board fixed the rate of royaltypayable to SOCAN to 6% of the price paid for a ringtone by a cellular phoneuser, subject to a minimum royalty of 6.0¢ per ringtone. The minimum royaltyonly applies to the years 2004-2005. Following a judicial review, the FederalCourt of Appeal upheld the decision of the Copyright Board.

 

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***InternetService Provider Liability***

 

In 1996, SOCAN proposed a tariff to be applied against Internet serviceproviders, in respect of composers’/publishers’ rights in musical workscommunicated over the Internet to Internet service providers’ customers. SOCAN’sproposed tariff was challenged by a number of industry groups and companies. In1999, the Copyright Board decided that Internet service providers should not beliable for the communication of musical works by their customers, although theymight be liable if they themselves operated a musical website.  In June 2004, the Supreme Court ofCanada upheld this portion of the decision of the Copyright Board anddetermined that Internet service providers do not incur liability for copyrightcontent when they engage in normal intermediary activities, including webhosting for third parties and caching. As a consequence, internet serviceproviders may, however, be found liable if their conduct leads to the inferencethat they have authorized a copyright violation. A proposed amendment to the *Copyright Act* (Canada) was introduced in June 2005in Parliament to exempt ISPs for copyright liability for merely providingcustomers with access to the Internet and not operating the website itself.Following the November 2005 election call, the June 2005 Bill toamend the *Copyright Act* (Canada) wasnot enacted. Although there were discussions in 2008 to reintroduce such aBill, it is premature to predict whether the amendment will be reintroduced inParliament and enacted into law.

 

**Canadian Telecommunications Services**

** **

***Jurisdiction***

 

The provisionof telecommunications services in Canada is regulated by the CRTC pursuant tothe *Telecommunications Act*(Canada). With certain exceptions, companies that own or operate transmissionfacilities in Canada that are used to offer telecommunications services to thepublic for compensation are deemed “telecommunications common carriers” underthe *Telecommunications Act*(Canada) administered by the CRTC and are subject to regulation. Cableoperators offering telecommunications services are deemed “Broadcast Carriers.”

 

The *Telecommunications Act* (Canada), whichcame into force on October 25, 1993, as amended, provides for theregulation of facilities-based telecommunications common carriers under federaljurisdiction. Under the *TelecommunicationsAct* (Canada), the CRTC may exempt any class of Canadiantelecommunications carriers from the application of the *Telecommunications Act* (Canada) if theCRTC is satisfied that such an exemption is consistent with implementation ofthe Canada telecommunications policy objectives. The CRTC must refrain fromregulating certain telecommunications services or classes of services providedby Canadian carriers, if it finds that such service or class is or will besubject to competition sufficient to protect the interests of users. The CRTCis prohibited from making a determination to refrain if refraining fromregulation could likely impair unduly the establishment or continuance of acompetitive market for a particular service or class of services.

 

In theCanadian telecommunications market, Videotron operates as a CLEC and a Canadianbroadcast carrier. Videotron is also constructing its own 3G mobile wirelessnetwork and intends to offer services over this network as a Wireless ServiceProvider (WSP).

 

The issuanceof licenses for the use of radiofrequency spectrum in Canada is administered byIndustry Canada under the *Radiocommunication Act*.  Use of spectrum is governed by conditions oflicense which address such matters as license term, transferability anddivisibility, technical compliance, lawful interception, research anddevelopment requirements, and requirements related to antenna site sharing andmandatory roaming.

 

Our AWSlicenses were issued on December 23, 2008, for a term of ten years.  At a minimum of two years before the end ofthis term, and any subsequent terms, we may apply for license renewal for anadditional license term of up to ten years.  AWS license renewal, including whether licensefees should apply for a subsequent license term, will be subject to a publicconsultation process initiated in year eight.

 

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***Overview of the Telecommunications Competition Framework***

 

Competition in the Canadian long-distance and local telephony marketsis guided to a large extent by the principles set out in Telecom Decision CRTC92-12, which removed the telephone companies’ monopoly in the provision ofpublic long-distance voice telecommunications services, *Review of Regulatory Framework*, TelecomDecision CRTC 94-19, which sets out the principles for a new, pro-competitiveregulatory framework, and *Local Competition*Telecom Decision CRTC 97-8, which establishes the policy framework for localexchange competition. The CRTC has issued numerous follow-up rulings on mattersof policy and inter-carrier dispute. The CRTC Interconnection SteeringCommittee, or CISC, also provides an ongoing forum for consensus-basedresolution of inter-carrier technical and operational issues.

 

***Application of Canadian Telecommunications Regulation***

 

In a series ofdecisions, the CRTC has determined that the carriage of “non-programming”services by cable companies results in that company being regulated as acarrier under the *Telecommunications Act* (Canada).This applies to a company serving its own customers, or allowing a third partyto use its distribution network to provide non-programming services tocustomers, such as providing access to cable Internet services.

 

In addition,the CRTC regulates the provision of telephony services in Canada. On May 1,1997, the CRTC established the regulatory framework for the provision ofcompetitive local telephony services in Canada. Among the key elements of thisframework are: a technical form of interconnection based on a co-carrier (*i.e.*, peer-to-peer) relationship betweenthe ILEC and CLECs; mutual compensation for traffic termination (including Bill &Keep compensation at low levels of traffic imbalance); effective deregulationof CLEC retail service offerings with the exception of certain socialobligations such as the provision of enhanced 911 service; and theimposition of a series of regulatory safeguards on the ILECs to protect againstanti-competitive conduct on their part, including retail tariffingrequirements, service bundling restrictions and winback restrictions. Most ofthe latter restrictions have since been removed or rendered moot as the ILECshave secured widespread regulatory forbearance for their local exchangeservices.

 

Elements ofthe CRTC’s telecommunications regulatory framework to which Videotron issubject include: interconnection standards and inter-carrier compensationarrangements; the mandatory provision of equal access (i.e. customerchoice of long distance provider); standards for the provision of911 service, message relay service and certain privacy features; and theobligation not to prevent other local exchange carriers from accessingend-users on a timely basis under reasonable terms and conditions in multi-dwellingunits where Videotron provides service and the payment of contribution on VoIPrevenues for the purposes of the revenue-based contribution regime establishedby the CRTC to subsidize residential telephone services in rural and remoteparts of Canada.

 

Generallyspeaking, the CRTC has pursued a policy of favoring facilities-basedcompetition in telecommunications. Key to the CRTC’s framework are decisionsissued on January 25, 2001 and June 30, 2003, respectively, regardingaccess to municipal rights of way and access to multi-dwelling units. In bothcases, the CRTC adopted a policy of open access, with fees generally limited torecovering costs reasonably incurred. Application of the framework principlesto individual access cases, however, has encountered resistance from certainmunicipalities and building owners. It remains to be determined whether any ofthese access cases will need to be brought before the CRTC for resolution.

 

On February 3,2005, the CRTC issued a decision re-affirming and expanding a tariff regimeinitially established in June 2002 whereby competitive carriers maypurchase certain digital network services from the ILECs at reduced cost-basedrates. This regime had undermined Videotron’s position in the wholesale marketfor business telecommunications services. To remain competitive with the ILECsin the wholesale market, Videotron has substantially reduced the rates itcharges other competitive carriers for certain digital network services thatwould be eligible under the new tariff regime were they purchased from theILEC.

 

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On March 3,2008, the CRTC released a decision in which it ruled that most mandatedwholesale digital network services will be phased out over a period of three tofive years. This decision is expected to have the effect of improving Videotron’sposition in the wholesale market.

 

On April 6,2006, the CRTC issued its framework for the forbearance from regulation oflocal telephone services offered by the ILECs. On April 4, 2007, inresponse to a petition filed by Bell Canada and the other ILECs, the Governorin Council issued an order varying this framework. The order eliminatedforthwith all restrictions on local telephone winback and promotionalactivities in all geographic markets, and further established a localforbearance framework whereby: (i) residential local exchange services andbusiness local exchange services are in different relevant markets; (ii) therelevant geographic market for local forbearance analysis is the telephoneexchange; and (iii) the incumbent carrier must demonstrate that acompetitor presence test has been satisfied, in addition to satisfying certaincriteria related to the availability and quality of provision of services tocompetitors, before forbearance can be sought in any given market. Forresidential services, the competitor presence test requires the existence oftwo independent facilities-based service providers, other than the incumbent,each of which is capable of serving 75% of the lines in the exchange, and oneof which is a fixed-line provider. In business markets, the competitor presencetest requires the existence of one independent facilities- based fixed-lineservice provider, other than the incumbent, capable of serving 75% of the linesin the exchange.

 

The CRTC hassince approved numerous applications for local forbearance submitted by BellAliant, Bell Canada, Télébec and TELUS-Québec, in both the residential andbusiness local exchange markets. As a result, Videotron’s incumbent localservice competitors are now free from regulation of local exchange services inthe vast majority of residential markets in which Videotron competes, as wellas in a large number of business markets, including all of the largestmetropolitan markets in the Province of Quebec. These rulings granting theILECs’ forbearance applications enable the ILECs to adjust their local exchangeservice prices for the approved exchanges without approval from the CRTC. Suchprice flexibility by our ILECs competitors for local exchange services couldhave an adverse impact on our ability to compete successfully with them in thelocal telephony market.

 

On December 20,2007, the CRTC granted conditional approval to a new telecommunicationsconsumer agency, to which Videotron had previously adhered voluntarily. Themajor Canadian cable operators, including Videotron, challenged certainelements of this ruling, and the CRTC issued a revised decision on May 30,2008. Among other things, the CRTC ruled that all telecommunications serviceproviders with annual revenues in excess of $10 million must become members ofthe agency for a period of three years. Videotron remains a member in goodstanding of the agency.

 

***Right to Access to Telecommunications and Support Structures***

 

The CRTC hasconcluded that some provisions of the *Telecommunications Act*(Canada) may be characterized as encouraging joint use of existing supportstructures of telephone utilities to facilitate efficient deployment of cabledistribution undertakings by Canadian carriers. We access these supportstructures in exchange for a tariff that is regulated by the CRTC.  If it were not possible to agree on the useor conditions of access with a support structure owner, we could apply to theCRTC for a right of access to a supporting structure of a telephone utility.The Supreme Court of Canada, however, held on May 16, 2003 that the CRTCdoes not have jurisdiction under the *Telecommunications Act*(Canada) to establish the terms and conditions of access to the support structureof hydro-electricity utilities. Terms of access to the support structures ofhydro-electricity utilities must therefore be negotiated with those utilities.

 

We haveentered into comprehensive support structure access agreements with all of themajor hydro-electric companies and all of the major telecommunicationscompanies in our service territory. Our agreement with Hydro-Québec, by far thelargest of the hydro-electric companies, expires in December 2010.

 

On October 30,2008, TELUS filed an application with the CRTC seeking an order to direct theILECs to file new costs, terms and conditions for support structure service.TELUS further requested that current telco support structure rates be declaredinterim, and that monthly rental rates be adjusted retroactively to the date ofits application to reflect any revised rates once a new tariff receives finalapproval. The major Canadian cable operators, including Videotron, have opposedTELUS’ application, whereas Bell Canada and its affiliates have supported it.If a review of 

 

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monthly rental rates does proceed and if it results in an increase inrates, it may have a significant impact on our network cost structure.

 

***Access by Third-Parties to Cable Networks***

 

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

 

On July 6,1999, the CRTC required certain of the largest cable operators in Canada,including us, to submit cost-based tariffs for cable Internet access services,known as open access or third party access, in order to allow competing retailInternet service providers, to offer such services over a cable infrastructure.The CRTC has further directed us to file, at the same time we offer any newretail Internet service speed in the future, proposed revisions to our TPIAtariff to include this new speed offering. TPIA tariff items have been filedand approved for all Videotron Internet service speeds.  Several third-party Internet serviceproviders are now interconnected to our cable network and so providing retailInternet access services to the general public.

 

The CRTC alsorequires the large cable carriers, such as us, to allow third-party Internetservice providers to provide voice or telephony applications services inaddition to retail Internet access services.

 

On March 3,2008, the CRTC released a decision affirming that cable TPIA services are not ‘essentialservices’, yet mandated that they continue to be provided at cost-based ratesuntil such time as it has been demonstrated that a functionally equivalent,practical and feasible wholesale alternative exists.

 

***Telemarketing***

 

On September 30,2008, a comprehensive reform of the CRTC’s telemarketing rules came intoforce, including the establishment of a new National Do Not Call List(DNCL).  In accordance with newlegislative powers granted under Bill C-37, which came into force on June 30,2006, the CRTC has the authority to fine violators of its telemarketing rules upto $1,500 per violation in the case of an individual and $15,000 per violationin the case of a corporation.  We haveestablished internal controls to minimize the risk of breaching these rules andto provide any required investigative assistance in relation to alleged third-partyviolations.

 

***Internet Traffic Management Practices***

*** ***

On November 20,2008, the CRTC initiated a public proceeding to consider Internet trafficmanagement practices for both wholesale and retail Internet services.  Among the issues to be considered in thisproceeding are trends in traffic growth and network congestion, technical andeconomic solutions to address network congestion, the end user impacts of thesesolutions, notification requirements, and the potential for unjustdiscrimination toward Internet content or application providers.  A decision is expected in November 2009.  Any restrictions the CRTC might impose on thetraffic management practices of Internet service providers could limit ourability to recover the costs of our access network.

 

***Regulatory Framework for Mobile Wireless Services***

*** ***

On July 21,2008, Quebecor Media was declared the provisional winner of 17 AWSspectrum and operating licenses allocated at auction by Industry Canada.  These licenses cover the entirety of theProvince of Quebec, as well as Eastern and Southern Ontario.  These licenses, the control of which wastransferred from Quebecor Media to Videotron subsequent to the completion ofthe auction, were issued by Industry Canada on December 23, 2008.

 

IndustryCanada’s policy framework for the AWS auction contained several measuresintended to promote new facilities-based entry into the wireless industry.  Among these measures were proposed rules tomandate inter-carrier roaming and the sharing of wireless antenna sites.  On November 29, 2008, Industry Canadapublished the final rules for 

 

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mandated roaming and site sharing, as well as the final arbitrationprocedure for resolving commercial disputes related to roaming and sitesharing.  These rules and proceduresare now in effect.

 

The CRTC alsoregulates mobile wireless services under the *TelecommunicationsAct*.  On August 12, 1994,the CRTC released a decision forbearing from the exercise of most of its powersunder the *Telecommunications Act* as they relate tomobile wireless service. However, the CRTC did maintain its ability to requireconditions governing customer confidential information and to place othergeneral conditions on the provision of mobile wireless service. Since 1994, theCRTC has since exercised this power, for example, to mandate wireless numberportability.

 

On February 2,2009, the CRTC issued a decision requiring all WSPs to upgrade their networksby February 1, 2010, to more precisely determine the location of a personusing a mobil phone to call 911.  Newentrants that launch services, after February 1, 2010, are to have therequired functionality in place at the time of launch.  This decision will add to Videotron’s initialcosts of network deployment.

 

**D-****                                   OrganizationalStructure**

Videotron is a wholly-owned subsidiary of Quebecor Media.  Quebecor Media is a 54.72% owned subsidiaryof Quebecor Inc., which we refer to as Quebecor. The remaining 45.28% ofQuebecor Media is owned by CDP Capital d’Amérique Investissements Inc., asubsidiary of the *Caisse de dépôt et placement du Québec*,one of Canada’s largest pension fund managers. The following chart illustratesthe corporate structure of Videotron as of December 31, 2008, includingVideotron’s significant subsidiaries, together with the jurisdiction ofincorporation or organization of each entity.

 

 

**E-**                                     Property,Plants and Equipment

 

Our corporateoffices are located in leased space at 612 St-Jacques Street West, Montréal,Québec, Canada, H3C 4M8, in the same building than Quebecor’s head office.  We also own several buildings in Montréal,the largest of which is located at 2155 Pie IX Street (approximately 112,000square feet). We also own a building of approximately 73,000 square feetlocated at 150 Beaubien Street in Montréal. In Québec City, we own a building of approximately 40,000 square feetwhere our regional headend for the Québec City region is located. Furthermore,we own or lease a significant number of smaller locations for signal receptionsites and customer service and business offices. We generally lease space forthe business offices and retail locations for the operation of our videostores.

 

Our seniorsecured credit facilities are secured by charges over all of our assets andthose of most of our subsidiaries.

 

**F-**                                     IntellectualProperty

 

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

 

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**G-**            Environment

 

Our operationsare subject to federal, provincial and municipal laws and regulationsconcerning, among other things, emissions to the air, water and sewerdischarge, the handling and disposal of hazardous materials and waste,recycling, the soil remediation of contaminated sites, or otherwise relating tothe protection of the environment. Laws and regulations relating to workplacesafety and worker health, which among other things, regulate employee exposureto hazardous substances in the workplace, also govern our operations.

 

Compliancewith these laws has not had, and management does not expect it to have, amaterial effect upon our capital expenditures, net income or competitiveposition. Environmental laws and regulations and the interpretation of suchlaws and regulations, however, have changed rapidly in recent years and maycontinue to do so in the future. We have monitored the changes closely and havemodified our practices where necessary or appropriate.  Our properties, as well as areas surroundingour properties, may have had historic uses or may have current uses that mayaffect these properties and require further study or remedial measures.  No material studies or remedial measures arecurrently anticipated or planned by us or required by regulatory authoritieswith respect to our properties. However, we cannot provide assurance that allenvironmental liabilities have been determined, that any prior owner of ourproperties did not create a material environmental condition not known to us,that a material environmental condition does not otherwise exist as to any suchproperty, or that expenditure will not be required to deal with known or unknowncontamination.

 

### **ITEM 4A -  UNRESOLVED STAFF COMMENTS**

 

None.

 

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## **ITEM 5 -  **OPERATING AND FINANCIAL REVIEW AND PROSPECTS

##  

*Thefollowing operating and financial review provides information concerning ouroperating results and financial condition. This discussion should be read inconjunction with our consolidated financial statements and accompanying notesincluded under “Item 17. Financial Statements” in this annual report. Italso contains forward-looking statements, which are subject to a variety offactors that could cause actual results to differ materially from thosecontemplated by these statements.  See “Forward-LookingStatements”.*

* *

**General**

** **

We, VideotronLtd, are a wholly-owned subsidiary of Quebecor Media Inc. (parent company),incorporated under Part IA of the Companies Act (Québec).  We are thelargest cable operator in the Province of Québec and the third largest inCanada, in each case based on the number of cable customers, a major Internetservice provider and a provider of telephony services in the Province ofQuébec. We offer pay television, Internet access, cable telephony and mobilewireless telephony services.

 

ThisManagement’s Discussion and Analysis contains an analysis of our consolidatedfinancial position as of December 31, 2008 and the results of ouroperations and cash flows for the years ended December 31, 2008, 2007 and2006. Our consolidated financial statements have been prepared in accordancewith Canadian generally accepted accounting principles (GAAP), which differ incertain respects from U.S. GAAP. Note 24 to our audited consolidated financial statements which areincluded under “Item 17. Financial Statements” in this annual report containsdiscussions of the principal differences between Canadian GAAP and U.S. GAAPand the extent to which those differences affect our consolidated financialstatements. All amounts are in Canadian dollars unless otherwise specified.

 

**Highlights Since December 31, 2007**

 

·      In May 2008, Videotron subscribed to200,000,000 preferred shares, Series B, of 9193-2962 Québec Inc., asubsidiary of Quebecor Media, for cash consideration of$200.0 million.  In September 2008,Videotron subscribed to an additional 336,601,953 preferred shares, Series B,of 9193-2962 Québec Inc. for cash consideration of$336.6 million.  These transactionswere effected in order to fund payments by 9193-2962 Québec Inc. in an amountof $554.5 million in connection with the successful bids for 17 new spectrumlicences for Advanced Wireless Services (“AWS”), covering all of the Provinceof Québec and certain areas of Ontario, obtained as part of the Canadianspectrum auction for AWS.  On September 23,2008, Videotron acquired all the common shares of 9193-2962 Québec Inc.from Quebecor Media for a cash consideration of $17.9 million and issuanceto Quebecor Media of one common share of Videotron.  As of December 31, 2008, otherintangible assets comprise the spectrum licences for AWS in the amount of $567.0 million(including capitalized interest). Industry Canada has informed 9193-2962 Québec Inc. that it met theCanadian ownership and control requirements of Section 10(2) of the *Radiocommunication Regulations*. The ownership transfer ofthese spectrum licences occurred in December 2008.

 

**Non-GAAP Financial Measures**

** **

We use certainsupplemental financial measures that are not calculated in accordance with orrecognized by accounting principles generally accepted in Canada (“CanadianGAAP”) or accounting principles generally accepted in the United States (“U.S. GAAP”)to assess our financial performance.  Weuse these non-GAAP financial measures, such as operating income and averagemonthly revenue per user, which we refer to as ARPU, because we believe that theyare meaningful measures of our performance. Our method of calculating these non-GAAPfinancial measures may differ from the methods used by other companies and, asa result, the non-GAAP financial measures presented in this annual report maynot be comparable to other similarly titled measures disclosed by othercompanies.

 

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***Operating Income***

 

We defineoperating income, reconciled to net income under Canadian GAAP, as net incomebefore amortization, financial expenses, (gain) loss on valuation andtranslation of financial instruments, impairment of goodwill and other items,income taxes and non-controlling interest. Operating income margin is operatingincome as a percentage of operating revenues. Operating income, and ratios using this measure, are not intended to beregarded as an alternative to other financial operating performance measures,or to the statement of cash flows as a measure of liquidity. Operating incomeis not intended to represent funds available for debt service, reinvestment,distributions of dividends, or other discretionary uses, and should not beconsidered in isolation from, or as a substitute for, our financial informationreported under Canadian GAAP and U.S. GAAP. We believe that operating income isa meaningful measure of performance because operating income excludes, amongother things, certain non-cash items and items that are not readily comparablefrom year to year. Operating income is also commonly used in the sector inwhich we operate, as well as by the investment community, to analyze andcompare companies in our field of activities. Operating income has limitationsas an analytical tool, including:

 

·      although amortization is a non-cash charge, theassets being amortized will often have to be replaced in the future, andoperating income does not reflect cash requirements for such capitalexpenditures;

 

·      it does not reflect income tax expense or the cashnecessary to pay income taxes; and

 

·      it does not reflect financial expenses or thecash necessary to pay financial expenses.

 

It should benoted that our definition of operating income may not be identical to similarlytitled measures reported by other companies, limiting its usefulness as acomparative measure.  We provide areconciliation of operating income to net income as disclosed in our financialstatements in Table 1 below.

 

**Table1**

 

**Reconciliationbetween the operating income measure used in this report and the net incomemeasure used in the consolidated financial statements(in millions of Canadian dollars)**

 
| ** **                                                         | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                         | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                         | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | **(restated)(1)** | ** ** | **(restated)(1)** | ** ** |
| **AMOUNTS UNDER CANADIAN GAAP**                               |       |                                       |       |   |   |   |   |   |   |   |   |
| Net income                                                         |       | $                                          | 395.4      |   | $ | 325.7 |   | $ | 183.7 |   | $ | 102.7 |   | $ | 111.7 |   |
| Amortization                                                       |       | 214.3                                      |       | 206.1 |   | 185.1 |   | 166.3 |   | 163.9 |   |
| Financial expenses                                                 |       | 90.9                                       |       | 76.1 |   | 81.8 |   | 65.8 |   | 61.0 |   |
| Loss (gain)  on valuation and translation of financial instruments |       | 24.7                                       |       | (9.1 | ) | (2.2 | ) | 8.9 |   | 31.9 |   |
| Impairment of goodwill and other items                             |       | (1.4                                       | )          | 5.4 |   | — |   | — |   | 1.9 |   |
| Income taxes (recovery) expense                                    |       | 73.1                                       |       | 38.3 |   | 64.2 |   | 69.8 |   | (6.7 | ) |
| Non-controlling  interest in a subsidiary                          |       | 0.2                                        |       | 0.2 |   | 0.1 |   | 0.1 |   | 0.1 |   |
| Operating income as defined                                        |       | $                                          | 797.2      |   | $ | 642.7 |   | $ | 512.7 |   | $ | 413.6 |   | $ | 363.8 |   |

 

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| ** **                                                         | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                         | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                         | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | **(restated)(1)** | ** ** | **(restated)(1)** | ** ** |
| ** **                                                         | ** ** | **(dollars in millions)**                  | ** ** |
| **AMOUNTS UNDER U.S. GAAP**                                        |       |                                       |       |   |   |   |   |   |   |   |   |
| Net income                                                         |       | $                                          | 375.0      |   | $ | 323.7 |   | $ | 168.8 |   | $ | 98.7 |   | $ | 100.5 |   |
| Amortization                                                       |       | 225.6                                      |       | 216.7 |   | 196.3 |   | 177.4 |   | 175.7 |   |
| Financial expenses                                                 |       | 90.9                                       |       | 76.1 |   | 81.8 |   | 65.8 |   | 61.0 |   |
| Loss (gain)  on valuation and translation of financial instruments |       | 30.1                                       |       | (14.1 | ) | 6.0 |   | 9.4 |   | 24.2 |   |
| Impairment of goodwill and other items                             |       | 0.6                                        |       | 5.4 |   | — |   | — |   | 1.9 |   |
| Income taxes (recovery) expense                                    |       | 77.3                                       |       | 32.3 |   | 56.1 |   | 60.4 |   | (1.2 | ) |
| Non-controlling  interest in a subsidiary                          |       | 0.2                                        |       | 0.2 |   | 0.1 |   | 0.1 |   | 0.1 |   |
| Operating income as defined                                        |       | $                                          | 799.7      |   | $ | 640.4 |   | $ | 509.0 |   | $ | 411.8 |   | $ | 362.2 |   |

 

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(1)   On January 1, 2006, a company under common control, VideotronTelecom Ltd., merged with Videotron.  On July 1,2006, Videotron also merged with its parent, 9101-0827 Québec inc.  Those transactions have been accounted forusing the continuity of interest method, and the results of operations andfinancial position of Videotron Telecom Ltd. and 9101-0827 Québec inc. havebeen included in these consolidated financial statements as if the threecompanies had always been combined. Comparative figures have been restated from statements previously presented.  In respect of U.S. GAAP financial data, seealso Note 24 “Significant differences between generally accepted accountingprinciples (GAAP) in Canada and the United States” to our auditedconsolidated financial statements which are included under “Item 17. FinancialStatements” in this annual report.

 

***Average Monthly Revenue per User***

 

Averagemonthly revenue per user (“ARPU”) is an industry metric that we use to measureour average cable, Internet, and cable and wireless telephony revenues permonth per basic cable customer. ARPU is not a measurement consistent withCanadian GAAP or U.S. GAAP.  Wecalculate ARPU by dividing our combined cable television, Internet-access, andcable and wireless telephony revenues by the average number of basic cablecustomers during the applicable period, and then dividing the resulting amountby the number of months in the applicable period.

 

**2008/2007 Year Comparison**

 

***Customer statistics***

 

*Cabletelevision* – The combined customer base for cabletelevision services increased by 77,519 (4.7%) in 2008 (compared with 65,686 in2007 and 66,298 in 2006) (see Table 2). As of December 31, 2008, our cablenetwork had a household penetration rate (number of subscribers as a proportionof 2,542,859 total homes passed as of the end of December 2008) of 67.5%versus 65.6% a year earlier and 64.0% in 2006.

 

·      The number of subscribers to illico Digital TVstood at 927,332 at the end of 2008, an increase of 159,111 or 20.7% during theyear (compared with an increase of 144,565 in 2007 and an increase of 149,017in 2006). At December 31, 2008, 54.1% of our cable television customerswere subscribers to our illico Digital TV services compared to 46.9% in 2007and 39.7% in 2006. At December 31, 2008, illico Digital TV had a householdpenetration rate of 36.5%, compared with 30.8% a year earlier and 25.4% in2006.

 

·      The customer base for analog cable televisionservices decreased by 81,602 (-9.4%) in 2008 (compared with a decrease of78,879 customers in 2007 and a decrease of 82,719 customers in 2006), primarilyas a result of customer migration to illico Digital TV.

 

*Internetaccess* – The number of subscribers to cable Internetaccess services stood at 1,063,847 at the end of 2008, an increase of 130,858(14.0%) from the previous year (compared with an increase of 141,023 in 2007and an 

 

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increase of 153,995 in 2006). At December 31, 2008, cable Internetaccess services had a household penetration rate of 41.8%, compared with 37.4%at December 31, 2007 and 32.2% at December 31, 2006.

 

*Cabletelephony service* – The number of subscribers to cabletelephony service stood at 851,987 at the end of 2008, an increase of 215,635(33.9%) from the previous year (compared with an increase of 238,522 in 2007and an increase of 234,851 in 2006). At December 31, 2008, the IPtelephone service had a household penetration rate of 33.5%, compared with25.5% at December 31, 2007 and 16.2% at December 31, 2006.

 

*Wireless telephony service* – At December 31, 2008, there were63,402 lines activated on our wireless telephony service, an increase of18,325 (40.6%) from the previous year (compared with an increase of 33,251 in2007).

 

**Table 2**

**End-of-yearcustomer numbers**

**(inthousands of customers)**

 
| ** **                                      | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| **Cable  television**                           |       |     |       |     |       |     |       |     |       |     |       |
| **Analog**                                      |       | 788.3    |       | 869.9    |       | 948.8    |       | 1,031.5  |       | 1,118.9  |       |
| **Digital**                                     |       | 927.3    |       | 768.2    |       | 623.6    |       | 474.6    |       | 333.7    |       |
| **Total  cable television**                     |       | 1,715.6  |       | 1,638.1  |       | 1,572.4  |       | 1,506.1  |       | 1,452.6  |       |
| **Cable  Internet**                             |       | 1,063.8  |       | 933.0    |       | 792.0    |       | 638.0    |       | 502.6    |       |
| **Cable  telephony**                            |       | 852.0    |       | 636.4    |       | 397.8    |       | 163.0    |       | —   |       |
| **Wireless  telephony (in thousands of lines)** |       | 63.4     |       | 45.1     |       | 11.8     |       | —   |       | —   |       |

 

***Results Analysis***

 

**Revenues**:$1,804.2 million, an increase of $251.6 million (16.2%).

 

·      Combined revenues from all cable televisionservices increased by $74.1 million (10.1%) to $809.9 million. Thisgrowth was primarily due to an increase in the average number of basic cablecustomers, the migration of our customers from our analog to our digitalservices, higher buying rates for our video-on-demand and pay-TV products, anincrease in the number of subscribers to our High Definition packages, as wellas price increases, partially offset by higher bundling discounts due to theincrease in Internet and cable telephony customers.

 

·      Revenues from Internet access services increasedby $77.2 million (18.3%) to $499.6 million. The improvement wasmainly due to an increase in the average number of cable-modem Internetcustomers, along with increased revenues from usage of bandwidth over thelimits stipulated in the contracts with our customers and a decrease inpromotional discounts.

 

·      Revenues from cable telephony services increasedby $90.6 million (46.3%) to $286.1 million, primarily due to customergrowth, partly offset by lower long distance revenues per user in 2008.

 

·      Revenues from wireless telephony servicesincreased by $13.9 million (78.5%) to $31.6 million, primarily due tocustomer growth.

 

·      Revenues from business solutions decreased by$6.6 million (-9.4%) to $63.6 million, due to the end of a major contract.

 

·      Revenues of Le SuperClub Vidéotron ltée decreasedby $2.9 million (-4.9%) to $57.0 million, primarily because of the impactof the sale of the StarStruck Entertainment chain (operating in Ontario), thefranchising of some of our corporate locations and some store closings, partlyoffset by higher retail sales, rental revenues and royalties.

 

·      Other revenues, which represent principally salesof equipment to customers, increased by $5.4 million (10.6%) to $56.4 million,due to an increase in the sale of set-top boxes and a higher proportion of HighDefinition set-boxes.

 

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**Monthlycombined ARPU**: $81.17, compared with $71.52 for 2007,an increase of $9.65 (13.5%).

 

**Operatingincome**: $797.2 million in 2008, an increase of$154.5 million (24.0%).  This increase was due primarily due to:

 

·      customer growth for all services;

 

·      price increases, mostly on our cable televisionservices and cable Internet access services;

 

·      a higher proportion of digital customers for ourtelevision services resulting in increased ARPU; and

 

·      a $34.3 million decrease in expenses relatedto the parent company’s management fees and stock option plan;

 

partiallyoffset by:

 

·      unfavourable variance of $29.0 millionrelated to recognition in 2008 of a charge for CRTC Part II licence feescovering the period from September 1, 2006 to December 31, 2008following the Federal Court of Appeal decision of April 29, 2008.  Videotron recorded Part II licence feesfor 2008 and will continue to record the fees going forward;

 

·      higher bundling discounts;

 

·      increase in our sales and marketing expenses;

 

·      higher regulatory contributions due to theincrease of our revenues;

 

·      increase in our call center, technical servicesand network maintenance costs in order to support our growth; and

 

·      decrease in our business solutions revenues.

 

**Operatingcosts, expressed as a percentage of revenues:**55.8% in 2008 compared with 58.6% in 2007. Operating costs as a proportionof revenues decreased slightly for the following reasons:

** **

·      the fixed component of costs, which does notfluctuate in proportion to revenue growth;

 

·      the marginal impact on costs of the higherconsumption revenues, price increases and long-distance telephone volume; and

 

·      the decrease in the parent company’s managementfees and stock option plan expenses which was largely offset by the increase inPart II licence fees.

 

**Amortizationcharge**: $214.3 million, an increase of$8.2 million (4.0%) compared with 2007.

 

·      The increase was mainly due to an increase in theacquisition of fixed assets, mostly related to telephony and Internet accessservices and the modernization of our network.

 

**Financialexpenses:**$90.9 million, an increase of$14.8 million (19.4%).  The increasewas mainly due to:

 

·      $30.4 million impact of increasedindebtedness;

 

partiallyoffset by:

 

·      $12.8 million of interest mainly capitalized tothe cost of intangible assets for 3G licences acquisition; and

 

·      $3.5 million increase of the dividend income (netof the interest expense) resulting from tax consolidation transactions.

 

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The increasein indebtedness was due to the issuance, on April 15, 2008, of US$455.0million aggregate principal amount of our 91/8 Senior Notes due 2018.

 

**Valuationand translation of financial instruments**: a loss of$24.7 million in 2008, compared to a gain of $9.1 million in 2007.  The loss in 2008 was mainly due to:

 

·      $10.8 million unfavourable impact related toa change in accounting estimates of the fair value of derivative instruments,reflecting market developments and recent accounting guidelines (see “Changesin accounting policies and accounting estimates” below); and

 

·      $12.8 million unfavourable impact related tothe ineffective portion of fair value hedges and the valuation of otherfinancial instruments.

 

The gain in2007 was mainly due to:

 

·      $12.5 million favourable impact related tothe ineffective portion of fair value hedges (first time adoption in 2007 of anew accounting policy on derivative financial instruments and hedgeaccounting); and

 

·      $3.4 million unfavourable impact related to thevaluation of other financial instruments.

 

**Income taxexpense**: $73.1 million (effective tax rate of15.6%), compared with $38.3 million in 2007 (effective tax rate of10.5%).  The variation in rate as compared to thestatutory tax rate in 2008 was mainly due to:

 

·      $86.1 million in non-taxable dividends fromrelated parties; and

 

·      $5.7 million due to the recognition of a deferredcredits related to the acquisition of tax losses in prior years.

 

The variation in rate as compared to thestatutory tax rate in 2007 was mainly due to:

 

·      $54.7 million in non-taxable dividends fromrelated parties; and

 

·      $23.6 million due to non-deductible charges,non-taxable income and differences between current and future tax rates.

 

**Net income**:$395.4 million, an increase of $69.8 million (21.4%). The increasewas mainly due to:

 

·      $154.5 million increase in operating income(taxable at an average rate of 15.6% due to tax consolidation transactions);

 

partially offset by:

 

·      $14.8 million increase in financialexpenses;

 

·      $8.2 million increase in amortization; and

 

·      $33.8 million increase in the loss on valuationand translation of financial instruments.

 

**2007/2006 Year Comparison**

** **

***Results Analysis***

 

**Revenues**:$1,552.6 million, an increase of $243.0 million (18.6%).

** **

·      Combined revenues from all cable televisionservices increased by $58.6 million (8.6%) to $735.8 million. Thisgrowth was primarily due to an increase in the average number of basic cablecustomers, higher buying rates for our video-on-demand and pay-TV products, aswell as the price increases implemented at the beginning of March 2006 andMarch 2007, partially offset by higher bundling discounts due to theincrease in cable telephony customers.

 

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·      Revenues from Internet access services increasedby $77.4 million (22.4%) to $422.4 million. The improvement wasmainly due to an increase in the average number of cable-modem Internetcustomers, along with increased revenues from usage of bandwidth over thelimits stipulated in the contracts with our customers, price increases and afavourable product mix.

 

·      Revenues from cable telephony services increasedby $88.1 million (82.1%) to $195.5 million, mainly due to an increasein the average number of cable telephony customers, along with a slightincrease in long distance and installation revenues.

 

·      Revenues from wireless telephony servicesincreased by $16.5 million to $17.7 million. The commercial launchoccurred August 2006.

 

·      Revenues from business solutions decreased by$4.2 million (-5.6%) to $70.2 million, due to the restructuring of a majorcontract.

 

·      Revenues of Le SuperClub Vidéotron ltée increasedby $4.4 million (7.9%) to $60.0 million, mainly due to increased sales ofequipment and video games as well as the acquisition of new stores in 2006 and2007.

 

·      Other revenues, which represent principally salesof equipment to customers, increased by $2.2 million (4.6%) to $51.0 million,due to an increase in the sale of higher value set-top boxes as well aswireless equipment, partly offset by a lower volume of sales of basic set-topboxes.

 

**Monthlycombined ARPU**: $71.52 in 2007, compared with $61.43 inthe same period of 2006, an increase of $10.09 (16.4%).

 

**Operatingincome**: $642.7 million in 2007, an increase of$130.0 million (25.4%).  Theincrease was due primarily to:

 

·      customer growth for all services;

 

·      price increases, mostly on our cable televisionservices and cable Internet access services;

 

·      our wireless telephony services (we launched ourservices in August 2006);

 

·      a higher proportion of digital customers for ourtelevision services resulting in increased ARPU; and

 

·      $12.9 million favourable variance related tonon-recognition in 2007 of current Canadian Radio-television andTelecommunications Commission (“CRTC”) Part II licence fee accrualsfollowing the notice issued on October 1, 2007;

 

partiallyoffset by:

 

·      $30.1 million increase in management fees chargedby our parent company including additional charges for the parent company stockoption plan;

 

·      additional resources required to support thegrowth in our customer base; and

 

·      decrease in business solutions revenues.

 

**Operatingcosts, expressed as a percentage of revenues**:58.6% in 2007 compared with 60.9% in 2006. Operating costs as a proportionof revenues decreased slightly for the following reasons:

 

·      the fixed component of costs, which does notfluctuate in proportion to revenue growth; and

 

·      the favourable variation related to thenon-recognition of the Part II fees.

 

**Amortizationcharge**: $206.1 million, an increase of$21.0 million (11.3%).

 

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The increasewas mainly due to an increase in the acquisition of fixed assets, mostlyrelated to telephony and Internet access services and the modernization of ournetwork.

 

**Financialexpenses**: $76.1 million, a decrease of$5.6 million (-6.9%).  The decreasewas mainly due to:

 

·      $5.9 million increase of the dividend income (netof the interest expense) resulting from tax consolidation transactions.

 

**Valuationand translation of financial instruments**: a gain of$9.1 million in 2007, compared to a gain of $2.2 million in 2006.  The gain in 2007 was mainly due to:

 

·      $12.5 million favourable impact related tothe ineffective portion of fair value hedges (first time adoption in 2007 of anew accounting policy on derivative financial instruments and hedgeaccounting); and

 

·      $3.4 million unfavourable impact related to thevaluation of other financial instruments.

 

The gain in2006 was mainly due to:

 

·      $3.3 million gain on the termination of along term debt; and

 

·      $1.1 million unfavourable impact related to thevaluation of other financial instruments.

 

**Income taxexpense**: $38.3 million (effective tax rate of10.5%), compared with $64.2 million in 2006 (effective tax rate of25.9%).  The variation in rate as compared to the statutorytax rate in 2007 was mainly due to:

 

·      $54.7 million in non-taxable dividend fromrelated parties (due to tax consolidation transactions); and

 

·      $23.6 million due to non-deductible charges,non-taxable income and differences between current and future tax rates.

 

The variation in rate as compared to thestatutory tax rate in 2006 was mainly due to:

 

·      $14.9 million due to a change insubstantively enacted tax rates affecting our future income tax balances.

 

**Net income**:$325.7 million, an increase of $142.0 million (77.3%).  The increase was mainly due to:

 

·      $130.0 million increase in operating income(taxable at an average rate of 10.5% due to tax consolidation transactions);

 

·      $55.0 million impact of the lower income taxesrate in 2007;

 

Partiallyoffset by:

 

·      $21.0 million increase in amortization; and

 

·      $5.4 million impairment in 2007 of the goodwillof our subsidiary, Le Superclub Vidéotron Ltée, related to the DVDs and gamesrental operations in Ontario.

 

**Other Developments Since December 31, 2007**

** **

In 2003 and2004, a number of companies, including Videotron, brought a suit against theCrown in Federal Court, alleging that the Part II licence fees annuallypaid by broadcasters constitute, in fact and in law, unlawful taxes under theBroadcasting Act (Canada). On December 14, 2006, the Federal Court foundthat these fees did indeed constitute taxes and that the CRTC should ceasecollection of such fees, but concluded that the plaintiff companies would notbe entitled to a reimbursement of the amounts already paid. The plaintiffs andthe defendant both filed an appeal before the Federal Court of Appeal. On October 1, 2007,the CRTC issued a document stating that it would adhere to the decisionrendered and that it would not collect, in 2007 or any subsequent years,the Part II licence fees payable on November 30 of each year unless aSuperior Court reverses the decision of the Federal Court of Appeal. In lightof these facts, and as a result of the decision of the Superior Court,Videotron reversed its liability of $11.1 million related to 

 

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these Part II licence fees covering the period from September 1, 2006to December 30, 2007 in the third quarter of 2007.  Videotron also ceased to record the Part IIlicence fees.

 

On April 29,2008, the Federal Court of Appeal handed down its decision and overturned the December 14,2006 decision of the Federal Court.  Theplaintiff companies disagree with this decision and the request for leave toappeal to the Supreme Court of Canada was accepted on December 18,2008.  The CRTC publicly stated that itwill make no attempt to collect outstanding Part II licence fees until theearlier of (a) the judgment of the Federal Court of Appeal is affirmed bythe Supreme Court or (b) the matter is settled between the parties.However, by virtue of the Federal Court of Appeal decision that confirms theright of the CRTC to collect Part II licence fees to which Videotron issubject, Videotron recorded in 2008 a total liability of $25.6 millionrelated to the Part II licence fees. This liability is for the periodcovering from September 1, 2006 to December 31, 2008.  Videotron continues to accrue for the Part IIlicence fees.

 

**Liquidity and Capital Resources**

** **

***Uses of Liquidity and Capital Resources***

 

Our principalliquidity and capital resource requirements consist of:

 

·      capital expenditures to maintain and upgrade ournetwork in order to support the growth of our customer base and the launch andexpansion of new or additional services;

 

·      the servicing and repayment of our debt; and

 

·      distributions to our shareholder.

 

**CapitalExpenditures**: $404.8 million in 2008, an increase of$74.7 million (22.6%) compared with 2007. The increase was mainly due to:

 

·      initial investments of $17.5 million in our AWSnetwork, higher investments in our Internet network and the modernization ofcertain parts of our network.

 

We continue tofocus on success-driven capital spending.

 

 
| **Fixed Assets Additions   (in millions)** | ** ** | **2008**   | ** ** | **2007**   | ** ** | **Variance** | ** ** |
|----------------------------------------------------------------|------------|------------|------------|------------|------------|--------------|------------|
| ** **                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** **   | ** ** |
| Customer premises equipment                                    |       | $          | 113.1      |       | $          | 122.9        |       | $ | (9.8 | ) |
| Scaleable infrastructure(1)                                    |       | 121.0      |       | 76.8       |       | 44.2         |       |
| Line extensions                                                |       | 41.2       |       | 27.3       |       | 13.9         |       |
| Upgrade/Rebuild                                                |       | 57.7       |       | 53.0       |       | 4.7          |       |
| Support Capital                                                |       | 71.8       |       | 50.1       |       | 21.7         |       |
| **Total fixed assets additions**                               |       | $          | 404.8      |       | $          | 330.1        |       | $ | 74.7 |   |

 

----

(1)        Includes our $17.5million initial investments in our AWS network.

 

Our strategyof maintaining a leadership position in respect of the suite of products andservices that we offer and launching new products and services requiresinvestments in our network to support growth in our customer base and increasesin bandwidth requirements.  Approximately99% of our network in Québec has been upgraded to a bandwidth of 750 MHz orgreater.  Also, in light of the greateravailability of HDTV programming, the ever increasing speed of Internet accessand increasing demand for our cable telephony service, further investment inthe network will be required.

 

In October 2008,we and Quebecor Media announced our intention to invest between $800 millionand $1.0 billion over the next four years to roll out our own AWS network.  This amount includes the cost of the acquiredspectrum and operating licenses (which has already been paid), the cost ofnetwork buildout and initial operating costs 

 

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(but excludes any capitalized interest).  We plan to fund future investments in AWSthrough cash flow generation and available credit facilities.  We currently anticipate that our new HighSpeed Packet Access (HSPA) network will be operational in 9 to 15 months.

 

**Serviceand Repayment of Our Debt**: Cash interest payments of$109.3 million in 2008, an increase of $29.2 million compared with 2007.  The increase was mainly due to:

 

·      the issuance, in April 2008, of $455.0million in aggregate principal amount of our 91/8%Senior Notes ($447.6 million net of financing costs).

 

**Purchaseof Shares of Quebecor Media and Service of Subsidiary Subordinated Loan**:  Unlike corporations in the United States,corporations in Canada are not permitted to file consolidated tax returns. As aresult, we have entered into certain transactions described below that have theeffect of using tax losses within the Quebecor Media group.

 

On January 3,2007, Videotron entered into a subordinated loan of $1.0 billion with QuebecorMedia, as lender, bearing interest at a rate of 10.5%, payable every six monthson June 20 and December 20, and which incremental amount matures on January 3,2022.  On May 31, 2007, Videotronincreased the principal amount of the subordinated loan by $870.0 million,maturing on May 31, 2022.  Videotroninvested the total proceeds of $1.0 billion and $870.0 million into 1,000,000and 870,000 preferred shares, Series B, of 9101-0835 Québec Inc., asubsidiary of Quebecor Media.  Theseshares carry the right to receive an annual dividend of 10.85%, payablesemi-annually.

 

On May 31,2007, CF Cable TV Inc., a wholly-owned subsidiary of Videotron, entered into asubordinated loan of $125.0 million with Quebecor Media, as lender, bearinginterest at a rate of 10.5%, payable every six months on June 20 and December 20,and maturing on May 31, 2022.  Onthe same day, CF Cable TV Inc. invested the total proceeds of $125.0 millioninto 125,000 preferred shares, Series B, of 9101-0835 Québec Inc.  These shares carry the right to receive anannual dividend of 10.85%, payable semi-annually.

 

On January 4,2008, Videotron entered into a subordinated loan of $415.0 million fromQuebecor Media, as lender, bearing interest at a rate of 10.5%, payable everysix months on June 20 and December 20, and maturing on January 4,2023.  On the same day, Videotroninvested the total proceeds of $415.0 million into 415,000 preferredshares, Series B, of 9101-0835 Québec Inc., a subsidiary of QuebecorMedia.  These shares carry the right toreceive an annual dividend of 10.85%, payable semi-annually.

 

On January 4,2008, CF Cable TV Inc., a wholly-owned subsidiary of Videotron, entered into asubordinated loan of $170.0 million with Quebecor Media, as lender,bearing interest at a rate of 10.5%, payable every six months on June 20and December 20, and maturing on January 4, 2023.  On the same day, CF Cable TV Inc. investedthe total proceeds of $170.0 million into 170,000 preferred shares, Series B,of 9101-0835 Québec Inc., a subsidiary of Quebecor Media.  These shares carry the right to receive anannual dividend of 10.85%, payable semi-annually.

 

On December 23,2008, 9101-0835 Québec Inc., a subsidiary of Quebecor Media, redeemed 525,000preferred shares, Series B, for a total cash consideration of$525.5 million, including cumulative dividends of $0.5 million. On thesame day, Videotron used the total proceeds of $525.0 million to repaypart of its subordinated loan contracted from Quebecor Media on January 3,2007.

 

On January 9,2009, CF Cable TV Inc., a wholly-owned subsidiary of Videotron, increased theprincipal amount of its subordinated loan with Quebecor Media, as lender, by$190.0 million, which incremental amount bears interest at a rate of 10.5%,payable every six months on June 20 and December 20, and maturing on January 9,2024.  On the same day, CF Cable TV Inc.invested the total proceeds of $190.0 million into 190,000 preferred shares, Series B,of 9101-0835 Québec Inc.  These sharescarry the right to receive an annual dividend of 10.85%, payable semi-annually.

 

**Income taxtransactions**: On December 18, 2008, Videotron’s ultimate parent company, QuebecorInc., transferred to Videotron a total of $104.9 of non-capital tax losses inexchange for net cash consideration of $18.4 

 

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million.  This transaction wasrecorded at the exchange amount.  As aresult, Videotron recorded an income tax asset of $32.4 million, and thedifference of $14.0 million, between the net cash consideration and the incometax asset, was recorded as a deferred credit, included in accounts payable andaccrued charges, which will reduce the income tax expense in the future asthese tax deductions are used.

 

On December 18and 21, 2007, Videotron’s ultimate parent company, Quebecor Inc., transferredto Videotron a total of $57.1 million of non-capital tax losses in exchange fornet cash consideration of $12.8 million. This transaction was recorded at theexchange amount. As a result, Videotron recorded an income tax asset of $17.7million, and the difference of $4.9 million between the net cash considerationand the income tax asset was recorded as a deferred credit, included inaccounts payable and accrued liabilities, which reduced income tax expense in2008 as these tax deductions were used.

 

On December 21,2007, Videotron’s ultimate parent company, Quebecor Inc., transferred to CFCable TV Inc., a wholly-owned subsidiary of Videotron, $9.4 million ofnon-capital tax losses in exchange for a net cash consideration of $2.1million. This transaction was recorded at the exchange amount. As a result, CFCable TV Inc. recorded an income tax asset of $2.9 million, and the differenceof $0.8 million between the net cash consideration and the income tax asset,was recorded as a deferred credit, included in accounts payable and accruedliabilities, which reduced income tax expense in 2008 as these tax deductionswere used.

 

**Distributionsto our Shareholder**: During the year ended December 31, 2008, we paid $230.0 million toour sole shareholder, Quebecor Media, in respect of reductions in paid-upcapital and dividends, compared to total cash distributions of$299.6 million in 2007.  See Note 16to our audited consolidated financial statements for the years ended December 31,2008, 2007 and 2006 for more information. We expect to make cash distributionsto our shareholder in the future, within the limits set by the terms of ourindebtedness and applicable laws.

 

**ContractualObligations and Other Commercial Commitments**: Ourmaterial contractual obligations included capital repayment and interest onlong-term debt, operating lease arrangements, capital asset purchases and othercommitments, and obligations related to derivative instruments.  Videotron entered in the following materialcontractual obligations in 2008:

 

·      On April 15, 2008, Videotron issued US$455.0million in aggregate principal amount of 91/8%Senior Notes due 2018.

 

·      On April 7, 2008, Videotron amended itsSenior Secured Credit Facility to increase commitments under the facility from$450.0 million to $575.0 million and extend the maturity date to April 2012.Pursuant to these amendments, Videotron may, subject to certain conditions,increase the commitments under the Senior Secured Credit Facility by anadditional $75.0 million (for aggregate commitments of $650.0 million).

 

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Details of ourcontractual obligations and other commercial commitments are disclosed in notes14, 15, 19, 20 and 21 to our annual consolidated financial statements for theyear ended December 31, 2008.

 
| ** **                                      | ** ** | ** **                                 | ** ** | **Payments Due by Period  as of December 31, 2008** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|
| ** **                                      | ** ** | **Total**                                  | ** ** | **< 1 year**                                                              | ** ** | **Less than 1-3  years** | ** ** | **3-5 years** | ** ** | **> 5 years** | ** ** |
| ** **                                      | ** ** | **(in million of dollars)** | ** ** |
| ***Contractual obligations (1):***              |       |                                       |       |                                                                                   |       |   |   |   |   |   |   |
| Bank indebtedness                               |       | $                                          | 3.6        |                                                                                   | $          | 3.6 |   | $ | — |   | $ | — |   | $ | — |   |
| Bank credit facility                            |       | 207.7                                      |       | —                                                                                 |       | — |   | 207.7 |   | — |   |
| Accounts payable and accrued charges            |       | 322.6                                      |       | 322.6                                                                                  |       | — |   | — |   | — |   |
| Amounts  payable to affiliated company          |       | 19.3                                       |       | 19.3                                                                                   |       | — |   | — |   | — |   |
| 6 7/8% Senior Notes due  January 15, 2014  |       | 800.4                                      |       | —                                                                                 |       | — |   | — |   | 800.4 |   |
| 6 3/8% Senior Notes due  December 15, 2015 |       | 212.4                                      |       | —                                                                                 |       | — |   | — |   | 212.4 |   |
| 9 1/8% Senior Notes due  April 15, 2018    |       | 546.2                                      |       | —                                                                                 |       | — |   | — |   | 546.2 |   |
| Cash Interest Expense(2)                        |       | 829.7                                      |       | 120.7                                                                                  |       | 241.3 |   | 228.7 |   | 239.0 |   |
| Derivative financial instruments(3)             |       | (60.3                                      | )          | —                                                                                 |       | — |   | — |   | (60.3 | ) |
|                                            |       |                                       |       |                                                                                   |       |   |   |   |   |   |   |
| Total contractual cash obligations              |       | $                                          | 2,881.6    |                                                                                   | $          | 466.2 |   | $ | 241.3 |   | $ | 436.4 |   | $ | 1,737.7 |   |

 

----

(1)           Thistable excludes obligations under subordinated loans due to Quebecor Media, ourparent company, the proceeds of which are used to invest in preferred shares ofan affiliated company for tax consolidation purposes of the Quebecor Mediagroup.  See note 9 to our auditedconsolidated financial statements which are included under “Item 17. FinancialStatements” in this annual report.

(2)           Estimate of interestto be paid on long-term debt and bank indebtedness is based on the hedged andunhedged interest rates and hedged foreign exchange rate as at December 31,2008.

(3)           Estimated net futurereimbursements on derivative financial instruments related to foreign exchangehedging.

 

We rentequipment and premises under various operating leases or purchasing agreements.As of December 31, 2008, we estimate that the minimum aggregate paymentsunder these leases and purchasing agreements over the next 20 years will beapproximately $147.0 million. During the year ended December 31,2008, we renewed or extended several leases and entered into new operatingleases.

 

We entered into a management agreement with QuebecorMedia for services it provides to us, including internal audit, legal andcorporate, financial planning and treasury, tax, real estate, human resources,risk management, public relations, and other services. This agreement providesfor an annual management fee payable to Quebecor Media of which we paid $25.4million for the year ended December 31, 2008, compared to $46.9 million in2007 and $23.4 million in 2006.  See “MajorShareholders and Related Party Transactions — Related Party Transactions — ManagementServices and Other.”

 

**Pensionplan and post-retirement benefits**: Videotron regularlymonitors the funded status of its pension plans. The total cash amount paid orpayable for employee future benefits for all plans, consisting of cashcontributed by Videotron to its funded pension plans, cash payments directly tobeneficiaries for its unfunded other benefit plans, and cash contributed to itsdefined contribution plans, totalled $9.7 million for the year ended December 31,2008 ($9.8 million in 2007 and $7.5 million in 2006).

 

***Sources of Liquidity and Capital Ressources***

*** ***

***Operating activities (2008/2007)***

*** ***

**Cash flowsprovided by operating activities**: $711.5 million in2008, compared with $552.9 million in 2007, an increase of $158.6 million(28.7%), mainly due to the increase in operating income.

 

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*** ***

***Operating activities (2007/2006)***

*** ***

**Cash flowsprovided by operating activities**: $552.9 million in2007, compared with $440.6 million in 2006, an increase of $112.3 million(25.5%), mainly due to the increase in operating income.

 

***Investing activities (2008/2007)***

*** ***

Cash flowsused by investing activities: $1,043.2 million in 2008, compared with$2,338.2 million in 2007, a decrease of $1,294.9 million (-55.4%).  The decrease was mainly due to theacquisition in 2007 of $1,995.0 million of shares of a company under common controlfor tax consolidation purposes.

 

Partiallyoffset by:

 

·                  acquisition of $554.5 million ofshares of a company under common control in 2008 in order to pay for thesuccessful bids of 17 new spectrum licences for AWS;

 

·                  acquisition of $60.0 million ofshares of a company under common control in 2008 for tax consolidationpurposes; and

 

·                  increase of $74.7 million in theacquisition of fixed assets.

 

***Investing activities (2007/2006)***

*** ***

Cash flows used by investing activities:$2,338.2 million in 2007, compared with $265.1 million in 2006, anincrease of $2,073.1 million.  Theincrease was mainly due to:

 

·                  acquisition in 2007 of $1,995.0million of shares of a company under common control in 2007 for taxconsolidation purposes;

 

·                  decrease of $39.5 million intemporary investments in 2006 compared to $1.0 million in 2007; and

 

·                  increase of $27.4 million in theacquisition of fixed assets.

 

***Financing activities (2008/2007)***

*** ***

Cash flows provided by financing activities:$331.7 million provided in 2008, compared with $1,785.2 millionprovided in 2007, a decrease of 81.4%.  The $1,453.5 million decrease was mainly due to:

 

·                  Videotron entering into asubordinated loan of $1,995.0 million from Quebecor Media Inc. in 2007 forfiscal consolidation purposes compared to $60.0 million in 2008; and

 

·                  a decrease in net borrowings underour bank credit facility of $38.8 million ($59.9 million in 2008 compared to$98.7 million in 2007).

 

Partially offset by:

 

·                  issuance, in 2008, of $455.0 millionaggregate principal amount of our 91/8% Senior Notes ($447.6 millionnet of financing costs); and

 

·                  a net decrease in cash distributionsto our parent company, Quebecor Media, of $69.6 million ($230.0 million in 2008compared to $299.6 million in 2007).

 

***Financing activities (2007/2006)***

*** ***

Cash flows provided (used in) by financingactivities: $1,785.2 million provided in 2007, compared with$202.2 million used in 2006.  The$1,987.4 million increase was mainly due to:

 

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·                  Videotron entering into asubordinated loan of $1,995.0 million from Quebecor Media Inc., as lender, in2007 for fiscal consolidation purposes; and

 

·                  repayment, in 2006, of $150.0 millionrelating to a subordinated loan to the parent company;

 

Partially offset by:

 

·                  a net increase of cash distributionsto our parent company, Quebecor Media, of $180.9 million ($299.6 million in2007 compared to $118.7 million in 2006).

 

Videotron believes that cashflow generated byoperations and available sources of financing should be sufficient to meet allour obligations with respect to capital investments, working capital, interestpayments and pension plans. Despite the crisis currently affecting the creditmarkets, Videotron believes that it will be able to meet its future long termdebt repayments, which are relatively limited in the next five years.

 

**Summary of Critical Accounting Estimates**

** **

Thepreparation of financial statements in conformity with generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities, the disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenue and expenses during the reporting period.Consequently, actual results could differ from these estimates. We believe thatthe following are some of the more critical areas requiring the use ofmanagement estimates.

 

***Long-Lived Assets***

 

Videotronreviews long-lived assets with definite useful lives for impairment wheneverevents or changes in circumstances indicate that the carrying amount of suchassets may not be recoverable.  Animpairment loss is recognized when the carrying amount of an asset or a groupof assets held for use exceeds the sum of the undiscounted cash flows expectedfrom its use and eventual disposition. Measurement of an impairment loss is based on the amount by which thecarrying amount of a group of assets exceeds its fair value.  Fair value is determined using quoted marketprices, when available, or using accepted valuation techniques such as thediscounted future cash flows method.

 

We alsoevaluate goodwill for impairment on at least an annual basis and wheneverevents or circumstances indicate that the carrying amount may not berecoverable from its estimated future cash flows. Impairment of goodwill ismeasured at the reporting unit level by comparing the reporting unit’s carryingamount, including goodwill, to the fair value of the reporting unit, which isestablished based on the projected discounted future cash flows of the unitusing a discount rate that reflects our average cost of funds. If the carryingamount of the reporting unit exceeds its fair value, goodwill is consideredimpaired, and a second test is performed to measure the amount of impairmentloss.

 

In ourdetermination of the recoverability of long-lived assets and goodwill, we basedour estimates used in preparing the discounted cash flows on historical andvarious other assumptions that we believe to be reasonable under thecircumstances. Actual results may differ from these estimates under differentassumptions or conditions.

 

***Employee Future Benefits***

 

**Pensions:**    Pensioncosts of our defined benefit pension plans are determined using actuarialmethods and could be impacted significantly by our assumptions and estimatesregarding future events, including expected return on plan assets, rate ofcompensation increases, retirement ages of employees and other actuarialassumptions. The fluctuation of the discount rate at each measurement date alsohas an impact.

 

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In light ofthe actual return on plan assets realized in 2008, Videotron estimates that thecash contribution to its defined benefit plans, for which actuarial valuationsare performed as of December, 31, 2008, will increase by $5.0 million per yearfor each of the next five years.  Aone-percentage point change in the discount rate would have the followingeffects:

 
| ** **                                            | ** ** | **Pension**  | ** ** | **Postretirement** | ** ** |
|-------------------------------------------------------|------------|--------------|------------|--------------------|------------|
| ** **                                            | ** ** | **benefits** | ** ** | **benefits**       | ** ** |
| ** **                                            | ** ** | **1%**       | ** ** | **1%**             | ** ** | **1%** | ** ** | **1%** | ** ** |
| **Sensitivity analysis (in millions)** | ** ** | **increase** | ** ** | **decrease**       | ** ** | **increase** | ** ** | **decrease** | ** ** |
| ** **                                            | ** ** | ** **   | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Effect on benefit costs                               |       | $            | (2.5       | )                  | $          | 2.2 | ** ** | **$** | (0.2 | ) | $ | 0.2 |   |
| Effect on benefit obligations                         |       | (10.3        | )          | 12.1               |       | (1.3 | ) | 1.6 |   |
|                                                       |            |              |            |                    |            |  |  |  |  |  |  |  |  |

 

A one-percentage pointchange in the expected return on plan assets would have the following effects:

 
| ** **                                            | ** ** | **Pension**  | ** ** | **Postretirement** | ** ** |
|-------------------------------------------------------|------------|--------------|------------|--------------------|------------|
| ** **                                            | ** ** | **benefits** | ** ** | **benefits**       | ** ** |
| ** **                                            | ** ** | **1%**       | ** ** | **1%**             | ** ** | **1%** | ** ** | **1%** | ** ** |
| **Sensitivity analysis (in millions)** | ** ** | **increase** | ** ** | **decrease**       | ** ** | **increase** | ** ** | **decrease** | ** ** |
| ** **                                            | ** ** | ** **   | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Effect on benefit costs                               |       | $            | (0.9       | )                  | 0.9        |   | $ | — |   | $ | — |   |
|                                                       |            |              |            |                    |            |  |  |  |  |  |  |  |

 

A one-percentage pointchange in the rate of compensation increase would have the following effects:

 
| ** **                                            | ** ** | **Pension**  | ** ** | **Postretirement** | ** ** |
|-------------------------------------------------------|------------|--------------|------------|--------------------|------------|
| ** **                                            | ** ** | **benefits** | ** ** | **benefits**       | ** ** |
| ** **                                            | ** ** | **1%**       | ** ** | **1%**             | ** ** | **1%** | ** ** | **1%** | ** ** |
| **Sensitivity analysis (in millions)** | ** ** | **increase** | ** ** | **decrease**       | ** ** | **increase** | ** ** | **decrease** | ** ** |
| ** **                                            | ** ** | ** **   | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Effect on benefit costs                               |       | $            | 0.6        |               | $          | (0.6 | ) | **$** | — |   | $ | — |   |
| Effect on benefit obligations                         |       | 1.4          |       | (1.4               | )          | — |   | — |   |
|                                                       |            |              |            |                    |            |  |  |  |  |  |  |  |  |

 

A one-percentage pointchange in the assumed health care cost trend would have the following effects:

 
| ** **                                            | ** ** | ** **   | ** ** | **Postretirement** | ** ** |
|-------------------------------------------------------|------------|--------------|------------|--------------------|------------|
| ** **                                            | ** ** | ** **   | ** ** | **benefits**       | ** ** |
| ** **                                            | ** ** | ** **   | ** ** | ** **         | ** ** | **1%** | ** ** | **1%** | ** ** |
| **Sensitivity analysis (in millions)** | ** ** | **increase** | ** ** | **decrease**       | ** ** |
| ** **                                            | ** ** | ** **   | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Effect on benefit costs                               |       |         |       |               |       | **$** | 1 |   | $ | (1 | ) |
| Effect on benefit obligations                         |       |         |       |               |       | 21 |   | (18 | ) |
|                                                       |            |              |            |                    |            |  |  |  |  |  |  |

 

**OtherPost-Retirement Benefits**:    Weaccrue the cost of post-retirement benefits, other than pensions, which areimpacted significantly by a number of management assumptions, such as thediscount rate, and an annual rate of increase in the per capita cost of coveredbenefits. These benefits, which are funded as they become due, principallyinclude health and life insurance programs and cable services.

 

The employeefuture benefits accounting policy is explained in Note 1(o) to ouraudited consolidated financial statements which are included under “Item 17.Financial Statements” in this annual report, and assumptions on expected 

 

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return on plan assets, rate of compensation increases and discountrates are disclosed in Note 23 to our audited consolidated financialstatements which are included under “Item 17. Financial Statements” in thisannual report.

 

***Revenue Recognition***

 

We recognize operating revenues when thefollowing criteria are met:

 

·                  persuasive evidence of an arrangementexists;

 

·                  delivery has occurred or serviceshave been rendered;

 

·                  the seller’s price to the buyer isfixed or determinable; and

 

·                  the collection of the sale isreasonably assured.

 

The portion of revenue that is unearned isrecorded under “Deferred revenue” when customers are invoiced. Revenuerecognition policies for each of Videotron’s main product lines are as follows:

 

Cable and wireless services are providedunder arrangement with multiple deliverables, for which there are two separateaccounting units: one for subscriber services (operating services andconnecting fees) and the other, for equipment sales to subscribers, includingactivation fees related to wireless telephones. Components of multiple deliverablearrangements are separately accounted for provided the delivered elements havestand-alone value to the customers and the fair-value of any undeliveredelements can be objectively and reliably determined.

 

Cable connection fee revenues are deferredand recognized as revenues over the estimated average 30-month period thatsubscribers are expected to remain connected to the network.  The incremental and direct costs related tocable connection fees, in an amount not exceeding the revenue, are deferred andrecognized as an operating expense over the same 30-month period.  Operating revenues from cable and otherservices, such as Internet access, IP telephony and wireless telephone, arerecognized when services are rendered. Revenue from equipment sales to subscribers and their costs arerecognized in income when the equipment is delivered and in the case ofwireless telephones, revenues from equipment sales are recognized in incomewhen the telephone is delivered and activated. Revenues from video rentals are recorded as revenue when services areprovided.  Promotional offers related tosubscriber services are accounted for as a reduction in the related servicerevenue over the period of performance of the service contract.  Promotional offers related to equipmentsales, including wireless telephones, are accounted for as a reduction in therelated equipment sales when the equipment is delivered.  Operating revenues related to servicecontracts are recognized in income over the life of the specific contracts on astraight-line basis over the period in which the services are provided.

 

**Off-Balance Sheet Arrangements**

** **

***Operating Leases***

 

Videotron hasguaranteed a portion of the residual values of certain assets under operatingleases for the benefit of the lessor. Should Videotron terminate these leases prior to term (or at the end ofthe lease term) and should the fair value of the leased assets be less than theguaranteed residual value, Videotron must, under certain conditions, compensatethe lessor for a portion of the shortfall. In addition, a subsidiary of Videotron has provided guarantees tocertain lessors under premises leases for certain videostore franchisees, withexpiry dates through 2017.  Should thelessee default under such agreements, Videotron must, under certain conditions,compensate the lessor.  As at December 31,2008, the maximum exposure in respect of these guarantees was $16.3 million andno liability has been recorded in the consolidated balance sheet sinceVideotron does not expect to make any payments pertaining to theseguarantees.  In prior years, Videotronhas not made any payments relating to these guarantees.

 

***Guarantees Related to our Various ExistingNotes***

 

Under theterms of the indenture governing our 67/8%Senior Notes due January 15, 2014, the indenture governing our 63/8% Senior Notes due December 15, 2015and the indenture governing our 91/8% Senior Notes due April 

 

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15, 2018, we are committed to pay any amount of withholding taxes thatcould eventually be levied by any Canadian taxing authority (as defined inthe indenture that governs such Notes) on payments made to the lenders so thatthe amounts the lenders would receive are not less than amounts receivablewhere no taxes are levied. The amount of such guarantee is not limited and itis not possible for us to establish a maximum exposure of the guarantee becauseour exposure depends exclusively on the future actions, if any, by Canadiantaxing authorities. Although no recourse exists for such liability, we have theright to redeem our 67/8%Senior Notes due January 15, 2014, our 63/8%Senior Notes due December 15, 2015 and our 91/8%Senior Notes due April 15, 2018, at their face value were such taxeslevied by any Canadian taxing authority, thereby terminating the guarantee.

 

**Risks and Uncertainties**

** **

Videotron’sfinancial risk management policies have been established to identify andanalyze the risks faced by Videotron, to set appropriate risk limits andcontrols, and to monitor risks and adherence to limits.  Risk management policies are reviewedregularly to reflect changes in market conditions and Videotron’s activities.

 

From its useof financial instruments, Videotron is exposed to credit risk, liquidity risk,and market risks relating to foreign exchange fluctuations, interest ratefluctuations and equity prices.  In orderto manage its foreign exchange and interest rate risks, Videotron and itssubsidiaries use derivative financial instruments (i) to achieve atargeted balance of fixed and variable rate debts and (ii) to set inCanadian dollars all future payments on debts denominated in U.S. dollars(interest and principal) and certain purchases of inventory and other capitalexpenditures denominated in a foreign currency. Videotron does not intend to settle its financial derivative instrumentsprior to their maturity, as none of these instruments are held or issued forspeculative purposes.  Videotrondesignates its derivative financial instruments either as fair value hedges orcash flow hedges when they qualify for hedge accounting.

 

***Description ofderivative financial instruments:***

*** ***

***Foreign exchange forward contracts:***

 
| **Currencies (sold/bought)** | ** ** | **Maturing**     | ** ** | **Weighted Average  Exchange Rate** | ** ** | **Notional Amount (in  millions of dollars)** | ** ** |
|-----------------------------------|------------|------------------|------------|-----------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                        | ** ** | ** **       | ** ** | ** **                                    | ** ** | ** **                                                        | ** ** |
| $ / US$                           |       | Less than 1 year |       | 1.0865                                        |       | $                                                                 | 75.5       |   |
|                                   |            |                  |            |                                               |            |                                                                   |            |  |

*** ***

***Cross-currency interest rate swaps:***

 
| ** **   | ** ** | **Period covered** | ** ** | **Notional  amount (in  millions of  dollars)** | ** ** | **Annual effective  interest rateusing  hedged rate** | ** **                                        | **Annual nominal  interest rate of  debt** | ** ** | **CDN dollar exchange  rate on interest and  capital payments per  one U.S. dollar** | ** ** |
|--------------|------------|-------------------------|------------|-----------------------------------------------------------|------------|----------------------------------------------------------------------|---------------------------------------------------|-----------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------|------------|
|         |       |                    |       |                                                      |       |                                                                 |                                              |                                                      |       |                                                                                                                              |       |
| Senior Notes |       | 2004 to 2014            |       | US$                                                       | 190.0      |                                                                 | Bankers’ acceptance 3 months plus 2.80% |                                                      | 6.875      | %                                                                                                                                 | 1.2000     |   |
| Senior Notes |       | 2004 to 2014            |       | US$                                                       | 125.0      |                                                                 | 7.45%                                             |                                                      | 6.875      | %                                                                                                                                 | 1.1950     |   |
| Senior Notes |       | 2003 to 2014            |       | US$                                                       | 200.0      |                                                                 | Bankers’ acceptance 3 months plus 2.73% |                                                      | 6.875      | %                                                                                                                                 | 1.3425     |   |
| Senior Notes |       | 2003 to 2014            |       | US$                                                       | 135.0      |                                                                 | 7.66%                                             |                                                      | 6.875      | %                                                                                                                                 | 1.3425     |   |
| Senior Notes |       | 2005 to 2015            |       | US$                                                       | 175.0      |                                                                 | 5.98%                                             |                                                      | 6.375      | %                                                                                                                                 | 1.1781     |   |
| Senior Notes |       | 2008 to 2018            |       | US$                                                       | 455.0      |                                                                 | 9.65%                                             |                                                      | 9.125      | %                                                                                                                                 | 1.0210     |   |

 

Certaincross-currency interest rate swaps entered into by Videotron include an optionthat allows each party to unwind the transaction on a specific date at the thensettlement amount.

 

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***Fair value of financial instruments:***

*** ***

The carryingamount of accounts receivable from external or related parties (classified asloans and receivables), accounts payable and accrued charges to external orrelated parties (classified as other liabilities) approximates their fair valuesince these items will be realized or paid within one year or are due ondemand.

 

The carryingvalues and fair value of long-term debt and derivative financial instruments asof December 31, 2008 and 2007 are as follows:

 
| ** **                         | ** ** | **December 31, 2008** | ** ** | **December 31, 2007** | ** ** |
|------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                         | ** ** | **Carrying value**         | ** ** | **Fair value**             | ** ** | **Carrying value** | ** ** | **Fair value** | ** ** |
|                               |       |                            |       |                            |       |   |   |   |   |
| Long-term debt (1)                 |       | $                               | (1,766,668 | )                               | $          | (1,577,000 | ) | $ | (973,355 | ) | $ | (938,158 | ) |
| Cross-currency interest rate swaps |       | 69,486                          |       | 69,486                          |       | (241,320 | ) | (241,320 | ) |
| Foreign exchange forward contracts |       | 9,013                           |       | 9,013                           |       | (4,236 | ) | (4,236 | ) |
|                                    |            |                                 |            |                                 |            |  |  |  |  |  |  |  |  |

 

----

(1)                        The carrying value of long-term debt excludesadjustments to record changes in the fair value of long-term debt related tohedges interest risk, the embedded derivatives or the financing fees.

 

The fair valueof long-term debt is estimated based on discounted cash flows using year-endmarket yields or the market value of similar instruments with the samematurity, or quoted market prices when available.  The majority of derivative financialinstruments (e.g. cross currency interest rate swaps) are traded over thecounter and, as such, there are no quoted prices.  The fair value of derivative financialinstruments is therefore estimated using valuation models that project futurecash flows and discount the future amounts to a present value using thecontractual terms of the derivative instrument and factors observable inexternal markets, such as period-end swap rates and foreign exchangerates.  An adjustment is also included toreflect non-performance risk, impacted by the financial and economicenvironment prevailing at the date of the valuation, in the recognized measureof the fair value of the derivative instruments by applying a credit defaultpremium to the net exposure of the counterparty or Videotron.  The fair value of early settlement optionsrecognized as embedded derivatives is determined by option pricing models usingmarket inputs and assumptions, including volatility and discount factors.

 

Due to the judgment used in applying a widerange of acceptable techniques and estimates in calculating fair value amounts,fair values are not necessarily comparable among financial institutions orother market participants and may not be realized in an actual sale or theimmediate settlement of the instrument.

 

***Credit risk management:***

*** ***

Credit risk isthe risk of financial loss to Videotron if a customer or counterparty to afinancial asset fails to meet its contractual obligations.

 

In the normalcourse of business, Videotron continuously monitors the financial condition ofits customers and reviews the credit history of each new customer.  As of December 31, 2008, nocustomer balance represented a significant portion of Videotron’s consolidatedtrade receivables.  Videotron establishesan allowance for doubtful accounts based on the specific credit risk of itscustomers and historical trends.  Theallowance for doubtful accounts amounted to $16.0 million as of December 31, 2008($11.7 million as of December 31, 2007).  As of December 31, 2008, 8.9% oftrade receivables were 90 days past their billing date (7.0% as of December 31, 2007).

 

Videotronbelieves that its product lines and the diversity of its customer base areinstrumental in reducing its credit risk, as well as the impact of fluctuationsin product-line demand.  Videotron doesnot believe that it is exposed to an unusual level of customer credit risk.

 

From its useof derivative financial instruments, Videotron is exposed to the risk of non-performanceby a third party.  When Videotron entersinto derivative contracts, the counterparties (either foreign or Canadian) musthave credit ratings at least in accordance with Videotron’s credit riskmanagement policy and are subject to concentration limits.

 

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Given the high minimum credit ratings required under Videotron’spolicy, Videotron does not foresee any failure by counterparties to meet theirobligations.

 

***Liquidity risk management:***

 

Liquidity riskis the risk that Videotron will not be able to meet its financial obligationsas they fall due or the risk that those financial obligations have to be met atexcessive cost.  Videotron manages thisexposure through staggered debt maturities. The weighted average term of Videotron’s consolidated debt wasapproximately 6.3 years as at December 31, 2008.

 

Videotron’smanagement believes that cash flows from continuing operations and availablesources of financing should be sufficient to cover committed cash requirementsfor capital investments, working capital, interest payments, debt repayments,pension plan contributions, and dividends (or distributions) in thefuture.  Videotron has access to cashflows generated by its subsidiaries through dividends (or distributions) andcash advances paid by its wholly-owned subsidiaries.

 

***Market risk:***

*** ***

Market risk isthe risk that changes in market prices due to foreign exchange rates, interestrates and/or equity prices will affect the value of Videotron’s financialinstruments.  The objective of marketrisk management is to mitigate and control exposures within acceptableparameters while optimizing the return on risk.

 

***Foreign currency risk:***

*** ***

Most ofVideotron’s consolidated revenues and expenses, other than interest expense onU.S. dollar-denominated debt, purchases of set-top boxes and cable modems andcertain capital expenditures, are received or denominated in Canadiandollars.  A large portion of theinterest, principal and premium, if any, payable on Videotron’s debt is payablein U.S. dollars.  Videotron hasentered into transactions to hedge the foreign currency risk exposure on 100%of its U.S. dollar-denominated debt obligations outstanding as of December 31,2008 and to hedge its exposure on certain purchases of set-top boxes, cablemodems and capital expenditures. Accordingly, Videotron’s sensitivity to thevariation of foreign exchange rates is economically limited.

 

The followingtable summarizes the estimated sensitivity on income and other comprehensiveincome, before income tax, of a $0.10 variance in the year-end exchange rate ofthe Canadian dollar per one U.S. dollar:

 
| ** **                                                                                                 | ** ** | **Income**                                   | ** ** | **Other comprehensive income** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                                 | ** ** | **(in thousands of dollars)** | ** ** |
| **Increase of $0.10**                                                                                      | ** ** | ** **                                   | ** ** | ** **                               | ** ** |
| U.S. dollar accounts payable                                                                               |       | $                                            | (680.0     | )                                        | $          | — |   |
| Gain (loss) on valuation and translation of  financial instruments and of derivative financial instruments |       | (2,250                                       | )          | 44,905                                   |       |
|                                                                                                       |       |                                         |       |                                     |       |
| **Decrease of $0.10**                                                                                      |       |                                         |       |                                     |       |
| U.S. dollar accounts payable                                                                               |       | 680                                          |       |                                     |       |
| Gain (loss) on valuation and translation of  financial instruments and of derivative financial instruments |       | 2,250                                        |       | (44,905                                  | )          |
|                                                                                                            |            |                                              |            |                                          |            |  |  |

*** ***

***Interest rate risk and non-performance risk:***

*** ***

Videotron’sbank credit facilities bear interest at floating rates based on the followingreference rates: (i) bankers’ acceptance rate (BA) and (ii) bankprime rate (Prime). The Senior Notes issued by Videotron bear interest at fixedrates.  Videotron has entered intovarious cross-currency interest rate swap agreements in order to manage cashflow and fair value risk exposure due to changes in interest rates.  After taking into account the hedginginstruments, the long-term debt is comprised of 58.7% of fixed rate debt and41.3% of floating rate debt as of December 31, 2008.

 

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The estimatedsensitivity on financial expense, before income tax, of a 100 basis pointvariance in the year-end Canadian Banker’s acceptance rate is $7.0 million.

 

The estimatedsensitivity income and other comprehensive income, before income tax, of a 100basis point variance in the discount rate used to calculate the fair value offinancial instruments, as per Videotron’s valuation model, is as follows:

 
| ** **                   | ** ** | **Income**                                   | ** ** | **Other comprehensive income** | ** ** |
|------------------------------|------------|----------------------------------------------|------------|------------------------------------------|------------|
| ** **                   | ** ** | **(in thousands of dollars)** | ** ** |
| ** **                   | ** ** | ** **                                   | ** ** | ** **                               | ** ** |
| Increase of 100 basis points |       | $                                            | 2,609      |                                     | $          | (3,908 | ) |
| Decrease of 100 basis points |       | (2,609                                       | )          | 3,908                                    |       |
|                              |            |                                              |            |                                          |            |  |  |

*** ***

***Capital management:***

*** ***

Videotron’sprimary objective in managing capital is to maintain an optimal capital base inorder to support the capital requirements of its various activities, includinggrowth opportunities.

 

In managingits capital structure, Videotron takes into account the asset characteristicsof its subsidiaries and planned requirements for funds, leveraging theirindividual borrowing capacities in the most efficient manner to achieve thelowest cost of financing.  Management ofthe capital structure involves the issuance of new debt, the repayment ofexisting debt using cash generated by operations and the level of distributionsto the parent company.  Videotron has notsignificantly changed its strategy regarding management of its capitalstructure since the last financial year.

 

Videotron’scapital structure is composed of shareholder’s equity, bank indebtedness,long-term debt, assets and liabilities related to derivative financialinstruments, and non-controlling interest, less cash and cash equivalents.  The capital structure is as follows:

 
| ** **                                                            | ** ** | **2008**  | ** ** | **2007** | ** ** |
|-----------------------------------------------------------------------|------------|-----------|------------|----------|------------|
|                                                                  |       |      |       |     |       |
| Bank indebtedness                                                     |       | $         | 3,613      |     | $          | 9,505 |   |
| Long-term debt                                                        |       | 1,807,997 |       | 950,988  |       |
| Net (assets) liabilities related to  derivative financial instruments |       | (78,499   | )          | 245,556  |       |
| Non-controlling interest                                              |       | 1,047     |       | 947      |       |
| Net debt                                                              |       | $         | 1,734,158  |     | $          | 1,206,996 |   |
| Shareholder’s equity                                             |       | $         | 403,654    |     | $          | 259,110 |   |

 

Videotron isnot subject to externally imposed capital requirements other than certainrestrictions under the term of its borrowing agreements which relate topermitted investments, inter-company transactions or the declaration andpayment of dividends and other distributions.

 

**Changes in Accounting Policies and Accounting Estimates**

** **

***Changes inaccounting policies***

*** ***

On January 1,2008, Videotron adopted the Canadian Institute of Chartered Accountants (“CICA”)Section 3031, Inventories, which provides more extensive guidance on therecognition and measurement of inventories, and related disclosures.  Under this new accounting policy, inventoriesare now valued at the lower of cost, determined by the weighted-average costmethod, and net realizable value. However, the net realizable value is now the estimated selling price inthe ordinary course of business less the estimated costs of completion and theestimated costs necessary to make the sale. The adoption of this new section had no impact on the consolidatedfinancial statements.

 

On January 1,2008, Videotron adopted the CICA Handbook Section 1535, *Capital Disclosures*, Section 3862, *FinancialInstruments - Disclosures*, and Section 3863, *Financial Instruments - Presentation*.  These sections relate to 

 

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disclosures and presentation of information and did not affect theconsolidated financial results. Disclosure requirements related to these new accounting standards arepresented in Note 21 of our audited consolidated financial statements forthe years ended December 31, 2008, 2007 and 2006.

 

Videotron estimatesthe fair value of its derivative financial instruments using a discounted cashflow valuation technique, since no quoted market prices exist for suchinstrument.  In the second quarter of2008, Videotron made some amendments to the technique used in measuring thefair value of its derivatives in a liability position and in an assetposition.  These amendments change theway Videotron factored counterparty and its own non-performance risk in itsvaluation technique, considering market developments and recent accountingguidelines.  The cumulative impact ofthese changes as of December 31, 2008, is a decrease of the fair value ofthese derivatives by $10.8 million and an increase of the comprehensiveloss by $10.8 million (before income taxes).

 

***Recent AccountingDevelopments in Canada***

*** ***

In January 2008,the CICA issued Section 3064, Goodwill and Intangible Assets, which willreplace Section 3062, Goodwill and Other Intangible Assets, and whichresults in the withdrawal of Section 3450, *Research andDevelopment Costs and Emerging Issues Committee* (“EIC”) Abstract 27,*Revenues and Expenditures During the Pre-operatingPeriod*, and amendments to Accounting Guideline (“AcG”) 11, *Enterprises in the Development Stage*. The new standardprovides guidance on the recognition of intangible assets in accordance withthe definition of an asset and the criteria for asset recognition, as well asclarifying the application of the concept of matching revenues and expenses,whether those assets are separately acquired or internally developed. Thisstandard applies to interim and annual financial statements relating to fiscalyears beginning on or after October 1, 2008.  Videotron is currently evaluating the effectsof adopting this standard, although it does not expect the adoption will have amaterial impact on its consolidated financial statements.

 

In February 2008,Canada’s Accounting Standards Board confirmed that Canadian GAAP, as used bypublicity accountable enterprises, will be fully converged to InternationalFinancial Reporting Standards (“IFRS”), as issued by the InternationalAccounting Standards Board (“IASB”). Videotron will be required to report underIFRS for its 2011 interim and annual financial statements and to provide in the2011 financial statements IFRS comparative information for the 2010 fiscalyear. Videotron is currently assessing the impact of the IFRS convergenceinitiative.

 

IFRS uses aconceptual framework similar to Canadian GAAP, but there are significantdifferences in recognition, measurement and disclosures.  In order to prepare for the transition toIFRS, we have established an IFRS implementation team which includes seniorlevels of management from all relevant departments and subsidiaries, and haveengaged an external expert advisor.

 

Videotron hascompleted a diagnostic impact assessment, including a high-level analysis ofpotential consequences to financial reporting, business processes, internalcontrols, and information systems. Initial training has been provided to key employeesand further investment in training and resources will be made throughout thetransition to facilitate a timely and efficient changeover to IFRS.  Videotron continues to monitor and assess theimpact of evolving differences between Canadian GAAP and IFRS.  At this time, the impact of this changeoveron our future financial position and results of operations is not yetdeterminable.

 

The adoptionwill result in changes to our reported financial position and results ofoperations, and these changes may be material. Moreover, the restatement of our2010 financial statements for comparative purposes may be significant.  In addition, IFRS could have an effect on thecomputation of our debt covenants and of certain other contractual obligations.In particular, although the adoption IFRS will not change our actual cashflows, our covenants linked to balance sheet ratios may be affected by theadoption of IFRS in ways that are difficult to predict at this time.  At this time, the impact on Videotron’sfuture financial position and results of operations is not yet reasonablydeterminable while Videotron continues to monitor and assess the impact ofevolving differences between Canadian GAAP and IFRS.  Further updates on the progress to conversionand potential reporting impact from the adoption of IFRS will be providedduring the implementation period to follow.

 

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***Recent accounting developments in the United States***

 

On January 1,2008, Videotron adopted the provisions of SFAS 157, *Fair ValueMeasurements*, that enhance guidance for using fair value to measureassets and liabilities. In February 2008, the FASB issued FASB StaffPosition (FSP) FAS 157-1, “*Application of SFAS 157 toFASB Statement No. 13 and Other Accounting Pronouncements That AddressFair Value Measurements for Purposes of Lease Classification or Measurementunder Statement 13*,” which removes certain leasing transactions fromthe scope of SFAS No. 157.  The FASBalso issued FSP FAS 157-2, “Effective Date of SFAS 157”, which defers theeffective date of SFAS 157 for one year for certain non-financial assets andnon-financial liabilities, except those that are recognized or disclosed atfair value in the financial statements on a recurring basis.  Videotron is still in the process ofevaluating this standard with respect to its effect on non-financial assets andliabilities and has not yet determined the impact that it will have on itsfinancial statements upon full adoption in 2009.

 

In December 2007,the FASB issued SFAS 141 (Revised 2007), *Business Combinations*(SFAS 141R), and SFAS 160, Non-controlling Interests in Consolidated FinancialStatements (SFAS 160), to improve and converge internationally the accountingfor business combinations, the reporting of non-controlling interests inconsolidated financial statements, accounting and reporting standards for thenon-controlling interest in a subsidiary and for the deconsolidation of asubsidiary. The provisions of SFAS 141R apply prospectively to businesscombinations for which the acquisition date is on or after December 31,2008 and SFAS 160 shall be effective as of the beginning of 2009.  Videotron is currently evaluating the impactof adopting SFAS 141R and SFAS 160 on its consolidated financial statements.

 

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## **ITEM 6 - DIRECTORS, SENIOR MANAGEMENT ANDEMPLOYEES**

 

**Directors and Executive Officers**

 

The following table presents certain information concerning ourdirectors and executive officers as of February 13, 2009:

 
| **Name and Municipality of  Residence** | ** ** | **Age**    | ** ** | **Position**                                                             |
|--------------------------------------------------------|------------|------------|------------|--------------------------------------------------------------------------|
| ** **                                             | ** ** | ** ** | ** ** | ** **                                                               |
| SERGE GOUIN  Outremont, Quebec                         |       | 65         |       | Director and Chairman of the  Board                                      |
|                                                   |       |       |       |                                                                     |
| JEAN LA COUTURE, FCA(1)  Montréal, Quebec         |       | 62         |       | Director and Chairman of the  Audit Committee                            |
|                                                   |       |       |       |                                                                     |
| ANDRÉ DELISLE(1)  Montréal, Quebec           |       | 62         |       | Director                                                                 |
|                                                   |       |       |       |                                                                     |
| A. MICHEL LAVIGNE, FCA(1)  Brossard, Quebec       |       | 58         |       | Director                                                                 |
|                                                   |       |       |       |                                                                     |
| PIERRE KARL PÉLADEAU  Montréal, Quebec       |       | 47         |       | Director                                                                 |
|                                                   |       |       |       |                                                                     |
| ROBERT DÉPATIE  Rosemère, Quebec             |       | 50         |       | President and Chief Executive  Officer                                   |
|                                                   |       |       |       |                                                                     |
| DONALD LIZOTTE  Kirkland, Quebec                       |       | 42         |       | President, Le SuperClub  Vidéotron and Vice President, Retail Sales |
|                                                   |       |       |       |                                                                     |
| JEAN NOVAK  Beaconsfield, Quebec                       |       | 45         |       | President, Videotron Business  Service                                   |
|                                                   |       |       |       |                                                                     |
| MARIE-JOSEE MARSAN  Montréal, Quebec              |       | 46         |       | Vice President, Finance and Chief Financial Officer                      |
|                                                   |       |       |       |                                                                     |
| MANON BROUILLETTE  Outremont, Quebec                   |       | 40         |       | Senior Vice President, Strategic Development and Marketing               |
|                                                   |       |       |       |                                                                     |
| DANIEL PROULX  Montréal, Quebec                   |       | 51         |       | Senior Vice President,  Engineering                                      |
|                                                   |       |       |       |                                                                     |
| MYRIANNE COLLIN  Laval, Québec                    |       | 35         |       | Vice President, Marketing,  Consumer division                            |
|                                                   |       |       |       |                                                                     |
| ANDRÉ GASCON  Longueuil, Quebec                   |       | 47         |       | Vice President, Wireless  Technologies                                   |
|                                                   |       |       |       |                                                                     |
| ROGER MARTEL  Montréal, Québec               |       | 60         |       | Vice President, Internal Audit                                           |
|                                                   |       |       |       |                                                                     |
| LOUIS MORIN  Kirkland, Quebec                          |       | 51         |       | Vice President                                                           |

 

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| **Name and Municipality of  Residence** | ** ** | **Age** | ** ** | **Position**                        |
|--------------------------------------------------------|------------|---------|------------|-------------------------------------|
|                                                   |       |    |       |                                |
| MARIE PIUZE  Pierrefonds, Quebec                       |       | 40      |       | Vice President, Control             |
|                                                   |       |    |       |                                |
| ÉDOUARD G. TRÉPANIER  Boucherville, Quebec   |       | 58      |       | Vice President, Regulatory  Affairs |
|                                                   |       |    |       |                                |
| NORMAND VACHON  Repentigny, Quebec                     |       | 60      |       | Vice President, Human  Resources    |
|                                                   |       |    |       |                                |
| JEAN-FRANÇOIS PRUNEAU  Repentigny, Quebec         |       | 38      |       | Treasurer                           |
|                                                   |       |    |       |                                |
| CLAUDINE TREMBLAY  Nun’s Island, Quebec           |       | 55      |       | Secretary                           |
|                                                   |       |    |       |                                |
| CHRISTIAN MARCOUX  Laval, Quebec                       |       | 34      |       | Assistant Secretary                 |

 

----

(1)  Member of theAudit Committee

 

***Serge Gouin***, Director and Chairman of theBoard of Directors. Mr. Gouin has been a Director and Chairman of ourBoard of Directors since July 2001. Mr. Gouin has also been aDirector of Quebecor Media Inc. since May 2001, and he re-assumed theposition of Chairman of its Board of Directors in May 2005, having alsoheld that position from January 2003 to March 2004.  Mr. Gouin served as President and ChiefExecutive Officer of Quebecor Media Inc. from March 2004 until May 2005.  Mr. Gouin also has served as Directorand Chairman of the Board of Directors of Sun Media Corporation since May 2004.  Mr. Gouin was an Advisory Director ofCitigroup Global Markets Canada Inc. from 1998 to 2003. From 1991 to 1996,Mr. Gouin served as President and Chief Operating Officer of Le GroupeVidéotron. From 1987 to 1991, Mr. Gouin was President and Chief ExecutiveOfficer of TVA Group Inc. Mr. Gouin is also a member of the board ofDirectors of Biovail Corporation, Onex Corporation and of TVA Group Inc.

 

***Jean La Couture***,FCA, Director and Chairman of the Audit Committee. Mr. La Couture hasserved as a Director and as Chairman of our Audit Committee since October 2003.  Mr. La Couture also serves as Director andChairman of the Audit Committee of Quebecor Inc., Quebecor Media inc. and SunMedia Corporation.  He was a Director ofQuebecor World Inc. from December 2007 until December 2008.  Mr. La Couture, a Fellow Chartered Accountant, is President of HuisClos Ltée., a management and mediation firm. He is also President of the *Regroupementdes assureurs de personnes à charte du Québec (RACQ)*, a position hehas held since August 1995.  From 1972 to 1994, he was President and ChiefExecutive Officer of three organizations, including The Guarantee Company ofNorth America, a Canadian specialty line insurance company from 1990 to1994.  He is Chairman of the Boards ofInnergex Power Trust, Groupe Pomerleau (a Québec-based construction company)and Maestro (a real estate capital fund), and serves as a Director of ImmunotecInc.

 

***André Delisle,***Directorand member of the Audit Committee. Mr. Delisle has served as a Director ofVideotron Ltd. and as a member of its Audit Committee since October 31,2005.  Since that date, Mr. Delislehas also served as a Director and a member of the Audit Committee of QuebecorMedia Inc. and Sun Media Corporation. From August 2000 until July 2003,Mr. Delisle acted as Assistant General Manager and Treasurer of the Cityof Montréal. He previously acted as internal consultant for the *Caisse de dépôtet placement du Québec* from February 1998 until August 2000. From1982 through 1997, he worked for Hydro-Québec and the Québec Department ofFinance, mainly in the capacity of Chief Financial Officer (Hydro-Québec) orAssistant Deputy Minister (Department of Finance).  Mr. Delisle is a member of the Instituteof Corporate Directors, a member of the Association of Québec Economists and amember of the *Barreau du Québec*.

 

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***A. Michel Lavigne***, FCA, Director andmember of the Audit Committee. Mr. Lavigne has served as a Director ofVideotron Ltd. and as a member of its Audit Committee since June 30,2005.  Since that date, Mr. Lavignehas also served as a Director and a member of the Audit Committee and theCompensation Committee of Quebecor Media Inc., and as a Director and a memberof the Audit Committee of Sun Media Corporation and of TVA Group Inc. Mr. Lavigneis also a Director of the *Caisse de dépôt etplacement du Québec*andNStein Technologies Inc*.*,as well as the Chairman of the Board of Primary Energy Recycling Corporation.Until May 2005, he served as President and Chief Executive Officer ofRaymond Chabot Grant Thornton in Montréal, Québec, as Chairman of the Board ofGrant Thornton Canada and as a member of the Board of Governors of GrantThornton International. Mr. Lavigne is a Fellow Chartered Accountant ofthe *Ordre des comptables agréés du Québec*and a member of the Canadian Institute of Chartered Accountants since 1973.

 

***Pierre Karl Péladeau***,Director. Mr. Péladeau has served as a Director of Videotron Ltd. since June 2001.Mr. Péladeau is also currently President and Chief Executive Officer ofQuebecor Media inc. (since August 2008), President and Chief ExecutiveOfficer of Sun Media Corporation (since November 2008) and President andChief Executive Officer of Quebecor Inc., a position he has held since 1999. Hewas Vice Chairman of the board of Directors and Chief Executive Officer ofQuebecor Media Inc. from May 2006 to November 2008 and President andChief Executive Officer of Quebecor World Inc. from March 2004 to May 2006.  Mr. Péladeau joined Quebecor Inc.’scommunications division in 1985 as Assistant to the President.  Since then, he has occupied various positionsin the Quebecor group of companies. In 1998, Mr. Péladeau spearheaded theacquisition of Sun Media Corporation and, in 2000 he was responsible for theacquisition of Groupe Vidéotron. Mr. Péladeau was also the President andChief Executive Officer of Videotron Ltd. from July 2001 until June 2003.Mr. Péladeau sits on the board of numerous Quebecor group companies and isactive in many charitable and cultural organizations.

 

***Robert Dépatie***,President and Chief Executive Officer. Mr. Dépatie has been our Presidentand Chief Executive Officer since June 2003 and served as a Director ofour company from June 2003 until October 2005. He joined us in December 2001as Senior Vice President, Sales, Marketing and Customer Service. Before joiningus, Mr. Dépatie held numerous senior positions in the food distributionindustry, such as President of Distributions Alimentaires Le Marquis/Plantersfrom 1999 to 2001 and General Manager of Les Aliments Small-Fry (Humpty Dumpty)from 1998 to 1999. From 1988 to 1998, he held various senior positions withH.J. Heinz Canada Ltd., such as Executive Vice-President from 1993 to1998.

 

***Donald Lizotte***, President,Le SuperClub Vidéotron and Vice President, Retail Sales Videotron.  Mr Lizotte joined Videotron Ltd. in January 2005as Vice-President, Sales, Vidéotron, and was promoted to his currentresponsibilities in September 2006. From 2000 to 2005, Mr Lizotte held various positions in sales anddistribution for Molson Breweries, Canada’s largest brewing company, includingGeneral Manager Key Accounts as well as Regional Manager.  Prior to Molson Breweries, Mr. Lizottespent nine years in Toronto, Ontario where he held various Sales managementpositions, including National Sales Manager for the Perrier Group, a divisionof Nestlé, from 1998 to 2000. He started his career at Heinz Canada where hespent 8 years starting from a sales representative and moved to General ManagerECR. Mr. Lizotte has a bachelor’s degree in Management from the *Université du Québec* in Montréal.

 

***Jean Novak***,President, Videotron Business Service. Mr. Novak has served in his currentposition since January 2005. Mr. Novak joined Videotron Ltd. in May 2004as Vice President, Sales. Between 1988 and May 2004, Mr. Novak heldvarious management positions in sales and distribution for Molson Breweries,Canada’s largest brewing company including General Manager for all on premiseaccounts and the Montréal sales region as well as Manager, Customer Service andTelesales in Québec. Mr. Novak holds a bachelor’s degree in marketing fromthe HEC Montréal.

 

***Marie******-Josée Marsan***, Vice President, Finance and ChiefFinancial Officer. Ms. Marsan has been appointed to her currentposition in June 2008. She joined Videotron Ltd. in July 2006 as VicePresident, Control.  Before joining us, Ms. Marsanheld various senior positions mainly in the television & filmindustry, such as First Director of Finance and Administration at the CanadianBroadcast Company (CBC) from 1999 to 2006 and Vice-President, Finance andBusiness Development for Groupe Covitec inc, today known as Technicolor, from1994 to 1999.  Prior to that, she workedfor TVA Group Inc. as Director of Production and held various financialpositions at General Motors of Canada. Ms. Marsan

 

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holds abachelor’s degree in Finance from the HEC Montréal, a master degree in Financeissued jointly by York University and HEC Montréal.  She is also a member of the Certified GeneralAccountants Association (CGA).

 

***Manon Brouillette***,Senior Vice President, Strategic Development and Marketing. Ms. Brouillettewas promoted in her current position in June 2008. She joined VideotronLtd in July 2004 and acted as Vice President, Marketing, from July 2004to January 2005, as Vice President, New Product Development, from January 2005to August 2006 and as Senior Vice President, Marketing, Content and NewProduct Development, from September 2006 to June 2008. Before joiningour company, Ms. Brouillette was Vice President, Marketing andCommunications of the San Francisco Group from April 2003 to February 2004.She was also responsible for the national and regional accounts of the Blitzdivision of Groupe Cossette Communication Marketing from April 2002 to April 2003.From September 1998 to April 2002, she worked at PublicitéMartin inc. Ms. Brouillette holds a Bachelor’s degree incommunications with a minor in marketing from Laval University.

 

***Daniel Proulx***,Senior Vice President, Engineering. Prior to his appointment as Vice President,Engineering in July 2003, Mr. Proulx had served as our VicePresident, Information Technology since July 2002. Mr. Proulx hasheld various management positions within Videotron Ltd. since joining us in1995.

 

***Myrianne Collin***,****Vice President, Marketing, Consumer division. Ms. Collin has servedas Vice President, Marketing, Consumer division since June 2008. Shejoined Videotron Ltd. In April 2005 as Senior Director Marketing, CableTelephony and Bundling. In September 2006, Ms. Collin was appointedSenior Director, Broadcast Services & Relationship Marketing. From1995 to 2005, Ms. Collin held various positions with Bell Canada andAlliance Data System (Air Miles). She holds a Bachelor’s degree in marketingfrom Sherbrooke University.

** **

***André Gascon***, Vice President, WirelessTechnologies. Mr. Gascon joined Videotron Ltd. in October 2003as Vice President, Information Technologies and he was appointed to his currentposition in 2008. Prior to joining Videotron Ltd., Mr. Gascon served formore than two years as Team Manager of Service Conseil Mona inc., aninformation technology consulting firm based in Montréal. From 1998 to 2001, hewas Director, Information Technology of Microcell Telecommunications Inc.Between 1986 and 1998, Mr. Gascon held various management positionsrelating to information technology with Larochelle Gratton Inc. andSociété de Transport de Laval. Mr. Gascon holds a Master’s degree inbusiness administration (MBA) from Université de Sherbrooke.

 

***Roger Martel***,Vice President, Internal Audit. Mr. Martel has served as Vice President,Internal Audit of Videotron Ltd. since February 2004. Mr. Martel alsoacts as Vice President, Internal Audit for Quebecor Inc., Quebecor Media Inc.and Sun Media Corporation.  From February 2001until February 2004, he was Principal Director, Internal Audit of QuebecorMedia. Prior to that, he was an Internal Auditor of Le Groupe Vidéotron ltée.

 

***Louis Morin***, Vice President. Mr. Morinbecame Vice President of Videotron Ltd. on January 15, 2007.  Mr. Morin also serves as Vice Presidentand Chief Financial Officer of Quebecor Inc. and Quebecor Media Inc.  From December 2003 until January 2006,he served as Chief Financial Officer of Bombardier Recreational Products Inc.Prior to that Mr. Morin was Senior Vice President and Chief FinancialOfficer of Bombardier Inc. from April 1999 until February 2003, wherehe had worked since 1982. Mr. Morin was appointed Vice President and ChiefFinancial Officer of Quebecor Inc. on January 14, 2008. Mr. Morinholds a Master’s degree as well as a Bachelor’s degree in BusinessAdministration from the University of Montréal and is a Chartered Accountant.

 

***Marie Piuze***,****VicePresident, Control. Ms. Piuze joined Videotron Ltdin September 2008. Prior to joining Videotron Ltd., Ms. Piuze wasFinancial Controller of CGI from 2005 to 2008. Ms. Piuze held variousfinancial positions in the telecommunication and software industry mainly atMicrocell, Téléglobe and Softimage.  Shestarted her career at Coopérative Fédérée de Québec in 1994.  Ms. Piuze holds a Bachelor’s degree inFinance from the HEC Montreal.  Sheis also a member of the Certified Management Accountants Association (CMA).

** **

***Edouard G. Trépanier***, Vice President,Regulatory Affairs. Mr. Trépanier was appointed as the Vice President,Regulatory Affairs of Videotron Ltd. in March 2002. He has also served asVice President, Regulatory Affairs of 

 

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Quebecor MediaInc. since the same date. Mr. Trépanier was Director, Regulatory Affairsof Videotron Ltd. from 1994 to 2001. Prior to joining us in 1994, Mr. Trépanierheld several positions at the CRTC, including Director of Operations,Pay-television and Specialty Services. Prior to joining the CRTC, Mr. Trépanierworked as a television producer for TVA Group Inc., RogersCommunications Inc. and the Canadian Broadcasting Corporation in Ottawa. Mr. Trépanieris and has been a member of the boards of numerous broadcast industryorganizations.

 

***Normand Vachon****,* Vice President, Human Resources. Mr. Vachonjoined Videotron Ltd. in January 2005 as Vice President, Human Resources.Prior to joining us, Mr. Vachon acted as senior executive officer andorganizational development consultant for many private organizations in theProvince of Québec between 2001 and 2004 and held the position of VicePresident, Corporate and Vice President, Human Resources and OrganizationalDevelopment at Nova Bus Corporation from 1995 to 2000.  Prior to that, Mr. Vachon worked atAlcan Inc. from 1972 to 1994, holding the positions of Director of Operationsat Alcan Smelters & Chemicals in Shawinigan, Manager of Alcan Wire andCable’s Saint-Augustin plant in the Québec City region and General Manager ofAlcan Extrusions’ Laval plant.

 

***Jean-François Pruneau***, Treasurer. Mr. Pruneauhas served as Treasurer of Videotron Ltd. since October 2005. Mr. Pruneaualso acts as Treasurer of Quebecor Inc., Quebecor Media Inc. and Sun MediaCorporation. He also serves as Treasurer of various subsidiaries of QuebecorMedia Inc. Before being appointed Treasurer of Quebecor Media Inc., Mr. Pruneausuccessively served as Director, Finance and Assistant Treasurer — CorporateFinance of Quebecor Media Inc. Before joining Quebecor Media Inc. in May 2001,Mr. Pruneau was Associate Director of BCE Media from 1999 to 2001. From1997 to 1999, he served as Corporate Finance Officer at Canadian NationalRailway. He has been a member of the CFA Institute, formerly the Associationfor Investment Management and Research, since 2000.

 

***Claudine Tremblay***,Secretary. Ms. Tremblay wasappointed Secretary of Videotron Ltd in November 2006. Ms. Tremblayis also Vice President and Secretary of Quebecor Inc. and Quebecor MediaInc. since January 2008 and Secretary of Sun Media Corporation since September 2001.  She also serves as either Secretary orAssistant Secretary of various subsidiaries of Quebecor Inc. and, since December 2004,Ms. Tremblay serves as Corporate Secretary of TVA Group Inc.  Ms. Tremblay was Senior Director,Corporate Secretariat for Quebecor Media Inc., Quebecor World Inc. and QuebecorInc. from 2003 to December 2007. Prior to joining the Quebecor group of companies in 1987, Ms. Tremblaywas Assistant Secretary and Administrative Assistant at the National Bank ofCanada from 1979 to 1987.  She has alsobeen a member of the *Chambre des notaires duQuébec* since 1977.

 

***Christian Marcoux***, Assistant Secretary. Mr. Marcouxwas appointed Assistant Secretary of Videotron Ltd. in December 2006. Mr. Marcouxjoined Quebecor Media Inc. in 2006 as Senior Legal Counsel, Compliance.  He is currently also Assistant Secretary ofQuebecor Inc., Quebecor Media Inc., TVA Group Inc. and Sun Media Corporation.From January 2004 to December 2006, Mr. Marcoux was Manager, ListedIssuer Services at the Toronto Stock Exchange. Prior to January 2004, Mr. Marcouxwas an attorney with BCF LLP, a law firm, for three years.

 

**B-**                                   BoardPractices

** **

Reference is made to “— Directors and Executive Officers” above for thecurrent term of office, if applicable, and the period during which ourdirectors and senior management have served in that office.

 

There are no directors’ service contracts with us or any of oursubsidiaries providing for benefits upon termination of employment.

 

Our Board of Directors is comprised of five directors. Each director isnominated and elected by Quebecor Media, our parent company, to serveuntil a successor director is elected or appointed.  Our Board of Directors has an AuditCommittee, but we do not have a compensation committee.  The Compensation Committee of Quebecor Mediadecides certain matters relating to the compensation of officers and employeesof Videotron, including certain matters relating to the Quebecor Media stockoption plan, as discussed further below.

 

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***Audit Committee***

 

Videotron’sAudit Committee, is currently composed of three directors, namely Messrs. JeanLa Couture, André Delisle and A. Michel Lavigne. Mr. La Couture isthe Chairman of our Audit Committee and our Board of Directors has determinedthat Mr. La Couture is an “audit committee financial expert” as definedunder SEC rules. See “Item 16A. Audit Committee Financial Expert”.Our Board of Directors adopted the mandate of our Audit Committee in light ofthe Sarbanes-Oxley Act of 2002. Our Audit Committee assists our Board ofDirectors in overseeing our financial controls and reporting. Our AuditCommittee also oversees our compliance with financial covenants and legal andregulatory requirements governing financial disclosure matters and financialrisk management.

 

The currentmandate of our Audit Committee provides, among other things, that our AuditCommittee reviews our annual and quarterly financial statements before they aresubmitted to our Board of Directors, as well as the financial informationcontained in our annual reports on Form 20-F, our management’s discussionand analysis of financial condition and results of operations, our quarterlyreports furnished to the SEC under cover of Form 6-K and other documentscontaining similar information before their public disclosure or filing withregulatory authorities; reviews our accounting policies and practices; anddiscusses with our independent auditor the scope of their audit and reviewstheir recommendations and the responses of our management to theirrecommendations.  Our Audit Committee isalso responsible for ensuring that we have in place adequate and effectiveinternal control and management information systems to monitor our financialinformation and to ensure that our transactions with related parties are madeon terms that are fair for us.  Our AuditCommittee pre-approves all audit services and permitted non-audit services andpre-approves all the fees pertaining to those services that are payable to ourindependent auditor, and submits the appropriate recommendations to our Boardof Directors in connection with these services and fees.  Our Audit Committee also reviews the scope ofthe audit and the results of the examinations conducted by our internal auditdepartment.  In addition, our AuditCommittee recommends the appointment of our independent auditors, subject toour shareholders’ approval.  It alsoreviews and approves our Code of Ethics for our President and Chief ExecutiveOfficer and principal financial officers.

 

**C-**                                   Compensationof Directors and Executive Officers

** **

Our directorsdo not receive any remuneration for acting in their capacity as directors ofVideotron.  The members of our AuditCommittee do, however, receive attendance fees of $2,500 per meeting and theChairman of our Audit Committee (currently, Mr. La Couture) receives anannual fee of $4,500 to act in such capacity. Our directors are reimbursed for their reasonable out-of-pocket expensesincurred in connection with meetings of our Board of Directors and our AuditCommittee.  During the financial yearended December 31, 2008, the amount of compensation (including benefits inkind) paid to our five directors for services in all capacities to Videotronand its subsidiaries was $143,750.  Noneof our directors have contracts with us or any of our subsidiaries that providefor benefits upon termination of employment.

 

The aggregateamount of compensation we paid for the year ended December 31, 2008 to ourexecutive officers as a group, excluding those who are also executive officersof, and compensated by, Quebecor Media, was $19.3 million,including salaries, bonuses and profit-sharing payments.

 

***Quebecor Media’s Stock Option Plan***

 

Under a stock option plan established byQuebecor Media, 6,180,140 common shares of Quebecor Media (representing 5%of all outstanding common shares of Quebecor Media) have been set aside fordirectors, officers, senior employees and other key employees of Quebecor Mediaand its subsidiaries, including Videotron. Each option may be exercised within a maximum period of 10 yearsfollowing the date of grant at an exercise price not lower than, as the casemay be, the fair market value of Quebecor Media common shares at the date ofgrant, as determined by its Board of Directors (if Quebecor Media common sharesare not listed on a stock exchange at the time of the grant) or the 5-dayweighted average closing price ending on the day preceding the date of grant ofthe common shares of Quebecor Media on the stock exchange(s) where suchshares are listed at the time of grant. For so long as the shares of Quebecor Media 

 

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are not listed on a recognized stockexchange, optionees may exercise their vested options during one of thefollowing annual periods: from March 1 to March 30, from June 1to June 29, from September 1 to September 29 and from December 1to December 30.  Holders of optionsunder the plan have the choice at the time of exercising their options toreceive an amount in cash equal to the difference between the fair marketvalue, as determined by Quebecor Media’s Board of Directors, and the exerciseprice of their vested options or, subject to certain stated conditions,purchase common shares of Quebecor Media at the exercise price. Except underspecific circumstances, and unless Quebecor Media’s Compensation Committeedecides otherwise, options vest over a five-year period in accordance with oneof the following vesting schedules as determined by Quebecor Media’sCompensation Committee at the time of grant: (i) equally over five yearswith the first 20% vesting on the first anniversary of the date of the grant; (ii) equallyover four years with the first 25% vesting on the second anniversary of thedate of grant; and (iii) equally over three years with the first 33%vesting on the third anniversary of the date of grant. Pursuant to the terms ofthis plan, no optionee may hold options representing more than 5% of theoutstanding common shares of Quebecor Media.

** **

During the year ended December 31, 2008,an aggregate total of 70,000 options were granted under this plan toexecutive officers of Videotron (excluding directors, officers and employeeswho, at the date of grant, were directors, officers or employees at multipleQuebecor Media group companies), with a weighted average exercise price of$45.82 per share, as determined by Quebecor Media’s CompensationCommittee.  During the year ended December 31,2008, a total of 610,962 options were exercised by officers and employees ofVideotron, for aggregate gross value realized of $18,165,946. The QuebecorMedia stock option plan did not allow the exercise of any option before 2008,at which time it covered a six year compensation value. The valuerealized on option exercises represents the difference between the optionexercise price and the fair market value of Quebecor Media common shares (asdetermined as set forth above) at the date of exercise. As of December 31, 2008, anaggregate total of 1,382,035 options granted to directors, officers andemployees of Videotron (excluding directors, officers and employees who,at the date of grant, were directors, officers or employees at multipleQuebecor Media group companies) remainoutstanding, with a weighted average exercise price of $42.35 per share, asdetermined by Quebecor Media’s Compensation Committee.  Of these outstanding options,1,030,220 options have been granted (and remain outstanding) toexecutive officers of Videotron (excluding executive officers who, atthe date of grant, were directors, officers or employees at multiple QuebecorMedia group companies), with aweighted average exercise price of $42.29 per share.  For more information on this stock optionplan, see Note 17 to our audited consolidated financial statementsincluded under “Item 17. Financial Statements” of this annual report.

 

***Pension Benefits***

 

BothQuebecor Media and Videotron maintain pension plans for our non-unionizedemployees and certain officers.

 

Videotron’spension plan provides pension benefits to our executive officers equal to 2.0%of salary (excluding bonuses) for each year of membership in the plan. Thepension benefits so calculated are payable at the normal retirement age of65 years, or sooner at the election of the executive officer, subject toan early retirement reduction. In addition, the pension benefits may bedeferred, but not beyond the age limit under the relevant provisions of the *Income Tax Act* (Canada), in which case the pensionbenefits are adjusted to take into account the delay in their payment inrelation to the normal retirement age. The maximum pension benefits payableunder our pension plan are as prescribed under the *IncomeTax Act* (Canada). An executive officer contributes to this planan amount equal to 5.0% of his or her salary up to a maximum of $4,700per year.

 

Quebecor Media’spension plan provides greater pension benefits to eligible executive officersthan it does to other employees. The higher pension benefits under this planequal 2.0% of average salary over the best five consecutive years of salary(including bonuses), multiplied by the number of years of membership in theplan as an executive officer. The pension benefits so calculated are payable atthe normal retirement age of 65 years, or sooner at the election of theexecutive officer, and from the age of 61 years without early retirementreduction. In addition, the pension benefits may be deferred, but not beyondthe age limit under the relevant provisions of the *IncomeTax Act* (Canada), in which case the pension benefits areadjusted to take into account the delay in their payment in relation to thenormal retirement age. The maximum pension benefits payable underQuebecor Media’s pension plan are as prescribed by the *Income Tax Act*

 

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(Canada). Anexecutive officer contributes to this plan an amount equal to 5.0% of his orher salary up to a maximum of $6,111 in 2009. Videotron has no liabilityregarding Quebecor Media’s pension plan.

 

The tablebelow indicates the annual pension benefits that would be payable at the normalretirement age of 65 years under both Quebecor Media’s and ourpension plans:

 
| ** **       | ** ** | **Years of Participation** | ** ** |
|------------------|------------|--------------------------------------|------------|
| **Compensation** | ** ** | **10**                               | ** ** | **15** | ** ** | **20** | ** ** | **25** | ** ** | **30** | ** ** |
|             |       |                                 |       |   |   |   |   |   |   |   |   |
| $122,222 or more |       | $                                    | 24,444     |   | $ | 36,667 |   | $ | 48,889 |   | $ | 61,111 |   | $ | 73,333 |   |
|                  |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

***Supplemental Retirement Benefit Plan for Designated Executives***

 

In addition,both Quebecor Media’s and our pension plans provide supplemental retirementbenefits to certain designated executives. As of December 31, 2008, three of our senior executive officers wereparticipants under Quebecor Media’s supplemental retirement benefit plan, andone of our senior executive officers was participant under our supplementalretirement benefit plan.

 

The benefitspayable to the senior executive officers who participate in Quebecor Media’ssupplemental retirement benefit plan are calculated as under the basic pensionplan but without regard to the limitation of the *Income TaxAct*(Canada), less the pension payable under the basic pension plan.The pension is payable for life without reduction from the age of 61. In caseof death after retirement and from the date of death, Quebecor Media’ssupplemental retirement benefit plan provides for the payment of a survivorpension to the eligible surviving spouse, representing 50.0% of the retiree’spension for a period of up to ten years.

 

As of December 31,2008, our senior executive officers participating in Quebecor Media’ssupplemental retirement benefit plan each had credited service of five years orless.

 

The benefitspayable to our senior executive officer who participates in our supplementalretirement benefit plan are calculated as under the basic pension plan butwithout regard to the limitation of the *Income Tax Act*(Canada),less the pension payable under the basic pension plan. The benefits socalculated are payable at the normal retirement age of 65 years, or soonerat the election of the senior executive officer, subject to an early retirementreduction. In case of death after retirement and from the date of death, oursupplemental retirement benefit plan provides for the payment of a survivorpension to the eligible surviving spouse representing 60.0% of the retiree’spension.

 

As of December 31,2008, our senior executive officers had a credited service of 6 years under our supplemental retirementbenefit plan.

 

The tablebelow indicates the annual supplemental pension that would be payable at thenormal retirement age of 65 years:

 
| ** **       | ** ** | **Years of Credited Service** | ** ** |
|------------------|------------|----------------------------------------------|------------|
| **Compensation** | ** ** | **10**                                       | ** ** | **15** | ** ** | **20** | ** ** | **25** | ** ** | **30** | ** ** |
|             |       |                                         |       |   |   |   |   |   |   |   |   |
| $200,000         |       | $                                            | 15,556     |   | $ | 23,333 |   | $ | 31,111 |   | $ | 38,889 |   | $ | 46,667 |   |
| $300,000         |       | $                                            | 35,556     |   | $ | 53,333 |   | $ | 71,111 |   | $ | 88,889 |   | $ | 106,667 |   |
| $400,000         |       | $                                            | 55,556     |   | $ | 83,333 |   | $ | 111,111 |   | $ | 138,889 |   | $ | 166,667 |   |
| $500,000         |       | $                                            | 75,556     |   | $ | 113,333 |   | $ | 151,111 |   | $ | 188,889 |   | $ | 226,667 |   |
| $600,000         |       | $                                            | 95,556     |   | $ | 143,333 |   | $ | 191,111 |   | $ | 238,889 |   | $ | 286,667 |   |
| $800,000         |       | $                                            | 135,556    |   | $ | 203,333 |   | $ | 271,111 |   | $ | 338,889 |   | $ | 406,667 |   |
| $1,000,000       |       | $                                            | 175,556    |   | $ | 263,333 |   | $ | 351,111 |   | $ | 438,889 |   | $ | 526,667 |   |
| $1,200,000       |       | $                                            | 215,556    |   | $ | 323,333 |   | $ | 431,111 |   | $ | 538,889 |   | $ | 646,667 |   |
| $1,400,000       |       | $                                            | 255,556    |   | $ | 383,333 |   | $ | 511,111 |   | $ | 638,889 |   | $ | 766,667 |   |

 

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***Liability Insurance***

*** ***

Quebecor carriesliability insurance for the benefit of its directors and officers, as well asfor the directors and officers of its subsidiaries, including Videotron and oursubsidiaries, against certain liabilities incurred by them in such capacity.  These policies are subject to customarydeductibles and exceptions.  The premiumsin respect of this insurance are entirely paid by Quebecor, which is thenreimbursed by Quebecor Media and its subsidiaries, including Videotron, fortheir ratable portion thereof.

 

**D-**                                   Employees

** **

At December 31,2008, we employed 4,769 employees. At December 31, 2007 and 2006, weemployed approximately 4,350 and 4,057 employees, respectively.  Substantially all of our employees are basedand work in the Province of Québec. Approximately 2,849 of our employees are unionized, and the terms oftheir employment are governed by one of our five regional collective bargainingagreements. Our two most important collective bargaining agreements, coveringour unionized employees in the Montréal and Québec City regions, have termsextending to December 31, 2009. We also have two collective bargainingagreements covering our unionized employees in the Chicoutimi and Hull regions,with terms running through January 31, 2010 and August 31, 2011,respectively, and one other collective bargaining agreement, covering39 employees of our SETTE inc. subsidiary, which expired on December 31,2007. Negotiations regarding this collective bargaining agreement began in 2008and are ongoing.

 

**E-**                                     ShareOwnership

 

No Videotron equity securities are held by any of our directors orsenior executive officers.

 

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## **ITEM 7 -  MAJOR SHAREHOLDERS AND RELATED PARTYTRANSACTIONS**

##  

**A-**                                   Major Shareholders

** **

We are awholly-owned subsidiary of Quebecor Media, a leading Canadian-based mediacompany with interests in newspaper publishing operations, televisionbroadcasting, business telecommunications, book and magazine publishing and newmedia services, as well as our cable operations. Through these interests,Quebecor Media holds leading positions in the creation, promotion anddistribution of news, entertainment and Internet-related services that aredesigned to appeal to audiences in every demographic category.

 

Quebecor Mediais 54.72% owned by Quebecor, a communications holding company, and 45.28% ownedby CDP Capital d’Amérique Investissements Inc. Quebecor’s primary assets areits interests in Quebecor Media. CDP Capital d’Amérique Investissements Inc. is a wholly-owned subsidiaryof *Caisse de dépôt et placement du Québec*,one of Canada’s largest pension fund managers.

 

**B-**                                   Related PartyTransactions

** **

The followingdescribes related-party transactions that are material to us and in which we orour directors, executive officers or affiliates are involved.  We believe that each of the transactionsdescribed below is on terms no less favorable to us than could have beenobtained from unrelated third parties.

 

**Video-on-DemandServices**

** **

The Companyentered into an affiliation agreement with Groupe Archambault Inc. (“Archambault”),a subsidiary of Quebecor Media and, as such, a company under commoncontrol.  This agreement provided thatthe Company pay Archambault 54% of all revenues generated from the fees paid bycustomers to use Archambault’s video-on-demand services.  In connection with this affiliationagreement, the Company entered into a video-on-demand services agreement withArchambault.  Under this agreement,various technical services were provided to Archambault.  In consideration of these services,Archambault paid a fee of 8% of all revenues generated from fees paid bycustomers to use Archambault’s video-on-demand services.  The acquisition of the video-on-demandlicense by the Company from Archambault for a total cash consideration of $0.8million resulted in the termination of these agreements on May 1, 2008.

 

Under theaffiliation agreement, the Company paid fees to Archambault of$5.5 million, $13.3 million and $9.0 million and received feesfrom Archambault of $0.8 million, $2.6 million and $1.9 millionfor the years 2008, 2007 and 2006, respectively.

 

**ManagementServices and Other**

** **

We have earnedrevenue from TVA Group for providing it with access to a specialty advertisingchannel carried on our network and incurred expenses for purchases and servicesobtained from related companies at prices and conditions prevailing on themarket, as summarized below. The majority of our related party purchases wererelated to the telecommunications and Internet services agreements describedabove and for programming purchases, advertising purchases, outsourcing of callcenter operations and information technology services.

 

The followingtable presents the amounts of our revenues, purchases and accounts payableresulting from transactions with related parties during the periods indicated:

 

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| ** **       | ** ** | **Year Ended December 31,** | ** ** |
|------------------|------------|--------------------------------------------|------------|
| ** **       | ** ** | **2008**                                   | ** ** | **2007** | ** ** |
| ** **       | ** ** | **(dollars in millions)**        | ** ** |
|             |       |                                       |       |   |   |
| Revenues         |       | $                                          | 10.3       |   | $ | 22.3 |   |
| Purchases        |       | 56.1                                       |       | 64.5 |   |
| Accounts payable |       | 19.4                                       |       | 75.2 |   |
|                  |            |                                            |            |  |  |  |  |

 

In 2002, webegan paying an annual management fee to Quebecor Media for services renderedto us pursuant to a five-year management services agreement. These servicesinclude internal audit, legal and corporate, financial planning and treasury,tax, real estate, human resources, risk management, public relations and otherservices. The agreement provides for an annual management fee of $25.4 million payable to Quebecor Media inrespect of 2008 (2007 - $46.9 million; 2006 — 23.4 million).  This agreement is now automatically renewedannually.  In addition, Quebecor Media isentitled to the reimbursement of out-of-pocket expenses incurred in connectionwith the services provided under the agreement.

 

On January 21,2008, Quebecor World Inc. and its U.S. subsidiaries were granted creditorprotection under the Companies Creditors Arrangement Act in Canada.  On the same date, its U.S. subsidiaries alsofiled a petition under Chapter 11 of the United States Bankruptcy Code.  Quebecor World Inc. outsourced its corporateinformation technology services to Videotron, which generated $3.0 million inrevenues for Videotron in 2008 ($9.8 million in 2007 and $13.0 million in2006).  This agreement was terminated in2008.

 

**AssetAcquisition**

** **

On December 15,2008, Videotron acquired fixed assets from Les Editions CEC Inc., awholly-owned subsidiary of Quebecor Media, for total consideration of $1.6million.  This transaction was recordedat the exchange amount. As a result, Videotron recorded a net book value of$0.4 million and the difference between the cash consideration and the net bookvalue, a loss of $1.2 million, was charged to the deficit.

** **

**Income TaxTransactions**

** **

Unlikecorporations in the United States, corporations in Canada are not permitted tofile consolidated tax returns. As a result, we enter into certain taxconsolidation transactions from time to time through which we are able torecognize certain income tax benefits.

 

On December 18,2008, Videotron’s ultimate parent company, Quebecor Inc., transferred to theCompany a total of $104.9 million of non-capital tax losses in exchangefor net cash consideration of $18.4 million.  This transaction was recorded at the exchangeamount. As a result, the Company recorded an income tax asset of$32.4 million and the difference of $14.0 million, between the netcash consideration and the income tax asset, was recorded as a deferred credit,included in accounts payable and accrued liabilities, which reduced income taxexpenses in 2008 as these tax deductions were used.

 

On December 21,2007, Videotron’s ultimate parent company, Quebecor Inc., transferred to CFCable TV Inc., a wholly-owned subsidiary of the Company, $9.4 million ofnon-capital tax losses in exchange for a net cash consideration of$2.1 million. This transaction was recorded at the exchange amount. As aresult, CF Cable TV Inc. recorded an income tax asset of $2.9 million andthe difference of $0.8 million between the net cash consideration and the incometax asset, was recorded as a deferred credit, included in accounts payable andaccrued liabilities, which reduced income tax expenses in 2008 as these taxdeductions were used.

 

On December 18and 21, 2007, Videotron’s ultimate parent company, Quebecor Inc., transferredto the Company a total of $57.1 million of non-capital tax losses inexchange for net cash consideration of $12.8 million. This transaction wasrecorded at the exchange amount. As a result, the Company recorded an income taxasset of $17.7 million and the difference of $4.9 million, betweenthe net cash consideration and the income tax asset, was recorded as a deferredcredit, 

 

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included in accounts payable and accrued liabilities, which reduced theincome tax expenses in 2008 as these tax deductions were used.

 

During theyear ended December 31, 2004, we acquired from Quebecor Mediaincome tax assets of $62.0 million, of which $55.5 million wasrecorded as future income tax assets and $6.5 million asincome taxes receivable. The consideration payable to Quebecor Mediafor these income tax assets was $35.2 million as at December 31,2004. The difference of $26.8 million was credited to contributed surplus.

 

**C-**                                   Interests of Expertsand Counsel

** **

Notapplicable.

 

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## **ITEM 8 -  FINANCIAL INFORMATION**

##  

**A-**                                   ConsolidatedStatements and Other Financial Information

** **

Our consolidated balance sheets as at December 31, 2007 and 2008and our consolidated statements of income, comprehensive income, shareholder’sequity and cash flows for the years ended December 31, 2006, 2007 and2008, including the notes thereto and together with the auditors’ reportthereon, are presented at Item 17 of this annual report.

 

**B-**                                   Legal Proceedings

** **

We areinvolved from time to time in various claims and lawsuits incidental to theconduct of our business in the ordinary course.

 

In 2003 and2004, a number of companies, including Videotron, brought a suit against theCrown in Federal Court, alleging that the Part II license fees annuallypaid by broadcasters constitute, in fact and in law, unlawful taxes under theBroadcasting Act (Canada). On December 14, 2006, the Federal Courtdecreed that these fees did indeed constitute taxes and that the CRTC was tocease collection of such fees but concluded that the plaintiff companies wouldnot be entitled to a reimbursement of the amounts already paid. The plaintiffsand the defendant both filed an appeal before the Federal Court of Appeal. On October 1, 2007,the CRTC issued a document stating that it would adhere to the decisionrendered and that it would not collect, in 2007 or any subsequent years,the Part II license fees payable on November 30 of each year unless aSuperior Court reverses the Federal Court decision. In light of these facts,and as a result of the decision of the Superior Court, Videotron reversed itsliability of $11.1 million related to these Part II license feescovering the period from September 1, 2006 to September 30, 2007in the third quarter of 2007. Videotron also ceased to record the Part II license fees insubsequent periods.

 

On April 29,2008, the Federal Court of Appeal handed down its decision and overturned the December 14, 2006decision of the Federal Court.  Theplaintiff companies disagree with this decision and the request for leave toappeal to the Supreme Court of Canada was accepted on December 18,2008.  The CRTC publicly stated that itwill make no attempt to collect outstanding Part II license fees until theearlier of (a) the judgment of the Federal Court of Appeal is affirmed bythe Supreme Court or (b) the matter is settled between the parties.However, by virtue of the Federal Court of Appeal decision that confirms theright of the CRTC to collect Part II license fees to which Videotron issubject, Videotron recorded in 2008 a total liability of $25.6 millionrelated to the Part II license fees. This liability is for the periodcovering from September 1, 2006 to December 31, 2008.  Videotron continues to accrue for the Part IIlicense fees.

 

On July 20,2007, a motion to certify a class action lawsuit was filed in the Province ofQuébec against Videotron in connection with an interruption of Internet serviceon July 18, 2007 and other sporadic interruptions of Internet service. Theplaintiff is claiming a credit for the portion of the fees paid for theInternet service for the duration of the interruptions. The plaintiff is alsoseeking punitive damages and damages for troubles and inconveniences. The classcertification hearing has not been scheduled yet. Although it is not possibleas of the date of this annual report to determine with a reasonable degree ofcertainty the outcome of this legal proceeding, our management believes thatthe suit is without merit and intends to vigorously defend its case.

 

In addition, anumber of other legal proceedings against Videotron, or in which Videotron isin demand, are currently pending. In the opinion of our management, the outcomeof these proceedings is not expected to have a material adverse effect on ourbusiness, results of operations, liquidity or financial position.

 

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**C-**                                   Dividend Policy andReductions of Paid-Up Capital

** **

As of December 31,2008, our issued and outstanding share capital consists of 2,515,277 Class “A”Common Shares, all of which are held by Quebecor Media.  See Note 15to our audited consolidated financial statements included under “Item17. Financial Statements” in this annual report.

 

During theyear ended December 31, 2008, we paid aggregate cash dividends of$110,000,000 on our common shares.  Inthe year ended December 31, 2007, we paid no dividends on our commonshares. We currently expect to pay dividends and other distributions on ourcommon shares in the future. The declaration and payment of dividends and otherdistributions is in the sole discretion of our Board of Directors, and anydecision regarding the declaration of dividends and other distributions will bemade by our Board of Directors depending on, among other things, our financialresources, the cash flows generated by our business, our capital needs, andother factors considered relevant by our Board of Directors, including theterms of our indebtedness and applicable law.

 

On severaloccasions during the years ended December 31, 2008 and 2007, the Companyreduced the paid-up capital of its common shares through aggregate cashdistributions of $120.0 million in 2008 and$299.6 million in 2007.

 

**D-**                                   Significant Changes

** **

Except as otherwise disclosed in this annual report, there has been noother material adverse change in our financial position since December 31,2008.

 

## **ITEM 9 -  THE OFFER AND LISTING**

##  

**A-**                                   Offer and ListingDetails

** **

Not applicable.

 

**B-**                                   Plan of Distribution

** **

Not applicable.

 

**C-**                                   Markets

** **

On April 15,2008, we issued and sold US$455,000,000 aggregate principal amount of our 91/8% Senior Notes due April 15, 2018 ina private placement exempt from the registration requirements of the SecuritiesAct.  In connection with the issuance ofthese unregistered notes, we agreed to file an exchange offer registrationstatement with the SEC if these notes are not freely tradeable as of the 366th day after the notes were issued.  In the event that we are so required toregister these notes and we fail to satisfy our registration obligations withinspecified time periods, we will be required to pay additional interest to theholders of the notes under certain circumstances.

 

On September 16,2005, we issued and sold US$175.0 million aggregate principal amount ofour 63/8% Senior Notes due December 15, 2015in a private placement exempt from the registration requirements of theSecurities Act.  In connection with theissuance of these unregistered notes, we agreed to file an exchange offerregistration statement with the SEC with respect to a registered offer toexchange without novation the unregistered notes for our new 63/8%Senior Notes due December 15, 2015, which would be registered underthe Securities Act.  We filed aregistration statement on Form F-4 with the SEC on December 16, 2005and completed the registered exchange offer on February 6, 2006.  As a result, we have US$175.0 million inaggregate principal amount of our 63/8% Senior Notes due December 15, 2015outstanding and registered under the Securities Act.

 

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On October 8,2003 and November 19, 2004, we issued and sold US$335.0 million andUS$315.0 million aggregate principal amount, respectively, of our 67/8% Senior Notes due January 15, 2014in private placements exempt from the registration requirements of theSecurities Act.  In connection with theissuance of these unregistered notes, we agreed to file exchange offerregistration statements with the SEC with respect to registered offers toexchange without novation the unregistered notes for our new 67/8%Senior Notes due January 15, 2014, which would be registered underthe Securities Act.  We filed aregistration statement on Form F-4 with the SEC on November 24, 2003and completed this registered exchange offer on February 9, 2004, and wefiled another registration statement on Form F-4 with the SEC on December 7,2004 and completed this exchange offer on March 4, 2004.  As a result, we have US$650.0 million inaggregate principal amount of our 6 7/8%Senior Notes due January 15, 2014 outstanding and registered under theSecurities Act.

 

There can beno assurance as to (1) the liquidity of the market, if any, for our SeniorNotes, (2) the ability of the holders of our Senior Notes to sell them or (3) theprices at which any sales may be made. Our Senior Notes are not currentlylisted on any national securities exchange or quoted on a quotation system. Wedo not presently intend to apply to list any of our Senior Notes on anynational securities exchange or to have them quoted on an automated quotationsystem.

 

The recordholder of each series of our Senior Notes is Cede & Co., anominee of The Depository Trust Company.

 

**D-**                                   Selling Shareholders

** **

Not applicable.

 

**E-**                                     Dilution

** **

Not applicable.

 

**F-**                                     Expenses of theIssue

** **

Not applicable.

 

## **ITEM 10 -ADDITIONAL INFORMATION**

##  

**A-**                                   Share Capital

** **

Not applicable.

 

**B-**                                   Memorandum andArticles of Association

** **

The Articles of Amalgamation of Videotron, dated as of July 1,2006, and the Articles of Amendment of Videotron, dated as of June 30,2008, have been filed by us as exhibits to this annual report. Videotron’sArticles of Amalgamation, as amended by its Articles of Amendment are referredto as our “Articles”. The following is a summary of certain provisions of ourArticles and by-laws:

 

1.                                       OnJuly 1, 2006, Vidéotron ltée and 9101-0827 Québec inc. amalgamated, under Part IAof the *Companies Act* (Québec), into a singlecompany using the name “Videotron Ltd.” (or “Vidéotron ltée” in French) withthe Designating Number 1163819882. The Articles provide no restrictions onthe purposes or activities that may be undertaken by Videotron.

 

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2.                                       (a)                                 Ourby-laws provide that we may transact business with one or more of our directorsor with any company of which one or more of our directors are members oremployees or with any corporation or association of which one or more of ourdirectors are shareholders, directors, officers or employees. The director whohas an interest in the transaction must disclose his or her interest to us andto the other directors before expressing a view of this transaction and shallrefrain from deliberating or voting on the transaction, except if his or hervote is necessary to commit us in respect of the transaction.

 

(b)                                 Neitherthe Articles nor our by-laws contain provisions with respect to directors’power, in the absence of an independent quorum, to determine theirremuneration.

 

(c)                                  Subjectto any restriction which may from time to time be included in the Articles orour by-laws, or the terms, rights or restrictions of any of our shares orsecurities outstanding, our directors may authorize us, by simple resolution,to borrow money and obtain advances upon the credit of our company when theyconsider it appropriate. Our directors also may, by simple resolution, whenthey consider it appropriate, (i) issue bonds or other securities of ourcompany and give them in guarantee or sell them for prices and amounts deemedappropriate; (ii) mortgage, pledge or give as surety our present or futuremovable and immovable property to ensure the payment of these bonds or othersecurities or give a part only of these guarantees for the same purposes; and (iii) mortgageor pledge our real estate or give as security or otherwise encumber with anycharge our movables or give these various kinds of securities to assure thepayment of loans made other than by the issuance of bonds as well as thepayment or the execution of other debts, contracts and commitments of our company.

 

Neither theArticles nor our by-laws contain any provision with respect to (a) theretirement or non-retirement of our directors under an age limit requirement or(b) the number of shares, if any, required for the qualification of ourdirectors.

 

3.                                       Therights, preferences and restrictions attaching to our common shares and ourpreferred shares (consisting of our Class “A” Common Shares and ourauthorized classes of preferred shares, comprised or our Class “B”Preferred Shares, Class “C” Preferred Shares, Class “D” PreferredShares, Class “E” Preferred Shares, Class “F” Preferred Shares, Class “G”Preferred Shares and Class “H” Preferred Shares) are set forth below:

 

**Common Shares**

** **

***Class “A”Common Shares***

*** ***

(a)                                  *Dividend rights*: Subject to the rights of the holders of ourpreferred shares (including their redemption rights) and subject to applicablelaw, each Class “A” Common Share is entitled to receive such dividends asour Board of Directors shall determine.

 

(b)                                 *Voting rights*: The holders of Class “A” Common Sharesare entitled to vote at each shareholders’ meeting with the exception ofmeetings at which only the holders of another class of shares are entitled tovote. Each Class “A” Common Share entitles the holder to one vote.  The holders of the Class “A” CommonShares shall elect the directors of Videotron at an annual or special meting ofshareholders called for that purpose, except that any vacancy occurring in theBoard of Directors may be filled, for the remainder of the term, by ourDirectors. At any meeting of shareholders called for such purpose, directorsare elected by a majority of the votes cast in respect of such election.

 

(c)                                  *Rights to share in our profits*: Other than as described inparagraph (a) above (whereby the holders of our Class “A” CommonShares are entitled to receive dividends as determined by our Board ofDirectors subject to certain restrictions) and paragraph (d) below(whereby the holders of our Class “A” Common Shares are entitled toparticipation in the remaining property and assets of our company available fordistribution in the event of liquidation or dissolution), None.

 

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(d)                                 *Rights upon liquidation*: In the event of our liquidation ordissolution or any other distribution of our assets among our shareholders forthe purpose of winding-up our affairs, whether voluntarily or involuntarily,the holders of our Class “A” Common Shares shall be entitled, subject tothe rights of the holders of our preferred shares, to participate equally,share for share, in our residual property and assets available for distributionto our shareholders, without preference or distinction.

 

(e)                                  *Redemption provisions*: None.

 

(f)                                    *Sinking fund provisions*: None.

 

(g)                                 *Liability to further capital calls by us*: None, providedthat our directors may make calls upon the shareholders in respect of anymoneys unpaid upon their shares.

 

(h)                                 *Provisions discriminating against existing or prospective holders ofcommon shares as a result of such holder owning a substantial number of commonshares*: None.

 

**PreferredShares**

** **

***Class “B”Preferred Shares***

*** ***

(a)                                  *Dividend rights*: When our Board of Directors declares adividend, the holders of our Class “B” Preferred Shares have the right toreceive, in priority over the holders of our Class “A” Common Shares, Class “C”Preferred Shares, Class “D” Preferred Shares, Class “E” PreferredShares and Class “F” Preferred Shares, but subordinated to the holders ofour Class “G” Preferred Shares, a preferential and non-cumulative dividendat the fixed rate of 1% per month, calculated on the basis of theapplicable redemption value of our Class “B” Preferred Shares.  A dividend may be declared and payable incash, in kind or through the issuance of fully paid shares of any class of ourcompany.

 

(b)                                 *Voting rights*: Subject to applicable law and except asexpressly otherwise provided, the holders of our Class “B” PreferredShares do not have the right to receive notice of meetings of shareholders orto attend any such meeting or vote at any such meeting.

 

(c)*                                  Rightsto share in our profits*: Other than as described in paragraph (a) above(whereby the holders of our Class “B” Preferred Shares are entitled toreceive certain dividends, if and when declared by our Board of Directors),paragraph (d) below (whereby the holders of our Class “B”Preferred Shares are entitled to participate in the distribution of theresidual property and assets of Videotron available for distribution in theevent of our liquidation or winding-up) and paragraph (e) below(whereby the holders of our Class “B” Preferred Shares have certainredemption rights): None.

 

(d)                                 *Rights upon liquidation*: In the event of our liquidation,dissolution or other distribution of our assets among our shareholders for thepurpose of winding-up our affairs, whether voluntarily or involuntarily, theholders of the Class “B” Preferred Shares shall be entitled to repaymentof the amount paid for the Class “B” Preferred Shares in the subdivisionof the issued and paid-up share capital account relating to the Class “B”Preferred Shares.

 

In addition,in the event of our liquidation, dissolution or other distribution of ourassets among our shareholders for the purpose of winding-up our affairs,whether voluntarily or involuntarily, the rights of holders of Class “B”Preferred Shares as regards to payment of dividends and the right toparticipate in the distribution of residual assets, shall rank in priority tothe rights of the holders of our Class “A” Common Shares, Class “C”Preferred Shares, Class “D” Preferred Shares, Class “E” PreferredShares 

 

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and Class “F”Preferred Shares, but subordinated to the rights of holders of our Class “G”Preferred Shares.

 

(e)                                  *Redemption provisions*: Subject to the provisions of the *Companies Act* (Québec), the holders of ourClass “B” Preferred Shares have, at any time, the right to requireVideotron to redeem (referred to as a “retraction right”) any or all of their Class “B”Preferred Shares at a redemption price equal to the amount paid for such sharesin the subdivision of the issued and paid-up share capital account relating tosuch shares, plus a specified premium, if applicable, plus the amount of anydeclared and unpaid dividends.

 

In addition,Videotron may, at its option, redeem any or all of the Class “B” PreferredShares outstanding at any time at an aggregate redemption price equal to theconsideration received by Videotron for these Class “B” Preferred Shares.Videotron may also, when it deems it appropriate and without giving notice ortaking into account the other classes of shares, buy, pursuant to a privateagreement, all or some of the Class “B” Preferred Shares outstanding at apurchase price for any such Class “B” Preferred Shares not exceeding theretraction right purchase price described above or the book value of Videotron’snet assets.

 

(f)                                    *Sinking fund provisions*: None.

 

(g)                                 *Liability to further capital calls by us*: None, providedthat our directors may make calls upon the shareholders in respect of anymoneys unpaid upon their shares.

 

(h)                                 *Provisions discriminating against existing or prospective holders ofour Class “B” Preferred Shares as a result of such holder owning asubstantial number of our Class “B” Preferred Shares*: None.

 

***Class “C”Preferred Shares***

*** ***

(a)                                  *Dividend rights*: When our Board of Directors declares adividend, the holders of our Class “C” Preferred Shares have the right toreceive, in priority over the holders of our Class “A” Common Shares, Class “D”Preferred Shares, Class “E” Preferred Shares and Class “F” PreferredShares, but subordinated to the holders of our Class “B” Preferred Sharesand Class “G” Preferred Shares, a preferential and non-cumulative dividendat the fixed rate of 1% per month, calculated on the basis of theapplicable redemption value of our Class “C” Preferred Shares. A dividendmay be declared and payable in cash, in kind or through the issuance of fullypaid shares of any class of our company.

 

(b)                                 *Voting rights*: Subject to applicable law and except asexpressly otherwise provided, the holders of our Class “C” PreferredShares do not have the right to receive notice of meetings of shareholders orto attend any such meeting or vote at any such meeting.

 

(c)*                                  Rightsto share in our profits*: Other than as described in paragraph (a) above(whereby the holders of our Class “C” Preferred Shares are entitled toreceive certain dividends, if and when declared by our Board of Directors),paragraph (d) below (whereby the holders of our Class “C”Preferred Shares are entitled to participate in the distribution of theresidual property and assets of Videotron available for distribution in theevent of our liquidation or winding-up) and paragraph (e) below(whereby the holders of our Class “C” Preferred Shares have certainredemption rights), None.

 

(d)                                 *Rights upon liquidation*: In the event of our liquidation,dissolution or other distribution of our assets among our shareholders for thepurpose of winding-up our affairs, whether voluntarily or involuntarily, theholders of the Class “C” Preferred Shares shall be shall be entitled torepayment of the amount paid for the Class “C” Preferred Shares in thesubdivision of the issued and paid-up share capital account relating to the Class “C”Preferred Shares.

 

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In addition,in the event of our liquidation, dissolution or other distribution of our assetsamong our shareholders for the purpose of winding-up our affairs, whethervoluntarily or involuntarily, the rights of holders of Class “C” PreferredShares as regards to payment of dividends and the right to participate in thedistribution of residual assets, shall rank in priority to the rights of theholders of our Class “A” Common Shares, Class “D” Preferred Shares, Class “E”Preferred Shares and Class “F” Preferred Shares, but subordinated to therights of holders of our Class “B” Preferred Shares and Class “G”Preferred Shares.

 

(e)                                  *Redemption provisions*: Subject to the provisions of the *Companies Act* (Québec), the holders of ourClass “C” Preferred Shares have, at any time, the right to requireVideotron to redeem (referred to as a “retraction right”) any or all of their Class “C”Preferred Shares at a redemption price equal to the amount paid for such sharesin the subdivision of the issued and paid-up share capital account relating tosuch shares, plus a specified premium, if applicable, plus the amount of anydeclared and unpaid dividends.

 

In addition,Videotron may, at its option, redeem any or all of the Class “C” PreferredShares outstanding at any time at an aggregate redemption price equal to theconsideration received by Videotron for these Class “C” Preferred Shares.Videotron may also, when it deems it appropriate and without giving notice ortaking into account the other classes of shares, buy, pursuant to a privateagreement, all or some of the Class “C” Preferred Shares outstanding at apurchase price for any such Class “C” Preferred Shares not exceeding theretraction right purchase price described above or the book value of Videotron’snet assets.

 

(f)                                    *Sinking fund provisions*: None.

 

(g)                                 *Liability to further capital calls by us*: None, providedthat our directors may make calls upon the shareholders in respect of anymoneys unpaid upon their shares.

 

(h)                                 *Provisions discriminating against existing or prospective holders ofour Class “C” Preferred Shares as a result of such holder owning asubstantial number of our Class “C” Preferred Shares*: None.

 

***Class “D”Preferred Shares***

*** ***

(a)                                  *Dividend rights*: When our Board of Directors declares adividend, the holders of our Class “D” Preferred Shares have the right toreceive, in priority over the holders of our Class “A” Common Shares, Class “E”Preferred Shares and Class “F” Preferred Shares, but subordinated to theholders of our Class “B” Preferred Shares, Class “C” Preferred Sharesand Class “G” Preferred Shares, a preferential and non-cumulative dividendat the fixed rate of 1% per month, calculated on the basis of theapplicable redemption value of our Class “D” Preferred Shares. A dividendmay be declared and payable in cash, in kind or through the issuance of fullypaid shares of any class of our company.

 

(b)                                 *Voting rights*: Subject to applicable law and except asexpressly otherwise provided, the holders of our Class “D” PreferredShares do not have the right to receive notice of meetings of shareholders orto attend any such meeting or vote at any such meeting.

 

(c)*                                  Rightsto share in our profits*: Other than as described in paragraph (a) above(whereby the holders of our Class “D” Preferred Shares are entitled toreceive certain dividends, if and when declared by our Board of Directors), paragraph (d) below(whereby the holders of our Class “D” Preferred Shares are entitled toparticipate in the distribution of the residual property and assets ofVideotron available for distribution in the event of our liquidation orwinding-up) and paragraph (e) below (whereby the holders of our Class “D”Preferred Shares have certain redemption rights), None.

 

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(d)                                 *Rights upon liquidation*: In the event of our liquidation,dissolution or other distribution of our assets among our shareholders for thepurpose of winding-up our affairs, whether voluntarily or involuntarily, theholders of the Class “D” Preferred Shares shall be shall be entitled torepayment of the amount paid for the Class “D” Preferred Shares in thesubdivision of the issued and paid-up share capital account relating to the Class “D”Preferred Shares.

 

In addition,in the event of our liquidation, dissolution or other distribution of ourassets among our shareholders for the purpose of winding-up our affairs,whether voluntarily or involuntarily, the rights of holders of Class “D”Preferred Shares as regards to payment of dividends and the right to participatein the distribution of residual assets, shall rank in priority to the rights ofthe holders of our Class “A” Common Shares, Class “E” PreferredShares and Class “F” Preferred Shares, but subordinated to the rights ofholders of our Class “B” Preferred Shares, Class “C” Preferred Sharesand Class “G” Preferred Shares.

 

(e)                                  *Redemption provisions*: Subject to the provisions of the *Companies Act* (Québec), the holders of ourClass “D” Preferred Shares have, at any time, the right to requireVideotron to redeem (referred to as a “retraction right”) any or all of their Class “D”Preferred Shares at a redemption price equal to the amount paid for such sharesin the subdivision of the issued and paid-up share capital account relating tosuch shares, plus a specified premium, if applicable, plus the amount of anydeclared and unpaid dividends.

 

In addition,Videotron may, at its option, redeem any or all of the Class “D” PreferredShares outstanding at any time at an aggregate redemption price equal to theconsideration received by Videotron for these Class “D” Preferred Shares.Videotron may also, when it deems it appropriate and without giving notice ortaking into account the other classes of shares, buy, pursuant to a privateagreement, all or some of the Class “D” Preferred Shares outstanding at apurchase price for any such Class “D” Preferred Shares not exceeding theretraction right purchase price described above or the book value of Videotron’snet assets.

 

(f)                                    *Sinking fund provisions*: None.

 

(g)                                 *Liability to further capital calls by us*: None, providedthat our directors may make calls upon the shareholders in respect of anymoneys unpaid upon their shares.

 

(h)                                 *Provisions discriminating against existing or prospective holders ofour Class “D” Preferred Shares as a result of such holder owning asubstantial number of our Class “D” Preferred Shares*: None.

 

***Class “E”Preferred Shares***

*** ***

(a)                                  *Dividend rights*: When our Board of Directors declares adividend, the holders of our Class “E” Preferred Shares have the right toreceive, in priority over the holders of our Class “A” Common Shares and Class “F”Preferred Shares, but subordinated to the holders of our Class “G”Preferred Shares, Class “C” Preferred Share and Class “E” PreferredShares, a preferential and non-cumulative dividend at the fixed rate of 1%per month, calculated on the basis of the applicable redemption value of our Class “E”Preferred Shares. A dividend may be declared and payable in cash, in kind orthrough the issuance of fully paid shares of any class of our company.

 

(b)                                 *Voting rights*: Subject to applicable law and except asexpressly otherwise provided, the holders of our Class “E” PreferredShares do not have the right to receive notice of meetings of shareholders orto attend any such meeting or vote at any such meeting.

 

(c)*                                  Rightsto share in our profits*: Other than as described in paragraph (a) above(whereby the holders of our Class “E” Preferred Shares are entitled toreceive certain dividends, if and when declared by our Board 

 

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of Directors),paragraph (d) below (whereby the holders of our Class “E”Preferred Shares are entitled to participate in the distribution of theresidual property and assets of Videotron available for distribution in theevent of our liquidation or winding-up) and paragraph (e) below(whereby the holders of our Class “E” Preferred Shares have certainredemption rights), None.

 

(d)                                 *Rights upon liquidation*: In the event of our liquidation,dissolution or other distribution of our assets among our shareholders for thepurpose of winding-up our affairs, whether voluntarily or involuntarily, theholders of the Class “E” Preferred Shares shall be shall be entitled torepayment of the amount paid for the Class “E” Preferred Shares in thesubdivision of the issued and paid-up share capital account relating to the Class “E”Preferred Shares.

 

In addition,in the event of our liquidation, dissolution or other distribution of ourassets among our shareholders for the purpose of winding-up our affairs,whether voluntarily or involuntarily, the rights of holders of Class “E”Preferred Shares as regards to payment of dividends and the right toparticipate in the distribution of residual assets, shall rank in priority tothe rights of the holders of our Class “A” Common Shares and Class “F”Preferred Shares, but subordinated to the rights of holders of our Class “B”Preferred Shares, Class “C” Preferred Shares, Class “D” PreferredShares and Class “G” Preferred Shares.

 

(e)                                  *Redemption provisions*: Subject to the provisions of the *CompaniesAct* (Québec), the holders of our Class “E” Preferred Shareshave, at any time, the right to require Videotron to redeem (referred to as a “retractionright”) any or all of their Class “E” Preferred Shares at a redemptionprice equal to the amount paid for such shares in the subdivision of the issuedand paid-up share capital account relating to such shares, plus a specifiedpremium, if applicable, plus the amount of any declared and unpaid dividends.

 

In addition,Videotron may, at its option, redeem any or all of the Class “E” PreferredShares outstanding at any time at an aggregate redemption price equal to theconsideration received by Videotron for these Class “E” Preferred Shares.Videotron may also, when it deems it appropriate and without giving notice ortaking into account the other classes of shares, buy, pursuant to a privateagreement, all or some of the Class “E” Preferred Shares outstanding at apurchase price for any such Class “E” Preferred Shares not exceeding theretraction right purchase price described above or the book value of Videotron’snet assets.

 

(f)                                    *Sinking fund provisions*: None.

 

(g)                                 *Liability to further capital calls by us*: None, providedthat our directors may make calls upon the shareholders in respect of anymoneys unpaid upon their shares.

 

(h)                                 *Provisions discriminating against existing or prospective holders ofour Class “E” Preferred Shares as a result of such holder owning asubstantial number of our Class “E” Preferred Shares*: None.

 

***Class “F”Preferred Shares***

*** ***

(a)                                  *Dividend rights*: When our Board of Directors declares adividend, the holders of our Class “F” Preferred Shares have the right toreceive, in priority over the holders of our Class “A” Common Shares, butsubordinated to the holders of our Class “B” Preferred Shares, Class “C”Preferred Shares, Class “D” Preferred Shares, Class “E” PreferredShares and Class “G” Preferred Shares, a preferential and non-cumulativedividend at the fixed rate of 1% per month, calculated on the basis of theapplicable redemption value of our Class “F” Preferred Shares. A dividendmay be declared and payable in cash, in kind or through the issuance of fullypaid shares of any class of our company.

 

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(b)                                 *Voting rights*: Subject to applicable law and except asexpressly otherwise provided, the holders of our Class “F” PreferredShares do not have the right to receive notice of meetings of shareholders orto attend any such meeting or vote at any such meeting.

 

(c)*                                  Rightsto share in our profits*: Other than as described in paragraph (a) above(whereby the holders of our Class “F” Preferred Shares are entitled toreceive certain dividends, if and when declared by our Board of Directors),paragraph (d) below (whereby the holders of our Class “F”Preferred Shares are entitled to participate in the distribution of theresidual property and assets of Videotron available for distribution in theevent of our liquidation or winding-up) and paragraph (e) below(whereby the holders of our Class “F” Preferred Shares have certainredemption rights), None.

 

(d)                                 *Rights upon liquidation*: In the event of our liquidation,dissolution or other distribution of our assets among our shareholders for thepurpose of winding-up our affairs, whether voluntarily or involuntarily, theholders of the Class “F” Preferred Shares shall be shall be entitled torepayment of the amount paid for the Class “F” Preferred Shares in thesubdivision of the issued and paid-up share capital account relating to the Class “F”Preferred Shares.

 

In addition,in the event of our liquidation, dissolution or other distribution of ourassets among our shareholders for the purpose of winding-up our affairs,whether voluntarily or involuntarily, the rights of holders of Class “F”Preferred Shares as regards to payment of dividends and the right toparticipate in the distribution of residual assets, shall rank in priority tothe rights of the holders of our Class “A” Common Shares, but subordinatedto the rights of holders of our Class “B” Preferred Shares, Class “C”Preferred Shares, Class “D” Preferred Shares, Class “E” PreferredShares and Class “G” Preferred Shares.

 

(e)                                  *Redemption provisions*: Subject to the provisions of the *Companies Act* (Québec), the holders of ourClass “F” Preferred Shares have, at any time, the right to requireVideotron to redeem (referred to as a “retraction right”) any or all of their Class “F”Preferred Shares at a redemption price equal to the amount paid for such sharesin the subdivision of the issued and paid-up share capital account relating tosuch shares, plus a specified premium, if applicable, plus the amount of anydeclared and unpaid dividends.

 

In addition,Videotron may, at its option, redeem any or all of the Class “F” PreferredShares outstanding at any time at an aggregate redemption price equal to theconsideration received by Videotron for these Class “F” Preferred Shares.Videotron may also, when it deems it appropriate and without giving notice ortaking into account the other classes of shares, buy, pursuant to a privateagreement, all or some of the Class “F” Preferred Shares outstanding at apurchase price for any such Class “F” Preferred Shares not exceeding theretraction right purchase price described above or the book value of Videotron’snet assets.

 

(f)                                    *Sinking fund provisions*: None.

 

(g)                                 *Liability to further capital calls by us*: None, providedthat our directors may make calls upon the shareholders in respect of anymoneys unpaid upon their shares.

 

(h)                                 *Provisions discriminating against existing or prospective holders ofour Class “F” Preferred Shares as a result of such holder owning asubstantial number of our Class “F” Preferred Shares*: None.

 

***Class “G”Preferred Shares***

*** ***

(a)                                  *Dividend rights*: When our Board of Directors declares adividend, the holders of our Class “G” Preferred Shares have the right toreceive, in priority over the holders of our common shares and preferred sharesof other series, a preferential and cumulative dividend, payable semi-annually,at the 

 

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fixed rate of11.25% per year, calculated daily on the basis of the applicable redemptionvalue of our Class “G” Preferred Shares. No dividends may be paid on anycommon shares or preferred shares of other series unless all dividends whichshall have become payable on the Class “G” Preferred Shares have been paidor set aside for payment.

 

(b)                                 *Voting rights*: Subject to applicable law and except as expresslyotherwise provided, the holders of our Class “G” Preferred Shares do nothave the right to receive notice of meetings of shareholders or to attend anysuch meeting or vote at any such meeting.

 

However, inthe event that we shall have failed to pay eight (8) half-yearlydividends, whether or not consecutive, on the Class “G” Preferred Shares,and only for so long as the dividend remains in arrears, the holders of Class “G”Preferred Shares shall have the right to receive notice of meetings of shareholdersand to attend and vote at any such meetings, except meetings at which onlyholders of another specified series or class of shares are entitled to vote. Ateach such meeting, each Class “G” Preferred Share shall entitle the holderthereof to one vote.

 

(c)                                  *Rights to share in our profits*: Except as described inparagraph (a) above (whereby the holders of our Class “G”Preferred Shares are entitled to receive a 11.25% cumulative preferred dividendin preference to the holders of our common shares and other series of ourpreferred shares), paragraph (d) below (whereby the holders of our Class “G”Preferred Shares are entitled to receive, in preference to the holders of ourcommon shares and other series of our preferred shares, an amount equal to$1,000 per Class “G” Preferred Share and any accumulated and unpaiddividends with respect thereto in the event of our liquidation, winding-up orreorganization) and paragraph (e) below (whereby the holders of our Class “G”Preferred Shares may require us to redeem the Class “G” Preferred Sharesat a redemption price of $1,000 per share plus any accrued and unpaid dividendswith respect thereto), None.

 

(d)                                 *Rights upon liquidation*: In the event of our liquidation,dissolution or reorganization or any other distribution of our assets among ourshareholders for the purpose of winding-up our affairs, whether voluntarily orinvoluntarily, the holders of our Class “G” Preferred Shares shall beentitled to receive in preference to the holders of our common shares and our preferredshares of other series an amount equal to $1,000 per Class “G” PreferredShare and any accrued and unpaid dividends with respect thereto.

 

Our Class “G”Preferred Shares have priority over our common shares and our preferred sharesof other series as to the order of priority of the distribution of assets incase of the liquidation or dissolution of our company, voluntary orinvoluntary, or of any other distribution of our assets to our shareholders forthe purpose of winding up our affairs.

 

(e)                                  *Redemption provisions*: Subject to the provisions of the *Companies Act* (Québec), the holders our Class “G”Preferred Shares have, at any time, the right to require Videotron to redeemany and all of their shares at a redemption price equal to $1,000 per shareplus any accrued and unpaid dividends with respect thereto. In addition, wemay, at our option, redeem any and all Class “G” Preferred Shares at anytime at a redemption price equal to $1,000 per share plus any accrued andunpaid dividends with respect thereto.

 

(f)                                    *Sinking fund provisions*: None.

 

(g)                                 *Liability to further capital calls by us*: None, providedthat our directors may make calls upon the shareholders in respect of anymoneys unpaid upon their shares.

 

(h)                                 *Provisions discriminating against existing or prospective holders ofour Class “G” Preferred Shares as a result of such holder owning asubstantial number of our Class “G” Preferred Shares*: None.

 

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***Class “H”Preferred Shares***

*** ***

(a)                                  *Dividend rights*:  Theholders of Class “H” Preferred Shares shall be entitled to receive, everyyear, in such manner and at such time as our Board of Directors may declare, anon-cumulative dividend at the fixed rate of 1% per month, calculated on theredemption price of the Class “H” Preferred Shares, payable in cash,property or through the issuance of fully paid shares of any class of theCompany.

 

(b)                                 *Voting rights*: Subject to applicable law and except asexpressly otherwise provided, the holders of our Class “H” PreferredShares do not have the right to receive notice of meetings of shareholders orto attend any such meeting or vote at any such meeting.

 

(c)                                  *Rights to share in our profits*: Except as described inparagraph (a) above (whereby the holders of our Class “H”Preferred Shares are entitled to receive, every year, in such manner and atsuch time as our Board of Directors may declare, a non-cumulative dividend atthe fixed rate of 1% per month), paragraph (d) below (whereby theholders of our Class “H” Preferred Shares are entitled to entitled torepayment of the amount paid for the Class “H” Preferred Shares in theevent of our liquidation, winding-up or reorganization) and paragraph (e) below(whereby the holders of our Class “H” Preferred Shares may require us toredeem the Class “H” Preferred Shares at a specified redemption price),None.

 

(d)                                 *Rights upon liquidation*: In the event of our liquidation,dissolution or reorganization or any other distribution of our assets among ourshareholders for the purpose of winding-up our affairs, whether voluntarily orinvoluntarily, the holders of our Class “H” Preferred Shares shall beentitled to repayment of the amount paid for the Class “H” PreferredShares into the subdivision of the issued and paid-up share capital accountrelating to the Class “H” Preferred Shares.

 

(e)                                  *Redemption provisions*: Subject to the provisions of the *Companies Act* (Québec), we may elect toredeem the Class “H” Preferred Shares at any time at a price equal to thespecified redemption price plus an amount equal to any dividends declaredthereon but unpaid up to the date of redemption. The specified redemption priceis, subject to certain conditions, equal to the aggregate considerationreceived for such share.

 

(f)                                    *Sinking fund provisions*: None.

 

(g)                                 *Liability to further capital calls by us*: None, providedthat our directors may make calls upon the shareholders in respect of anymoneys unpaid upon their shares.

 

(h)                                 *Provisions discriminating against existing or prospective holders ofour Class “H” Preferred Shares as a result of such holder owning asubstantial number of our Class “H” Preferred Shares*: None.

 

4.                                       ***Actions necessary to change the rights of shareholders.*****Under the *Companies Act*(Québec), (i) the Articles may only be amended by the affirmative vote ofthe holders of two-thirds (2/3) of the votes cast by theshareholders at a special meeting called for that purpose and (ii) ourby-laws may be amended by our directors and ratified by a majority of the votescast by the shareholders at a meeting called for such purpose  In addition, pursuant to the *Companies Act*(Québec), we may not make any amendments tothe Articles that affect the rights, conditions, privileges or restrictionsattaching to issued shares of any series outstanding, other than an increase inthe share capital or the number of our authorized shares, without obtaining theconsent of all the shareholders concerned by the amendment, whether or not theyare eligible to vote. The consent of the shareholders of any classesoutstanding with respect to the matters described in the foregoing requireseither (i) the formal authorization given by all the holders of the sharesof such class outstanding, or (ii) a resolution adopted by at leastthree-quarters (3/4) of the votes cast holders ofthe shares of such class voting on this resolution at a special general meetingheld by order and under the supervision of a judge of the Superior Court of Québec.

 

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5.                                       ***Shareholder Meetings****. *Our by-laws providethat the annual meeting of our shareholders shall be held at such place, onsuch date and at such time as our Board of Directors may determine from time totime. Annual meetings of our shareholders may be called at any time by order ofour Board of Directors, our Chairman of the Board or, provided they aremembers of our Board of Directors, the president or any vice-president of ourcompany. Special general meetings of our shareholders shall be held at suchplace, on such date and at such time as our Board of Directors may determinefrom time to time or at any place where all our shareholders entitled to voteare present in person or represented by proxy or at such other place as all ourshareholders shall approve in writing. Special general meetings of ourshareholders may be called at any time by order of our Board of Directors, ourChairman of the Board or, provided they are members of our Board ofDirectors, the president or any vice-president of our company.

 

Our by-lawsprovide that notice specifying the place, date, time and purpose of any meetingof our shareholders shall be given to all the shareholders entitled to thisnotice at least 21 days but not more than 50 days prior to the datefixed for the meeting. The notice may be mailed, postage prepaid, to theshareholders at their respective addresses as they appear on our books ordelivered by hand or transmitted by any means of telecommunication.

 

Our chairmanof the board or, in his absence, our president, if he is a director or, in hisabsence, one of our vice-presidents who is a director shall preside at allmeetings of our shareholders. If all of the aforesaid officers are absent ordecline to act, the persons present and entitled to vote may choose one oftheir number to act as chairman of the meeting.

 

Our by-lawsprovide that the holders of not less than 30% of the outstanding shares of ourshare capital carrying the right to vote at a shareholders’ meeting, present inperson or represented by proxy, shall constitute a quorum for any meeting ofour shareholders.

 

6.                                       ***Limitations on right to own securities***.**There is no limitation imposed by Canadian law or by theArticles or our other constituent documents on the right of nonresidents orforeign owners to hold or vote shares, other than as provided in the *Investment Canada Act* (Canada) and the *RadiocommunicationAct*. The *Investment Canada Act*(Canada)requires “non-Canadian” (as defined in the *Investment Canada Act*(Canada)) individuals, governments, corporations and other entities who wish toacquire control of a “Canadian business” (as defined in the *Investment Canada Act* (Canada)) to file either anapplication for review (when certain asset value thresholds are met) or a postclosing notification with the Director of Investments appointed under the *Investment Canada Act* (Canada), unless a specific exemptionapplies. The *Investment Canada Act* (Canada)requires that, when an acquisition of control of a Canadian business by a “non-Canadian”is subject to review, it must be approved by the Minister responsible for the *Investment Canada Act*(Canada) on the basis that theMinister is satisfied that the acquisition is “likely to be of net benefit toCanada”, having regard to criteria set forth in the *InvestmentCanada Act* (Canada). Radio licenses may be issued under the *Radiocommunication Act* to radiocommunication serviceproviders (“Service Providers”)that meet the eligibility criteria of Canadian ownership and control set forthin the *Canadian Telecommunications CommonCarrier Ownership and Control Regulations*  (the “CTCCOCR”).  Under the CTCCOCR, the Service Provider mayrefuse to accept any subscription for or register the transfer of any of itsvoting shares unless it receives a declaration that such subscription ortransfer would not result in the percentage of the total voting shares of theService Provider that are beneficially owned and controlled by non-Canadiansexceeding 331/3%.

 

7.                                       *Provisions that could have the effect of delaying, deferring orpreventing a change of control*: The Articles provide that ourdirectors shall refuse to issue (including on the occasion or because of aconversion of shares or in shares), and to allow a transfer of, any share ofour capital stock if this issuance or transfer would, in the opinion of ourdirectors, affect our eligibility or of any other company or partnership inwhich we have or may have an interest, to obtain, preserve or renew a licenseor authorization required for the operation or continuation of its broadcastingcompany (as defined in the *Broadcasting Act*(Canada), as amended) (or any part thereof) or 

 

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of any otheractivity necessary for the continuation of our company. See “Item 4. Informationon the Company — Regulation — Ownership and Control of CanadianBroadcast Undertakings”.

 

8.                                       Notapplicable.

 

9.                                       Notapplicable.

 

10.                                 Notapplicable.

 

**C-**                                   MATERIAL CONTRACTS

** **

The following is a summary of each material contract, other thancontracts entered into in the ordinary course of business, to which we or anyof our subsidiaries is a party, for the two years preceding publication of thisannual report.

 

(a)**                                 ****Indenturerelating to US$650,000,000 of our 6****7****/****8****% Senior Notes due January 15, 2014,dated as of October 8, 2003, by and among Videotron, the guarantors partythereto and Wells Fargo Bank Minnesota, N.A. (now Wells Fargo Bank,National Association) as trustee, as supplemented.**

** **

On October 8, 2003, we issued US$335.0 million aggregateprincipal amount of our 67/8% Senior Notes due January 15, 2014 and, on November 19,2004, we issued an additional US$315.0 million aggregate principal amountof these notes, pursuant to an Indenture, dated as of October 8, 2003, byand among Videotron, the guarantors party thereto and Wells Fargo BankMinnesota, N.A. (now Wells Fargo Bank, National Association), as trustee.These notes are unsecured and are due January 15, 2014.  Interest on these notes is payablesemi-annually in arrears on January 15 and July 15 of each year,beginning on July 15, 2004. These notes are guaranteed on a seniorunsecured basis by most, but not all, of our subsidiaries. These notes areredeemable, at our option, under certain circumstances and at the redemptionprices set forth in the indenture. The indenture contains customary restrictivecovenants with respect to us and certain of our subsidiaries and customaryevents of default. If an event of default occurs and is continuing (other thanour bankruptcy or insolvency) the trustee or the holders of at least 25% inprincipal amount at maturity of the then-outstanding notes may declare all thenotes to be due and payable immediately.

 

(b)                                 **Indenture relating to US$175,000,000 of our 6****3/****8% Senior Notes dueDecember 15, 2015, dated as of September 16, 2005, by and amongVideotron, the guarantors party thereto, and Wells Fargo Bank, NationalAssociation, as trustee.**

 

On September 16, 2005, we issued US$175,000,000 aggregateprincipal amount of our 63/8% Senior Notes due December 15, 2015, pursuantto an Indenture, dated as of September 16, 2005, by and among Videotron,the guarantors party thereto, and Wells Fargo Bank, National Association, astrustee.  These notes are unsecured andare due on December 15, 2015. Interest on these notes is payable semi-annually in arrears on June 15and December 15 of each year, beginning on December 15, 2005. Thesenotes are guaranteed on a senior unsecured basis by most, but not all, of oursubsidiaries. These notes are redeemable, at our option, under certaincircumstances and at the redemption prices set forth in the indenture. Theindenture contains customary restrictive covenants with respect to us andcertain of our subsidiaries, and customary events of default.  If an event of default occurs and iscontinuing, other than our bankruptcy or insolvency, the trustee or the holdersof at least 25% in principal amount at maturity of the then-outstanding notesmay declare all the notes to be due and payable immediately.

 

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(c)**                                  Indenturerelating to US$455,000,000 of our 9****1/****8% Senior Notes dueApril 15, 2018, dated as of April 15, 2008, by and among Videotron,the guarantors party thereto, and Wells Fargo Bank, National Association, astrustee.**

 

On April 15, 2008, we issued US$455,000,000 aggregate principalamount of our 91/8% Senior Notes due April 15, 2018, pursuant to an Indenture, dated asof April 15, 2018, by and among Videotron, the guarantors party thereto,and Wells Fargo Bank, National Association, as trustee.  These notes are unsecured and are due on April 15,2018.  Interest on these notes is payablesemi-annually in arrears on June 15 and December 15 of each year,beginning on June 15, 2008. These notes are guaranteed on a seniorunsecured basis by most, but not all, of our subsidiaries. These notes areredeemable, at our option, under certain circumstances and at the redemptionprices set forth in the indenture. The indenture contains customary restrictivecovenants with respect to us and certain of our subsidiaries, and customaryevents of default.  If an event ofdefault occurs and is continuing, other than our bankruptcy or insolvency, thetrustee or the holders of at least 25% in principal amount at maturity of thethen-outstanding notes may declare all the notes to be due and payableimmediately.

 

(d)                                 **Amendedand Restated Credit Agreement, as amended as of April 7, 2008, by andamong Videotron, as borrower, the financial institutions party thereto fromtime to time, as lenders, and Royal Bank of Canada, as administrative agent.**

** **

On April 7, 2008, Videotron amended its senior secured creditfacilities to increase commitments under the facility from $450.0 millionto $575.0 million and extend the maturity date to April 2012.  Pursuant to these amendments, Videotron may,subject to certain conditions, increase the commitments under the seniorsecured credit facilities by an additional $75.0 million (for aggregatecommitments of $650.0 million) subject to approval by existing lendersproviding such commitments or by adding new lenders.  The proceeds of our senior secured creditfacilities are to be used for general corporate purposes, including, withoutlimitation, for distributions to our shareholder in certain circumstances.

 

Borrowings under our senior secured credit facilities bear interest atthe Canadian prime rate, the bankers’ acceptance rate or LIBOR, plus, in eachcase an applicable margin. Borrowings under our senior secured creditfacilities are repayable in full in April 2012.

 

Borrowings under senior secured credit facilities and under eligiblederivative instruments are secured by a first-ranking hypothec or securityinterest (subject to certain permitted encumbrances) on all of our current andfuture assets, as well as those of the guarantors party thereto, including mostbut not all of our subsidiaries (the “Vidéotron Group”), guarantees of all themembers of the Videotron Group, pledges of the shares of Videotron and the membersof the Vidéotron Group, and other security.

 

Our senior secured credit facilities contain customary covenants thatrestrict and limit the ability of Videotron and the members of the VidéotronGroup to, among other things, enter into merger or amalgamation transactions,grant encumbrances, sell assets, pay dividends or make other distributions,issue shares of capital stock, incur indebtedness and enter into related partytransactions. In addition, our senior secured credit facilities contain customaryfinancial covenants and customary events of default, including the non-paymentof principal or interest, the breach of any financial covenant, the failure toperform or observe any other covenant, certain bankruptcy events relating to usand the members of the Videotron group, and the occurrence of a change ofcontrol.

 

(e)                                  **Back-to-back transaction agreement, effective as of January 3,2007, by and between Quebecor Media and Videotron (partly redeemed on December 23,2008).**

** **

On January 3, 2007, we entered in a back-to-back transaction bycontracting a subordinated loan of $1.0 billion from Quebecor Media andused the entire proceeds of this borrowing to purchase 1,000,000 

 

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Preferred Shares, Series B of 9101-0835 Québec inc., a subsidiaryof Quebecor Media. The subordinated loan bears interest at a rate of 10.5%,payable semi-annually, and matures on January 3, 2022. The PreferredShares, Series B carry the right to receive a cumulative annual dividendof 10.85% payable semi-annually. On December 23, 2008, 9101-0835 QuébecInc. redeemed 525,000 preferred shares, Series B, for a total cashconsideration of $525.5 million, including cumulative dividends of $0.5million. On the same day, the Company used the total proceeds of$525.0 million to repay a part of its subordinated loan contracted fromQuebecor Media on January 3, 2007. See also Note 9 to our consolidated financial statements included under “Item17. Financial Statements” of this annual report.

 

(f)**                                    Back-to-backtransaction agreement, effective as of May 31, 2007, by and betweenQuebecor Media and Videotron.**

** **

On May 31, 2007, we entered in a back-to-back transaction bycontracting a subordinated loan of $870.0 million from Quebecor Media and usedthe entire proceeds of this borrowing to purchase 870,000 Preferred Shares, Series Bof 9101-0835 Québec inc., a subsidiary of Quebecor Media. The subordinated loanbears interest at a rate of 10.5%, payable semi-annually, and matures on May 31,2022. The Preferred Shares, Series B carry the right to receive acumulative annual dividend of 10.85% payable semi-annually. See also Note 6 toour consolidated financial statements included under “Item 17. FinancialStatements” of this annual report.

 

(g)**                                 Back-to-backtransaction agreement, effective as of May 31, 2007, by and betweenQuebecor Media and CF Cable TV Inc., a wholly-owned subsidiary of Vidéotron.**

** **

On May 31, 2007, CF Cable TV inc., a wholly-owned subsidiary ofthe Company, entered into back-to-back transaction by contracting asubordinated loan of $125.0 million from Quebecor Média Inc. and invested the$125 million into 125,000 preferred shares, Series B, of 9101-0835 QuébecInc., a subsidiary of Quebecor Média Inc. The subordinated loan bears interestat a rate of 10.5% payable every six months on June 20 and December 20,and matures on May 31, 2022. The preferred shares carry the right toreceive a cumulative annual dividend of 10.85%, payable semi-annually. See alsoNote 6 to our consolidated financialstatements included under “Item 17. Financial Statements” of this annualreport.

 

(h)                                 **Back-to-back transaction agreement, effective as of January 4,2008, by and between Quebecor Media and Vidéotron.**

** **

On January 4, 2008, the Company contracted a subordinated loan of$415.0 million from Quebecor Média Inc., bearing interest at a rate of 10.5%,payable every six months on June 20 and December 20, and maturing on January 4,2023. on the same day, the company invested the total proceeds of $415.0million into 415,000 preferred shares, Series B, of 9101-0835 Québec inc.,a subsidiary of Quebecor Media Inc. These shares carry the right to receive anannual dividend of 10.85%, payable semi-annually. See also Note 6 to our consolidated financial statements includedunder “Item 17. Financial Statements” of this annual report.

 

(i)                                     **Back-to-back transaction agreement, effective as of January 4,2008, by and between Quebecor Media and CF Cable TV Inc., a wholly-ownedsubsidiary of Videotron.**

** **

On January 4, 2008, CF Cable TV inc., a wholly-owned subsidiary ofVideotron, contracted a subordinated loan of $170.0 million from QuebecorMedia, bearing interest at a rate of 10.5%, payable every six months on June 20and December 20, and maturing on January 4, 2023. On the same day, CFCable TV Inc. invested the total proceeds of $170.0 million into 170,000preferred shares, Series B, of 9101-0835 Québec inc., a subsidiary ofQuebecor Media.  These shares carry theright to receive an annual dividend of 10.85%, payable semi-annually. See alsoNote 9 to our consolidated financialstatements included under “Item 17. Financial Statements” of this annualreport.

 

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**D-**                                   Exchange Controls

** **

There are currently no laws, decrees, regulations or other legislationin Canada that restricts the export or import of capital, or affects theremittance of dividends, interest or other payments to non-resident holders ofour securities, other than withholding tax requirements. See “— Taxation —Canadian Material Federal Income Tax Considerations for Residents of the UnitedStates” below.

 

There is no limitation imposed by Canadian law or by the Articles orour other charter documents on the right of a non-resident to hold our votingshares, other than as provided by the *Investment Canada Act*,as amended (the “Act”), as amended by the *North American Free TradeAgreement Implementation Act*(Canada), and the *World TradeOrganization (WTO) Agreement Implementation Act*. The Act requiresnotification and, in certain cases, advance review and approval by theGovernment of Canada of the acquisition by a “non-Canadian” of “control of aCanadian business”, all as defined in the Act. Generally, the threshold forreview will be higher in monetary terms for a member of the WTO or NAFTA. Inaddition, there are regulations related to the ownership and control ofCanadian broadcast undertakings. See “Item 4. Information on theCompany — Regulation”.

 

**E-**                                     Taxation

** **

**Certain U.S.Federal Income Tax Considerations**

** **

The followingdiscussion is a summary of certain U.S. federal income tax consequencesapplicable to the purchase, ownership and disposition of (i) our 63/8% Senior Notes due 2015 (our “63/8% Senior Notes”) and (ii) our 67/8% Senior Notes due 2014 (our “67/8% Senior Notes” and, together with our 63/8% Senior Notes, the “notes”) by a U.S. Holder(as defined below), but does not purport to be a complete analysis of allpotential U.S. federal income tax effects. Our 67/8%Senior Notes were issued in two issuances, on October 8, 2003 (the “first67/8% Senior Notes issuance”) and November 19,2004 (the “second 67/8% Senior Notes issuance”),under the same indenture.  This summaryis based on the Internal Revenue Code of 1986, as amended (the “Code”),U.S. Treasury regulations promulgated thereunder, Internal Revenue Service(“IRS”) rulings and judicial decisions now in effect. All of these are subjectto change, possibly with retroactive effect, or different interpretations.

 

This summarydoes not address all aspects of U.S. federal income taxation that may berelevant to particular U.S. Holders in light of their specificcircumstances (for example, U.S. Holders subject to the alternativeminimum tax provisions of the Code) or to holders that may be subject tospecial rules under U.S. federal income tax law, including:

 

·                  dealers in stocks, securities orcurrencies;

 

·                  securities traders that use amark-to-market accounting method;

 

·                  banks and financial institutions;

 

·                  insurance companies;

 

·                  regulated investment companies;

 

·                  real estate investment trusts;

 

·                  tax-exempt organizations;

 

·                  persons holding notes as part of ahedging or conversion transaction or a straddle;

 

·                  persons deemed to sell notes underthe constructive sale provisions of the Code;

 

·                  persons who or that are, or maybecome, subject to the expatriation provisions of the Code;

 

·                  persons whose functional currency isnot the U.S. dollar; and

 

·                  direct, indirect or constructiveowners of 10% or more of our outstanding voting shares.

 

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The summaryalso does not discuss any aspect of state, local or foreign law, orU.S. federal estate and gift tax law as applicable toU.S. Holders.  In addition, thisdiscussion is limited to U.S. Holders that acquired notes pursuant to therespective exchange offers that we filed with the Securities and ExchangeCommission on January 8, 2004 (in respect of the first 67/8% Senior Notes issuance), on January 18, 2005 (in respect of thesecond 67/8% Senior Notes issuance), and on December 16, 2005 (in respect of our63/8% Senior Notes).  Moreover, thediscussion is limited to U.S. Holders who acquire and hold the notes as “capital assets” within the meaning of Section 1221of the Code (generally, property held for investment). In addition, thissummary assumes that the notes are properly characterized as debt that is notcontingent debt for U.S. federal income tax purposes.

 

For purposes of this summary, “U.S. Holder” means the beneficialholder of a note who or that for U.S. federal income tax purposes is:

 

·                  an individual citizen or residentalien of the United States;

 

·                  a corporation or other entity treatedas such formed in or under the laws of the United States, any statethereof or the District of Columbia;

 

·                  an estate, the income of which issubject to U.S. federal income taxation regardless of its source; or

 

·                  a trust, if a court within theUnited States is able to exercise primary supervision over the administrationof such trust and one or more “U.S. persons” (within the meaning of theCode) have the authority to control all substantial decisions of the trust, orif a valid election is in effect to be treated as a U.S. person.

 

No ruling hasbeen or will be sought from the IRS with respect to the matters discussedbelow. There can be no assurance that the IRS will not take a differentposition concerning the tax consequences of the purchase, ownership ordisposition of the notes or that any such position will not be sustained.

 

If apartnership or other entity or arrangement treated as a partnership forU.S. federal income tax purposes holds the notes, the U.S. federalincome tax treatment of a partner generally will depend on the status of thepartner and the activities of the partnership. Such partner should consult itsown tax advisor as to the tax consequences of the partnership purchasing,owning and disposing of the notes.

 

To ensure compliance with requirements imposed by the IRS, you arehereby informed that the United States tax advice contained herein: (i) iswritten in connection with the promotion or marketing by Videotron of thetransactions or matters addressed herein, and (ii) is not intended orwritten to be used, and cannot be used by any taxpayer, for the purpose ofavoiding United States tax penalties. Each taxpayer should seek advicebased on the taxpayer’s particular circumstances from an independent taxadvisor.

 

U.S. INVESTORSSHOULD CONSULT THEIR OWN TAX ADVISORS WITH REGARD TO THE APPLICATION OF THE TAXCONSEQUENCES DESCRIBED BELOW TO THEIR PARTICULAR SITUATIONS AS WELL AS THEAPPLICATION OF ANY STATE, LOCAL, FOREIGN OR OTHER TAX LAWS, INCLUDING GIFT ANDESTATE TAX LAWS.

 

***Interest onthe Notes***

*** ***

Payments ofstated interest on the notes generally will be taxable to a U.S. Holder asordinary income at the time that such payments are received or accrued, inaccordance with the U.S. Holder’s method of accounting forU.S. federal income tax purposes. Interest on the notes will constituteincome from sources outside the United States and generally, with certainexceptions, for taxable years beginning after December 31, 2006, will be “passivecategory income” which is treated separately from other income for purposes ofcomputing the foreign tax credit allowable to a U.S. Holder under thefederal income tax laws. Due to the complexity of the foreign tax credit rules,U.S. Holders should consult their own tax advisors with respect to the amountof foreign taxes that may be claimed as a credit.

 

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In certaincircumstances we may be obligated to pay amounts in excess of stated interestor principal on the notes or may make payments or redeem the notes in advanceof the expected maturity of the notes. According to U.S. Treasuryregulations, the possibility that any such payments or redemptions will be madewill not affect the amount of interest income a U.S. Holder recognizes ifthere is only a remote chance as of the date the notes were issued that suchpayments will be made. We believe the likelihood that we will make any suchpayments is remote. Therefore, we do not intend to treat the potential paymentsor redemptions pursuant to the provisions related to changes in Canadian lawsor regulations applicable to tax-related withholdings or deductions, theregistration rights provisions, or the other redemption and repurchaseprovisions as part of the yield to maturity of the notes or as affecting thetax treatment of the notes. Our determination that these contingencies areremote is binding on a U.S. Holder unless such holder discloses itscontrary position in the manner required by applicable U.S. Treasury regulations.Our determination is not, however, binding on the IRS, and if the IRS were tochallenge this determination, a U.S. Holder may be required to accrueincome on its notes in excess of stated interest and to treat as ordinaryincome rather than capital gain any income realized on the taxable dispositionof a note before the resolution of the contingencies. In the event acontingency occurs, it would affect the amount and timing of the incomerecognized by a U.S. Holder. If we pay additional amounts on the notes,U.S. Holders will be required to recognize such amounts as income.

 

In the issuance of our 63/8% Senior Notes and in the first 67/8% Senior Notes issuance, the noteswere issued with a *de minimis*amount of original issue discount (“OID”). OID is the excess, if any, of a note’s “stated redemption price atmaturity” over its “issue price”.  A note’sstated redemption price at maturity is the sum of all payments provided by thenote other than payments of qualified stated interest (i.e., stated interestthat is unconditionally payable in cash or other property (other than debt ofthe issuer)).  The “issue price” is the firstprice at which a substantial amount of the notes in the issuance that includesthe notes is sold (excluding sales to bond houses, brokers or similar personsor organizations acting in the capacity of underwriters, agents orwholesalers).  The amount of originalissue discount with respect to a note will be treated as zero if it is lessthan an amount equal to 0.0025 multiplied by the product of the statedredemption price at maturity and the number of complete years to maturity (orweighted average maturity, as applicable) (“*de minimis* OID”).  Generally, any *de minimis*OID must be included in income as principal payments are received on thesecurities in the proportion that each such payment bears to the originalprincipal balance of the security. The treatment of the resulting gain is subject to thegeneral rules discussed under “—Sale, Exchange or Retirement of a Note”below.

 

***MarketDiscount and Bond Premium***

*** ***

If a U.S.Holder purchases notes for an amount less than their stated redemption price atmaturity, the difference is treated as market discount.  Subject to a *de minimis*exception, gain realized on the maturity, sale, exchange or retirement of amarket discount note will be treated as ordinary income to the extent of anyaccrued market discount not previously recognized (including in the case of anote exchanged for a registered note pursuant to the registration offer, any marketdiscount accrued on the related outstanding note).  A U.S. Holder may elect to include marketdiscount in income currently as it accrues, on either a ratable or constantyield method.  In that case, a U.S.Holder’s tax basis in its notes will increase by such income inclusions.  An election to include market discount inincome currently, once made, will apply to all market discount obligationsacquired by the U.S. Holder during the taxable year of the election andthereafter, and may not be revoked without the consent of the IRS.  If a U.S. Holder does not make such anelection, in general, all or a portion of such holder’s interest expense on anyindebtedness incurred or continued in order to purchase or carry notes may bedeferred until the maturity of the notes, or certain earlier dispositions.  Unless a U.S. Holder elects to accrue marketdiscount under a constant yield method, any market discount will accrue ratablyduring the period from the date of acquisition of the related outstanding noteto its maturity date.

 

If a U.S.Holder purchases notes for an amount greater than the sum of all amounts (otherthan qualified stated interest) payable with respect to the notes after thedate of acquisition, such holder will have purchased such notes with amortizablebond premium.  A U.S. Holder generallymay elect to amortize that premium from the purchase date to the maturity dateof the notes under a constant yield method. Amortizable premium generally may be deducted against interest income onsuch notes and generally may not be deducted against other income.  A U.S. Holder’s basis in a note will bereduced by any premium amortization deductions. An election to amortize premium on a constant yield method, once made,generally applies to all debt obligations held or subsequently acquired by aU.S. Holder during the taxable 

 

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year of the election and thereafter, and may not be revoked without IRSconsent.  The notes in the second 67/8% Senior Notes issuance were issued withamortizable bond premium.

 

The marketdiscount and bond premium rules are complicated, and U.S. Holders areurged to consult their own tax advisors regarding the tax consequences ofowning and disposing of notes with market discount or bond premium, includingthe availability of certain elections.

 

***Sale, Exchangeor Retirement of a Note***

*** ***

A U.S. Holder generally will recognize gain or loss upon the sale,exchange (other than in a tax-free transaction), redemption, retirement orother taxable disposition of a note, equal to the difference, if any, between:

** **

·                                        the amount ofcash and the fair market value of any property received (less any portionallocable to the payment of accrued interest not previously included in income,which amount will be taxable as ordinary interest income); and

 

·                                        theU.S. Holder’s adjusted tax basis in the note.

 

Any such gainor loss generally will be capital gain or loss (except as described under “—MarketDiscount and Bond Premium” above) and generally will be long-term capital gainor loss if the note has been held or deemed held for more than one year at thetime of the disposition. Long-term capital gains of noncorporateU.S. Holders, including individuals, may be taxed at lower rates thanitems of ordinary income. The ability of a U.S. Holder to offset capitallosses against ordinary income is limited. Any capital gain or loss recognizedby a U.S. Holder on the sale or other disposition of a note generally willbe treated as income from sources within the United States or lossallocable to income from sources within the United States. U.S. Holdersshould consult their own tax advisors regarding the source of gain attributableto market discount. Any loss attributable to accrued but unpaid interest willbe allocated against income of the same category and source as the interest on thenotes unless certain exceptions apply. A U.S. Holder’s adjusted tax basisin a note will generally equal the U.S. Holder’s cost therefor, increasedby the amount of market discount, if any, previously included in income inrespect of the note and decreased (but not below zero) by the amount ofprincipal payments received by such U.S. Holder in respect of the note, anyamounts treated as a return of pre-issuance accrued interest and the amount ofamortized bond premium, if any, previously taken into account with respect tothe note.

 

***InformationReporting and Backup Withholding***

*** ***

A U.S. Holder of the notes may be subject to “backup withholding”with respect to certain “reportable payments”, including interest payments and,under certain circumstances, principal payments on the notes or upon thereceipt of proceeds upon the sale or other disposition of such notes. Thesebackup withholding rules apply if the U.S. Holder, among otherthings:

 

·                                        fails tofurnish a social security number or other taxpayer identification number (“TIN”)certified under penalty of perjury within a reasonable time after the requestfor the TIN;

 

·                                        furnishes anincorrect TIN;

 

·                                        is notified bythe IRS that it has failed to report properly interest or dividends; or

 

·                                        under certaincircumstances, fails to provide a certified statement, signed under penaltiesof perjury, that the TIN furnished is the correct number and that such holderis not subject to backup withholding.

 

AU.S. Holder that does not provide us with its correct TIN also may besubject to penalties imposed by the IRS. Any amount withheld from a payment toa U.S. Holder under the backup withholding rules is creditableagainst the U.S. Holder’s federal income tax liability, *provided* that the required information istimely furnished to the IRS. Backup 

 

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withholding will not apply, however, with respect to payments made tocertain exempt U.S. Holders, including corporations and tax-exemptorganizations, *provided* theirexemptions from backup withholding are properly established.

 

We will reportto U.S. Holders and to the IRS the amount of any “reportable payments” foreach calendar year and the amount of tax withheld, if any, with respect tothese payments.

** **

**CanadianMaterial Federal Income Tax Considerations for Residents of the United States**

** **

The followingsummary fairly describes the main Canadian federal income tax consequencesapplicable to you if you invested, as initial purchaser or through a subsequentinvestment, in any of our 6 7/8%Senior Notes due January 15, 2014 or 6 3/8%Senior Notes due December 15, 2015 (which we refer to, collectively, asthe “notes”), and you hold such notes as capital property for purposes of the *Income Tax Act* (Canada), which we refer to as the Act.Generally, a note will be considered to be capital property to a holder *provided* the holder does not hold the note in the course ofcarrying on a business and has not acquired the note in one or moretransactions considered to be an adventure or concerns in the nature of trade.This summary is based on the Canada-United States Income Tax Convention(1980), as amended, or the Convention, the relevant provisions of the Act andthe Regulations thereunder, or the Regulations, as in force on the date hereof,and counsel’s understanding of the administrative practices of the CanadaRevenue Agency. It assumes that the specific proposals to amend the Act and theRegulations publicly announced by the Minister of Finance of Canada prior tothe date of this annual report are enacted in their present form, but the Actor the Regulations may not be amended as proposed or at all. This summary doesnot address provincial, territorial or foreign income tax considerations.Changes in the law or administrative practices or future court decisions mayaffect your tax treatment.

 

The followingcommentary is generally applicable to a holder who, at all times for purposesof the Act, deals at arm’s length with us and is neither an insurer who carrieson an insurance business in Canada nor an authorized foreign bank and who, atall times for the purposes of the Convention and the Act, is a resident of theUnited States, is not and is not deemed to be a resident of Canada and does notuse or hold, and is not deemed to use or hold the notes in the course ofcarrying on a business in Canada, who we refer to as a U.S. Holder.

 

***InterestPayments***

*** ***

A U.S. Holder will not be subject to tax (including withholding tax)under the Act on interest, principal or premium on the notes.

 

***Dispositions***

*** ***

Gains realized on the disposition or deemed disposition of notes by aU.S. Holder will not be subject to tax under the Act.

 

**The preceding discussions of federal incometax consequences is for general information only and is not legal or taxadvice. Accordingly, you should consult your own tax advisor as to particulartax consequences of purchasing, holding, and disposing of the notes, includingthe applicability and effect of any state, provincial, territorial, local orforeign tax laws, and of any proposed changes in applicable laws.**

** **

**F-**                                     Dividends andPaying Agents

** **

Not applicable.

 

**G-**                                   Statement By Experts

** **

Not applicable.

 

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**H-**                                   Documents on Display

** **

We file periodic reports and other information with the SEC. Thesereports include certain financial and statistical information about us and maybe accompanied by exhibits. You may read and copy this information at the SEC’sPublic Reference Room at 100 F Street, N.E., Room 1580,Washington, D.C. 20549, or obtain copies of this information by mail fromthe public reference room at the prescribed rates.  You may call the SEC at 1-800-SEC-0330 forfurther information on the SEC’s Public Reference Room.  The SEC also maintains an Internet websitethat contains reports and other information about issuers like us who fileelectronically with the SEC. The URL of that website is http://www.sec.gov. Anydocuments referred to in this annual report may also be inspected at ouroffices at 612 St. Jacques Street, Montréal, Québec, Canada, H3C 4M8.

 

**I-**                                        SubsidiaryInformation

** **

Not applicable.

 

## **ITEM 11 -QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

##  

Videotron’sfinancial risk management policies have been established to identify andanalyze the risks faced by Videotron, to set appropriate risk limits andcontrols, and to monitor risks and adherence to limits.  Risk management policies are reviewedregularly to reflect changes in market conditions and Videotron’s activities.

 

From its use of financial instruments, Videotron is exposed to creditrisk, liquidity risk, and market risks relating to foreign exchangefluctuations, interest rate fluctuations and equity prices.  In order to manage its foreign exchange andinterest rate risks, Videotron and its subsidiaries use derivative financialinstruments (i) to achieve a targeted balance of fixed and variable ratedebts and (ii) to set in Canadian dollars all future payments on debtsdenominated in U.S. dollars (interest and principal) and certain purchases ofinventory and other capital expenditures denominated in a foreigncurrency.  Videotron does not intend tosettle its financial derivative instruments prior to their maturity as none ofthese instruments are held or issued for speculative purposes.  Videotron designates its derivative financialinstruments either as fair value hedges or cash flow hedges when they qualityfor hedge accounting.

 

These instruments are used solely to manage the financial risksassociated with our obligations and are not used for trading or speculationpurposes.

 

**ForeignCurrency Risk**

** **

Most of our revenues and expenses, other than interest and principalpayments on U.S. dollar-denominated debt, purchases of set-top boxes andcable modems and certain capital expenditures, including those related to thebuildout of our wireless network, are received or denominated in Canadiandollars. A large portion of the interest, principal and premium, if any,payable on our debt must be paid in U.S. dollars. We have entered intotransactions to hedge the foreign currency risk exposure on 100% of ourU.S. dollar-denominated debt obligations outstanding as of December 31,2008 and to hedge our exposure on certain purchases of set-top boxes, cablemodems and capital expenditures.

 

***Foreign exchange forward contracts:***

 
| **Currencies (sold/bought)** | ** ** | **Maturing**     | ** ** | **Weighted Average  Exchange Rate** | ** ** | **Notional Amount (in  millions of dollars)** | ** ** |
|-----------------------------------|------------|------------------|------------|-----------------------------------------------|------------|-------------------------------------------------------------------|------------|
|                              | ** ** | ** **       | ** ** | ** **                                    | ** ** | ** **                                                        | ** ** |
| $ / US$                      |       | Less than 1 year |       | 1.0865                                        |       | $                                                                 | 75.5       |   |
|                                   |            |                  |            |                                               |            |                                                                   |            |  |

 

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**Interest RateRisk**

** **

Our senior secured credit facilities bear interest at floating ratesbased on the following reference rates: (i) bankers’ acceptances rate(BA), (ii) London Interbank Offered Rate (LIBOR) and (iii) bank primerate (Prime). Our 91/8% Senior Notes due 2018, our 63/8% Senior Notes due 2015 and our 67/8% SeniorNotes due 2014 bear interest at fixed rates. We have entered into variousinterest rate and cross-currency interest rate swap agreements in order tomanage our cash flow and fair value risk exposure to changes in interest rates.

** **

**Cross-Currency Interest Rate Swaps**

 

| ** **   | ** ** | **Period covered** | ** ** | **Notional  amount (in  millions of  dollars)** | ** ** | **Annual effective  interest rateusing  hedged rate** | ** **                                        | **Annual nominal  interest rate of  debt** | ** ** | **CDN dollar exchange  rate on interest and  capital payments per  one U.S. dollar** | ** ** |
|--------------|------------|--------------------|------------|-------------------------------------------------|------------|-------------------------------------------------------|---------------------------------------------------|--------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|
|         |       |               |       |                                            |       |                                                  |                                              |                                       |       |                                                                                 |       |
| Senior Notes |       | 2004 to 2014       |       | US$                                             | 190.0      |                                                  | Bankers’ acceptance 3 months plus 2.80% |                                       | 6.875      | %                                                                                    | 1.2000     |   |
|         |       |               |       |                                            |       |                                                  |                                              |                                       |       |                                                                                 |       |
| Senior Notes |       | 2004 to 2014       |       | US$                                             | 125.0      |                                                  | 7.45%                                             |                                       | 6.875      | %                                                                                    | 1.1950     |   |
| Senior Notes |       | 2003 to 2014       |       | US$                                             | 200.0      |                                                  | Bankers’ acceptance 3 months plus 2.73% |                                       | 6.875      | %                                                                                    | 1.3425     |   |
|         |       |               |       |                                            |       |                                                  |                                              |                                       |       |                                                                                 |       |
| Senior Notes |       | 2003 to 2014       |       | US$                                             | 135.0      |                                                  | 7.66%                                             |                                       | 6.875      | %                                                                                    | 1.3425     |   |
| Senior Notes |       | 2005 to 2015       |       | US$                                             | 175.0      |                                                  | 5.98%                                             |                                       | 6.375      | %                                                                                    | 1.1781     |   |
| Senior Notes |       | 2008 to 2018       |       | US$                                             | 455.0      |                                                  | 9.65%                                             |                                       | 9.125      | %                                                                                    | 1.0210     |   |

** **

**Credit Risk**

** **

Credit risk isthe risk of financial loss to Videotron if a customer or counterparty to afinancial asset fails to meet its contractual obligations.

 

In the normalcourse of business, Videotron continuously monitors the financial condition ofits customers and reviews the credit history of each new customer.  As of December 31, 2008, nocustomer balance represented a significant portion of Videotron’s consolidatedtrade receivables.  Videotron establishesan allowance for doubtful accounts based on the specific credit risk of itscustomers and historical trends.  Theallowance for doubtful accounts amounted to $16.0 million as of December 31, 2008($11.7 million as of December 31, 2007).  As of December 31, 2008, 8.9% oftrade receivables were 90 days past their billing date (7.0% as of December 31, 2007).

 

Videotronbelieves that its product lines and the diversity of its customer base areinstrumental in reducing its credit risk, as well as the impact of fluctuationsin product-line demand.  Videotron doesnot believe that it is exposed to an unusual level of customer credit risk.

 

From the useof derivative financial instruments, Videotron is exposed to the risk of non-performanceby a third party.  When Videotron entersinto derivative contracts, the counterparties (either foreign or Canadian) musthave credit ratings at least in accordance with Videotron’s credit risk managementpolicy and are subject to concentration limits. Given the high minimum credit ratings required under Videotron’s policy,Videotron does not foresee any failure by counterparties to meet theirobligations.

 

**Fair Value ofFinancial Instruments**

** **

The carryingamount of accounts receivable from external or related parties (classified asloans and receivables), accounts payable and accrued charges to external orrelated parties (classified as other liabilities) approximates their fair valuesince these items will be realized or paid within one year or are due ondemand.

 

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The carryingvalues and fair value of long-term debt and derivative financial instruments asof December 31, 2008 and 2007 are as follows:

 

| ** **                         | ** ** | **December 31, 2008** | ** ** | **December 31, 2007** | ** ** |
|------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                         | ** ** | **Carrying value**         | ** ** | **Fair value**             | ** ** | **Carrying value** | ** ** | **Fair value** | ** ** |
|                               |       |                            |       |                            |       |   |   |   |   |
| Long-term debt (1)                 |       | $                               | (1,766,668 | )                               | $          | (1,577,000 | ) | $ | (973,355 | ) | $ | (938,158 | ) |
| Cross-currency interest rate swaps |       | 69,486                          |       | 69,486                          |       | (241,320 | ) | (241,320 | ) |
| Foreign exchange forward contracts |       | 9,013                           |       | 9,013                           |       | (4,236 | ) | (4,236 | ) |
|                                    |            |                                 |            |                                 |            |  |  |  |  |  |  |  |  |

 

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(1)                        The carrying value of long-term debt excludesadjustments to record changes in fair value of long-term debt related to hedgesinterest risk, the embedded derivatives and the financing fees.

 

The fair valueof long-term debt is estimated based on discounted cash flows using year-endmarket yields or market value of similar instruments with the same maturity, orquoted market prices when available.  Themajority of derivative financial instruments (e.g. cross currency interest rateswaps) are traded over the counter and, as such, there are no quotedprices.  The fair value of derivativefinancial instruments is therefore estimated using valuation models thatproject future cash flows and discount the future amounts to a present valueusing the contractual terms of the derivative instrument and factors observablein external markets, such as period-end swap rates and foreign exchangerates.  An adjustment is also included toreflect non-performance risk, impacted by the financial and economicenvironment prevailing at the date of the valuation, in the recognized measureof fair value of the derivative instruments by applying a credit defaultpremium to a net exposure by the counterparty or by Videotron.  The fair value of early settlement optionsrecognized as embedded derivatives is determined by option pricing models usingmarket inputs and assumptions, including volatility and discount factors.

 

Due to the judgment used in applying a widerange of acceptable techniques and estimates in calculating fair value amounts,fair values are not necessarily comparable among financial institutions orother market participants and may not be realized in an actual sale orimmediate settlement of the instrument.

 

***MaterialLimitations***

*** ***

Fair value estimates are made at a specific point in time and are basedon relevant market information about the financial instruments. These estimatesare subjective in nature and involve uncertainties and matters of significantjudgment and therefore cannot be determined with precision. Changes inassumptions could significantly affect the estimates.

 

**PrincipalRepayments**

** **

As at December 31, 2008, the aggregate amount of minimum principalpayments on long-term debt required in each of the next five years andthereafter based on borrowing levels as at that date, are as follows:

 
| **Year ending December 31, ** | ** ** | **(in thousands of  dollars) ** | ** ** |
|---------------------------------------------------|------------|------------------------------------------------|------------|
| 2009                                              |       | $                                              | —     |   |
| 2010                                              |       | $                                              | —     |   |
| 2011                                              |       | $                                              | —     |   |
| 2012                                              |       | $                                              | 207.7      |   |
| 2013                                              |       | $                                              | —     |   |
| 2014 and thereafter                               |       | $                                              | 1,559.0    |   |

 

## **ITEM 12 -DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES**

##  

Not applicable.

 

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# **PART II**

#  

## **ITEM 13 -DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES**

##  

None.

 

## **ITEM 14 - MATERIALMODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS**

##  

**MaterialModifications to the Rights Of Security Holders**

** **

There have been no material modifications to the rights of securityholders.

 

**Use ofProceeds**

** **

Not applicable.

 

## **ITEM 15 - CONTROLSAND PROCEDURES**

##  

As at the end of the period covered by this report, Videotron’s President and Chief Executive Officer and Videotron’s VicePresident, Finance and Chief Financial Officer, together with members of Videotron’s senior management, have carried out an evaluation of the effectiveness of Videotron’s disclosure controls and procedures. These are defined (in Rule 13a-15(e) or15d-15(e) under the Securities Exchange Act of 1934, as amended) ascontrols and procedures designed to ensure that information required to bedisclosed in reports filed under the Exchange Act is recorded, processed,summarized and reported within specified time periods. As of the date of theevaluation, Videotron’s President and Chief Executive Officer and Videotron’s Vice President, Finance and Chief Financial Officer, concluded that Videotron’s disclosure controls and procedures were effective to ensure that information required to be disclosedin the reports that Videotron files or submits under the Exchange Act isaccumulated and communicated to management, including the company’s principalexecutive and principal financial officer, to allow timely decisions regardingdisclosure.

 

Videotron’s management isresponsible for establishing and maintaining adequate internal control overfinancial reporting of the company (as defined by Rules 13a-15(f) and15d-15(f) under the Securities Exchange Act of 1934).  Videotron’s internal control over financialreporting is a process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accountingprinciples. Our internal control over financial reporting includes thosepolicies and procedures that (i) pertain to the maintenance of recordsthat, in reasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of Videotron; (ii) provide reasonable assurancethat transactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, andthat receipts and expenditures of Videotron are being made only in accordancewith authorizations of Videotron’s management and directors; and (iii) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of Videotron’s assets that could have amaterial effect on the financial statements. Because of its inherentlimitations, internal controls over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

 

Videotron’s managementconducted an evaluation of the effectiveness of internal control over financialreporting based on the framework in *Internal Control —Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission. Based on this evaluation, managementconcluded that Videotron’s internal control over financial reporting waseffective as of December 31, 2008.

 

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Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 andrelated temporary SEC rules, this annual report does not include an attestationreport of Videotron’s registered public accounting firm regarding our internalcontrol over financial reporting.  Ourmanagement’s report regarding the effectiveness of our internal control overfinancial reporting was not subject to attestation by our registered publicaccounting firm pursuant to temporary rules of the SEC that permit us toprovide only management’s report in this annual report.

 

There have been no changes in Videotron’s internal control overfinancial reporting (as defined in Rule 13a-15 or 15d-15 under the ExchangeAct) that occurred during the period covered by this annual report that havematerially affected, or are reasonably likely to materially affect, Videotron’sinternal control over financial reporting.

 

## **ITEM 16 -  [RESERVED]**

## ** **

### **ITEM 16A - AUDITCOMMITTEE FINANCIAL EXPERT**

### ** **

Our Board of Directors has determined that Mr. La Couture is an “auditcommittee financial expert” (as defined in Item 16A of Form 20-F)serving on our Audit Committee.  OurBoard of Directors has determined that Mr. La Couture is an “independent”director, as defined under SEC rules.

 

### **ITEM 16B - CODE OFETHICS**

### ** **

We have a code of ethics(as defined in Item 16B of Form 20-F) that applies to alldirectors, officers and employees of Videotron, including our Chief Executive Officer, Chief FinancialOfficer, principal accounting officer, controller and persons performingsimilar functions.  In 2008 we adopted arestated Code of Ethics which effects a general update of the Code of Ethicsthat we originally adopted in 2003, as well as a new section specificallysetting forth our commitment to respect for the environment and compliance withenvironmental laws and regulations.  Wehave filed a copy of our new Code of Ethics as an exhibit to this annual reporton Form 20-F.

 

### **ITEM 16C - PRINCIPALACCOUNTANT FEES AND SERVICES**

### ** **

Ernst & Young LLP has served as our independent publicaccountant for the fiscal year ended December 31, 2008.  Prior to this year, KPMG LLP served asour independent public accountant, including for the fiscal years ended December 31,2007 and December 31, 2006.  Theaudited financial statements for each of the fiscal years in the three-yearperiod ended December 31, 2008 are included in this annual report on Form 20-F.

 

The Audit Committee establishes theindependent auditors’ compensation. In November 2008, the Audit Committeereviewed its policy relating to the pre-approval of services to be rendered byits independent auditors.  The AuditCommittee pre-approved all audit services, determined which non-audit servicesthe independent auditors are prohibited from providing, and authorizedpermitted non-audit services to be performed by the independent auditors to theextent those services are permitted by the Sarbanes-Oxley Act and Canadianlaw.  For each of the years ended December 31,2007 and 2008, none of the non-audit services described below were approved bythe Audit Committee of our Board of Directors pursuant to the “*de minimis* exception” to the pre-approval requirement fornon-audit services. The following table presents the aggregate fees billed forprofessional services and other services rendered by our independent auditor,Ernst & Young LLP, for the year ended December 31, 2008,and the aggregate fees billed for professional services and other servicesrendered by our former independent auditor, KPMG LLP, for the year ended December 31,2007 and for a portion of the year ended December 31, 2008.

 

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| ** **            | ** ** | **2008(1)** | ** **  | **2008(2)** | ** ** | **2007**    | ** ** |
|-----------------------|------------|-------------|-------------|-------------|------------|-------------|------------|
|                  |       |        |        |        |       |        |       |
| Audit Fees(3)         |       | $           | 477,941     |        | $          | 67,200      |       | $ | 590,300 |   |
| Audit-related Fees(4) |       | 19,048      |        | 200,452     |       | 56,600      |       |
| All Other Fees(5)     |       | —      |        | 3,300       |       | 327,400     |       |
| **Total**             | ** ** | **$**       | **496,989** | ** **  | **$**      | **270,952** | ** ** | **$** | **974,300** | ** ** |

 

----

(1)        Fees of Ernst &Young LLP.

 

(2)        Fees of KPMG LLP.

 

(3)        Audit Fees consist of feesapproved for the annual audit of the Company’s consolidated financialstatements and quarterly reviews of interim financial statements of the Companywith the SEC, including required assistance or services that only the externalauditor reasonably can provide and accounting consultations on specific issues.

 

(4)        Audit-Related Fees includefees for the audits of our employee pension plans, the review of one subsidiary’sfinancial statements and various reports to statutory authorities and feesrelated to the Offering Memorandum issued in April 2008.

 

(5)        All Other Fees include feesbilled for assistance with respect to internal controls over financialreporting and disclosure controls and procedures and US tax compliance.

 

### **ITEM 16D - EXEMPTIONSFROM THE LISTING STANDARDS FOR AUDIT COMMITTEES**

### ** **

Not applicable.

 

### **ITEM 16E - PURCHASESOF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS**

### ** **

Not applicable.

 

### **ITEM 16F - CHANGES INREGISTRANT’S CERTIFYING ACCOUNTANT**

### ** **

On June 9, 2008, Videotron announced its decision to appoint Ernst &Young LLP as its auditors, and the dismissal of KPMG LLP, effective as of the2008 financial year.  Ernst &Young LLP has audited Videotron’s financial statements for the year ended December 31,2008.  The decision to change auditorswas approved by the Audit Committee of the Board of Directors of Videotron on May 5,2008.  This change in auditors waseffected simultaneously with a corresponding change in auditors at QuebecorMedia and at Quebecor Inc.

 

KPMG LLP’s reports on the financial statements of Videotron for thefiscal years ended December 31, 2007 and 2006 did not contain any adverseopinion or disclaimer of opinion, and were not qualified or modified as touncertainty, audit scope, or accounting principles, except that KPMG’s reportfor the fiscal year ended December 31, 2007 contained the followingexplanatory paragraphs:

 

“Also, asdiscussed in note 1 b) to the consolidated financial statements,effective January 1, 2007 the Company adopted the Canadian Institute ofChartered Accountants’ new accounting standards on (i) Comprehensiveincome; (ii) Financial instruments and (iii) Hedges.

 

Canadiangenerally accepted accounting principles vary in certain significant respectsfrom US generally accepted accounting principles (“US GAAP”). Informationrelating to the nature and effect of such differences is presented innote 20 to the consolidated financial statements. Also, as discussed innote 20 to the consolidated financial statements, in 2007 the Company changedin its US GAAP reconciliation its method of accounting for uncertainty inincome taxes.”

 

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and exceptthat KPMG LLP’s report for the fiscal year ended December 31, 2006contained the following explanatory paragraph:

 

“Canadiangenerally accepted accounting principles vary in certain significant respectsfrom accounting principles generally accepted in the United States of America.Information relating to the nature and effect of such differences is presentedin note 24 to the financial statements. Also, as discussedin note 24 to the consolidated financial statements, in 2006 the Companychanged in its US GAAP reconciliation (i) its method of accounting forshare-based payment; and (ii) its method of accounting for pensions andother postretirement benefits plans. As described in note 24, the Companyhas restated its US GAAP reconciliation from that previously issued.”

 

For Videotron’s fiscal years ended December 31, 2007 and 2006 andany subsequent interim period through June 9, 2008, there were nodisagreements with KPMG LLP on any matter of accounting principles orpractices, financial statement disclosure or auditing scope or procedure whichdisagreements, if not resolved to the satisfaction of KPMG LLP, would havecaused it to make reference to the subject matter of such disagreements in connectionwith their reports on the financial statements for such years.

 

During Videotron’s two most recent fiscal years ended December 31,2007 and 2006 and any subsequent interim period prior to June 9, 2008,neither Videotron nor anyone acting on its behalf, consulted with Ernst &Young LLP regarding either (a) the application of accounting principles toa specified transaction, either completed or proposed; or the type of auditopinion that would have been rendered on Videotron’s consolidated financial statementsand either a written report was provided to Videotron or oral advice wasprovided that Ernst & Young LLP concluded was an important factorconsidered by Videotron in reaching a decision as to the accounting, auditingor financial reporting issue, or (b) any matter that was either thesubject of a disagreement (as that term is used in Item 16F (a)(1)(iv) of Form 20-Fand the related instructions to Item 16F) with the former auditors or areportable event (as described in Item 16F (a)(1)(v) of Form 20-F).

 

On February 23, 2009, Videotron provided KPMG LLP and Ernst &Young LLP with a copy of the foregoing disclosures.  Videotron requested that KPMG LLP furnish itwith a letter addressed to the Securities and Exchange Commission statingwhether it agrees with the above statements, and if not, stating the respectsin which it does not agree.  Videotronhas received the requested letter from KPMG LLP, and a copy of KPMG LLP’sletter is filed as Exhibit 99.1 to this annual report.  Videotron requested that Ernst &Young LLP review the foregoing disclosures and offered Ernst & YoungLLP the opportunity to furnish Videotron with a letter addressed to theSecurities and Exchange Commission containing any new information,clarification of Videotron’s expression of its views or the respects in whichit does not agree with the statements by Videotron in response to this Item16F.  Ernst & Young LLP had nodisagreement with the disclosures and consequently declined the opportunity tofurnish Videotron with such a letter.

 

### **ITEM 16G - CORPORATEGOVERNANCE**

### ** **

Not applicable.

 

# **PART III**

# ** **

## **ITEM 17 - FINANCIAL STATEMENTS**

## ** **

Our consolidated balance sheets as at December 31, 2008 and 2007and our consolidated statements of income, shareholder’s equity, comprehensiveincome and cash flows for the years ended December 31, 2008, 2007 and2006, including the notes thereto and together with the auditors’ reportsthereon, are included beginning on page F-1 of this annual report.

 

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## **ITEM 18 - FINANCIALSTATEMENTS**

## ** **

Not applicable.

 

## **ITEM 19 - EXHIBITS**

## ** **

**A-**                                   EXHIBITS

** **

The following documents are filed as exhibits to this Form 20-F:

 
|  1.1 |   | Articles  of Amalgamation of Videotron Ltd. as of July 1, 2006 (translation)  (incorporated by reference to Exhibit 1.1 to Videotron Ltd.’s Annual  Report on Form 20-F for the fiscal year ended December 31, 2006,  filed on March 30, 2007). |
|-----------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|      |   |                                                                                                                                                                                                                                                                          |
| 1.2       |   | Certificate  and Articles of Amendment of Videotron as of June 30, 2008.                                                                                                                                                                                                 |
|      |   |                                                                                                                                                                                                                                                                          |
| 1.3       |   | Certificate  and Articles of Amendment of Videotron as of December 12, 2008.                                                                                                                                                                                             |
|      |   |                                                                                                                                                                                                                                                                          |
| 1.4       |   | By-laws  of Videotron Ltd. as of July 1, 2006 (incorporated by reference to  Exhibit 1.2 to Videotron Ltd.’s Annual Report on Form 20-F for the  fiscal year ended December 31, 2006, filed on March 30, 2007).                                 |
|      |   |                                                                                                                                                                                                                                                                          |
| 1.5       |   | Certificate  and Articles of Amalgamation of Le SuperClub Vidéotron ltée as of  December 28, 2008 (translation).                                                                                                                                               |
|      |   |                                                                                                                                                                                                                                                                          |
| 1.6       |   | By-laws  of Le SuperClub Vidéotron ltée (incorporated by reference to Exhibit 3.8  to Videotron Ltd.’s Amendment No. 1 to the Registration Statement on  Form F-4 dated January 8, 2004, Registration Statement  No. 333-110697).     |
|      |   |                                                                                                                                                                                                                                                                          |
| 1.7       |   | Articles  of Amalgamation of CF Cable TV Inc. (translation) (incorporated by  reference to Exhibit 1.13 to Videotron Ltd.’s Annual Report on  Form 20-F for the fiscal year ended December 31, 2005, dated  March 21, 2006).                    |
|      |   |                                                                                                                                                                                                                                                                          |
| 1.8       |   | By-laws  of CF Cable TV Inc. (incorporated by reference to Exhibit 1.14 to  Videotron Ltd.’s Annual Report on Form 20-F for the fiscal year ended  December 31, 2005, dated March 21,  2006).                                                        |
|      |   |                                                                                                                                                                                                                                                                          |
| 1.9       |   | Certificate of Incorporation of Videotron US  Inc. as of September 20, 2007.                                                                                                                                                                                             |
|      |   |                                                                                                                                                                                                                                                                          |
| 1.10      |   | Amended and Restated Certificate of  Incorporation of Videotron US Inc. as of October 1, 2008.                                                                                                                                                                           |
|      |   |                                                                                                                                                                                                                                                                          |
| 1.11      |   | By-laws of Videotron US Inc.                                                                                                                                                                                                                                                  |
|      |   |                                                                                                                                                                                                                                                                          |
| 1.12      |   | Articles of Incorporation of 9193-2962 Québec  inc. as of February 28, 2008 (translation).                                                                                                                                                                          |
|      |   |                                                                                                                                                                                                                                                                          |
| 1.13      |   | By-laws  of 9193-2962 Québec inc. (translation).                                                                                                                                                                                                                         |
|      |   |                                                                                                                                                                                                                                                                          |
| 2.1       |   | Form of  67/8 % Senior Notes due January 15, 2014 of  Videotron Ltd. (included as Exhibit A to Exhibit 2.3 below).                                                                                                                                   |

 

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| 2.2    |   | Form of  Notation of Guarantee by the subsidiary guarantors of the 67/8 % Senior Notes due January 15, 2014 of  Videotron Ltd. (included as Exhibit E to Exhibit 2.3 below).                                                                                                                                                                                                                                                                                  |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 2.3    |   | Indenture,  dated as of October 8, 2003, by and among Videotron Ltd., the subsidiary  guarantors signatory thereto and Wells Fargo Bank Minnesota, N.A. (now named  Wells Fargo Bank, National Association), as trustee (incorporated by  reference to Exhibit 4.3 to Videotron Ltd.’s Registration Statement on  Form F-4 dated November 24, 2003, Registration Statement  No. 333-110697).                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 2.4    |   | Supplemental  Indenture, dated as of July 12, 2004, by and among Videotron Ltd.,  SuperClub Vidéotron Canada inc., Les Propriétés SuperClub inc. and  Wells Fargo Bank, National Association, as trustee, to the Indenture dated as  of October 8, 2003 (incorporated by reference to Exhibit 4.4 to  Videotron Ltd.’s Registration Statement on Form F-4 dated  December 6, 2004, Registration Statement No. 333-121032). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 2.5    |   | Supplemental  Indenture, dated as of April 15, 2008, by and among Videotron Ltd.,  Videotron US Inc., as guarantor, and Wells Fargo Bank, National Association,  as trustee, to the Indenture dated as of October 8, 2003.                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 2.6    |   | Supplemental  Indenture, dated as of September 23, 2008, by and among Videotron Ltd.,  9193-2962 Québec inc., as guarantor, and Wells Fargo Bank, National  Association, as trustee, to the Indenture dated as of October 8, 2003.                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 2.7    |   | Form of  63/8% Senior Notes due  December 15, 2015 of Vidéotron Ltd. (included as Exhibit A to Exhibit 2.9  below).                                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 2.8    |   | Form of  Notation of Guarantee by the subsidiary guarantors of the 63/8% Senior Notes due  December 15, 2015 of Vidéotron ltée (included as Exhibit E to  Exhibit 2.9 below).                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 2.9    |   | Indenture,  dated as of September 16, 2005, by and among Videotron ltée, the  subsidiary guarantors signatory thereto and Wells Fargo Bank, National  Association, as trustee (incorporated by reference to Exhibit 4.3 to  Videotron Ltd.’s Registration Statement on Form F-4 dated  October 14, 2005, Registration Statement No. 333-128998).                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 2.10   |   | Supplemental  Indenture, dated as of April 15, 2008, by and among Videotron Ltd.,  Videotron US Inc., as guarantor, and Wells Fargo Bank, National Association,  as trustee, to the Indenture dated as of September 16, 2005.                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 2.11   |   | Supplemental  Indenture, dated as of September 23, 2008, by and among Videotron Ltd.,  9193-2962 Québec inc., as guarantor, and Wells Fargo Bank, National  Association, as trustee, to the Indenture dated as of September 16,  2005.                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 2.12   |   | Form of  91/8 % Senior Notes due April 15, 2018 of  Vidéotron Ltd. (included as Exhibit A to Exhibit 2.14 below).                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 2.13   |   | Form of  Notation of Guarantee of the subsidiary guarantors of the 91/8% Senior Notes due  April 15, 2018 of Vidéotron ltée (included as Exhibit E to  Exhibit 2.14 below).                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 2.14   |   | Indenture,  dated as of April 15, 2008, by and among Videotron Ltd., the subsidiary  guarantors signatory thereto and Wells Fargo Bank, National Association, as  trustee.                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 2.15   |   | Supplemental  Indenture, dated as of September 23, 2008, by and among Videotron Ltd.,  9193-2962 Québec inc., as guarantor, and Wells Fargo Bank, National  Association, as trustee, to the Indenture dated as of April 15, 2008.                                                                                                                                                                                                                                       |

 

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| 4.1    |   | Form of  Amended and Restated Credit Agreement (the “Credit Agreement”) entered into  as of November 28, 2000, (as amended by a First Amending Agreement dated  as of January 5, 2001, a Second Amending Agreement dated as of  June 29, 2001, a Third Amending Agreement dated December 12, 2001  and accepted by the Lenders as of December 21, 2001, a Fourth Amending  Agreement dated as of December 23, 2002, a Fifth Amending Agreement  dated as of March 24, 2003, a Sixth Amending Agreement dated as of  October 8, 2003, a Seventh Amending Agreement dated as of  November 19, 2004, an Eighth Amending Agreement dated as of  March 6, 2008 and a Ninth Amending Agreement dated as of April 7,  2008) entered into as of November 28, 2000, as amended as of  April 7, 2008, by and among Videotron Ltd., Royal Bank of Canada, as  administrative agent, and the financial institutions signatory thereto.                                                                                                                                                                                                                                                                                                                 |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.2    |   | Ninth  Amending Agreement, dated as of April 7, 2008, to the Credit Agreement,  dated as of November 28, 2000, as amended by the First Amending  Agreement, dated as of January 5, 2001, a Second Amending Agreement,  dated as of June 29, 2001, a Third Amending Agreement, dated as of  December 12, 2001, a Fourth Amending Agreement, dated as of  December 23, 2002, a Fifth Amending Agreement, dated as of  March 24, 2003, a Sixth Amending Agreement dated as of October 8,  2003, a Seventh Amending Agreement dated as of November 19, 2004 and an  Eighth Amending Agreement dated as of March 6, 2008, among Videotron  Ltd., Royal Bank of Canada, as administrative agent, and the financial  institutions signatory thereto and acknowledged by Le  SuperClub-Vidéotron ltée, Groupe de Divertissement SuperClub inc.,  CF Cable TV Inc., Les Propriétés SuperClub inc. and SuperClub  Vidéotron Canada inc., as guarantors, and by Quebecor Media Inc.                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.3    |   | Eighth  Amending Agreement, dated as of March 6, 2008, to the Credit Agreement,  dated as of November 28, 2000, as amended by the First Amending  Agreement, dated as of January 5, 2001, a Second Amending Agreement,  dated as of June 29, 2001, a Third Amending Agreement, dated as of  December 12, 2001, a Fourth Amending Agreement, dated as of  December 23, 2002, a Fifth Amending Agreement, dated as of  March 24, 2003, a Sixth Amending Agreement dated as of October 8,  2003 and a Seventh Amending Agreement, dated as of November 19, 2004  among Videotron Ltd., Royal Bank of Canada, as administrative agent, and the  financial institutions signatory thereto and acknowledged by Le  SuperClub-Vidéotron ltée, Groupe de Divertissement SuperClub inc.,  CF Cable TV Inc., Les Propriétés SuperClub inc. and SuperClub  Vidéotron Canada inc., as guarantors, and by Quebecor Media Inc.                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.4    |   | Seventh  Amending Agreement, dated as of November 19, 2004, to the Credit  Agreement, dated as of November 28, 2000, as amended by the First  Amending Agreement, dated as of January 5, 2001, a Second Amending  Agreement, dated as of June 29, 2001, a Third Amending Agreement, dated  as of December 12, 2001, a Fourth Amending Agreement, dated as of  December 23, 2002, a Fifth Amending Agreement, dated as of  March 24, 2003 and a Sixth Amending Agreement dated as of  October 8, 2003 among Videotron Ltd., Royal Bank of Canada, as  administrative agent, and the financial institutions signatory thereto and  acknowledged by Le SuperClub Vidéotron ltée, Groupe de Divertissement  SuperClub inc., Vidéotron (1998) ltée, CF Cable TV Inc.  Videotron Regional Ltd., 9139-3256 Québec inc., Videotron  TVN inc., Les Propriétés SuperClub inc. and SuperClub  Vidéotron Canada inc., as guarantors (the “Guarantors”), and by Quebecor  Media Inc. (incorporated by reference to Exhibit 10.2 to Videotron  Ltd.’s Registration Statement on Form F-4 dated December 6, 2004,  Registration Statement No. 333-121032). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.5    |   | Form of  Guarantee of the Guarantors of the Credit Agreement (incorporated by  reference to Schedule D of Exhibit 10.5 to Quebecor  Media Inc.’s Registration Statement on Form F-4 dated  September 5, 2001, Registration Statement No. 333-13792).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.6    |   | Form of  Share Pledge of the shares of Videotron Ltd. and the Guarantors of the Credit  Agreement (incorporated by reference to Schedule E of Exhibit 10.5  to Quebecor Media Inc.’s Registration Statement on Form F-4 dated  September 5, 2001, Registration Statement No. 333-13792).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |

 

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| 4.7    |   | Management  Services Agreement, effective as of January 1, 2002, between Quebecor  Media Inc. and Videotron Ltd. (incorporated by reference to  Exhibit 10.5 to Videotron Ltd.’s Registration Statement on Form F-4  dated November 24, 2003, Registration Statement No. 333-110697).                                                                                                                                                                    |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.8    |   | Lease  Agreement, dated November 24, 1993, between Le Groupe Vidéotron ltée and  National Bank of Canada for the property located at 300 Viger Street East,  Montréal, Province of Québec, Canada, together with a summary thereof in the  English language (incorporated by reference to Exhibit 10.3 to Quebecor  Media Inc.’s Registration Statement on Form F-4 dated  September 5, 2001, Registration Statement No. 333-13792). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.9    |   | Form of  Share Pledge of the shares of Vidéotron ltée and the Guarantors of the Credit  Agreement (incorporated by reference to Schedule E of Exhibit 10.5 to  Quebecor Media Inc.’s Registration Statement on Form F-4 dated  September 5, 2001, Registration Statement No. 333-13792).                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.10   |   | Subordinated  Loan Agreement, dated January 3, 2007, between Quebecor Media Inc. and  Videotron Ltd.                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.11   |   | Subordinated  Loan Agreement, dated May 31, 2007, between Quebecor Media Inc. and  Videotron Ltd.                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.12   |   | Subordinated  Loan Agreement, dated May 31, 2007, between Quebecor Media Inc. and CF  Cable TV Inc.                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.13   |   | Subordinated  Loan Agreement, dated January 4, 2008, between Quebecor Media Inc. and  Videotron Ltd.                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.14   |   | Subordinated  Loan Agreement, dated January 4, 2008, between Quebecor Media Inc. and  CF Cable TV Inc.                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 7.1    |   | Statement  regarding calculation of ratio of earnings to fixed charges.                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 8.1    |   | Subsidiaries  of Videotron Ltd.                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 11.1   |   | Code  of Ethics.                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 12.1   |   | Certification  of Robert Dépatie, President and Chief Executive Officer of Videotron Ltd.,  pursuant to 15 U.S.C. Section 78(m)(a), as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 12.2   |   | Certification  of Marie-Josée Marsan, Vice President, Finance and Chief Financial Officerof Videotron Ltd., pursuant to 15 U.S.C.  Section 78(m)(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 13.1   |   | Certification  of Robert Dépatie, President and Chief Executive Officer of Videotron Ltd.,  pursuant to 18 U.S.C. Section 1350 as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 13.2   |   | Certification  of Marie-Josée Marsan, Vice President, Finance and Chief Financial Officer of  Videotron Ltd. pursuant to 18 U.S.C. Section 1350 as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 99.1   |   | Letter  from KPMG LLP                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |

** **

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**SIGNATURE**

** **

The registrant hereby certifies that it meets all of the requirementsfor filing on Form 20-F and that it has duly caused and authorizedthe undersigned to sign this annual report on its behalf.

 

 
| ** ** | **VIDEOTRON LTD.** |
|------------|--------------------|
|       |               |
|       | By:                |   |
|       |               | /s/ Marie-Josée Marsan |
|       |               | Name: | Marie-Josée Marsan |
|       |               | Title: | Vice President, Finance and Chief Financial Officer |

 

Dated: March 6, 2009

 

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**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

 
| **Videotron  Ltd.**                                                                                                                         |   |   |
|---------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
| ***Annual Consolidated Financial Information  as at December 31, 2008 and 2007 and for the Years Ended December 31, 2008,  2007 and 2006*** |   |   |
| Report of Independent Registered Public Accounting Firm                                                                                     |   | F-2    |
| Report of Independent  Registered Public Accounting Firm                                                                                    |   | F-3    |
| Consolidated  Statements of Income for the years ended December 31, 2008, 2007 and 2006                                                     |   | F-4    |
| Consolidated Statements of Comprehensive Income for the years ended  December 31, 2008, 2007 and 2006                                       |   | F-5    |
| Consolidated  Statements of Shareholder’s Equity (Deficiency in Assets) for the years ended  December 31, 2008, 2007 and 2006          |   | F-6    |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006                                                 |   | F-7    |
| Consolidated Balance  Sheets as at December 31, 2008 and 2007                                                                               |   | F-8    |
| Notes to Consolidated  Financial Statements for the years ended December 31, 2008, 2007 and 2006                                            |   | F-10   |

 

F-1

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**REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM**

**TO THE BOARD OF DIRECTORS AND TO THESHAREHOLDER OF VIDEOTRON LTD.**

 

We haveaudited the accompanying consolidated balance sheet of Videotron Ltd. asof December 31, 2008 and the related consolidated statements of income,comprehensive income, shareholder’s equity and cash flows for the year ended December 31,2008. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audit. The financial statements of Videotron Ltd.for the years ended December 31, 2007 and 2006, were audited by otherauditors whose report dated February 29, 2008, expressed an unqualifiedopinion on those statements and included an explanatory paragraph thateffective January 1, 2007 the Company adopted the Canadian Institute ofChartered Accountants’ new accounting standards on (i) Comprehensiveincome; (ii) Financial instruments and (iii) Hedges.

 

We conductedour audit in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. We were not engaged to perform anaudit of the Company’s internal control over financial reporting. Our auditincluded consideration of internal control over financial reporting as a basisfor designing audit procedures that are appropriate in the circumstances, butnot for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting. Accordingly, we express nosuch opinion. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management,and evaluating the overall financial statement presentation. We believe thatour audit provides a reasonable basis for our opinion.

 

In ouropinion, the financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of Videotron Ltd.as of December 31, 2008, and the consolidated results of their operationsand their cash flows for the year ended December 31, 2008, in conformitywith Canadian generally accepted accounting principles.

 

 
| /s/ ERNST & YOUNG LLP(1)                                    |   |
|----------------------------------------------------------------------|--------|
| Chartered Accountants                                                |   |
| Montreal, Canada                                                     |   |
| February 11, 2009 except as to  note 25(a), which is as of |   |
| February 26, 2009                                               |   |

 

----

(1) CAauditor permit no. 19483

 

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Table of Contents

 

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

**TO THE BOARD OF DIRECTORS AND TO THESHAREHOLDER OF VIDEOTRON LTD.**

 

We haveaudited the accompanying consolidated balance sheet of Videotron Ltd. andits subsidiaries as of December 31, 2007 and the related consolidatedstatements of income, comprehensive income, shareholder’s equity and cash flowsfor each of the years in the two-year period ended December 31, 2007.These consolidated financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

 

We conductedour audits in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

In ouropinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of Videotron Ltd.and its subsidiaries as of December 31, 2007 and the results of theiroperations and their cash flows for each of the years in the two-year periodended December 31, 2007 in conformity with Canadian generally acceptedaccounting principles. Also, as discussed in note 1 h) to theconsolidated financial statements, effective January 1, 2007 the Companyadopted the Canadian Institute of Chartered Accountants’ new accountingstandards on (i) Comprehensive income; (ii) Financial instruments and(iii) Hedges.

 

Canadiangenerally accepted accounting principles vary in certain significant respectsfrom US generally accepted accounting principles (“US GAAP”). Informationrelating to the nature and effect of such differences is presented innote 24 to the consolidated financial statements. Also, as discussedin note 24 to the consolidated financial statements, in 2007 theCompany changed in its US GAAP reconciliation its method of accounting foruncertainty in income taxes.

 

 
| /s/ KPMG LLP           |   |
|------------------------|--------|
| Chartered Accountants  |   |
| Montréal, Canada  |   |
| February 29, 2008 |   |

 

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**VIDEOTRON LTD.**

**CONSOLIDATED STATEMENTS OF INCOME**

**Years ended December 31, 2008, 2007 and2006**

**(in thousands of Canadian dollars)**

 
| ** **                                                                       | ** ** | **2008**  | ** ** | **2007**  | ** ** | **2006**  | ** ** |
|----------------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
| Operating revenues:                                                              |       |      |       |      |       |      |       |
| Cable television                                                                 |       | $         | 809,891    |      | $          | 735,832   |       | $ | 677,273 |   |
| Internet                                                                         |       | 499,627   |       | 422,448   |       | 345,075   |       |
| Telephony                                                                        |       | 286,063   |       | 195,477   |       | 107,357   |       |
| Wireless telephony                                                               |       | 31,630    |       | 17,717    |       | 1,208     |       |
| Business solution                                                                |       | 63,592    |       | 70,189    |       | 74,352    |       |
| Video stores                                                                     |       | 57,015    |       | 59,956    |       | 55,585    |       |
| Other                                                                            |       | 56,388    |       | 50,987    |       | 48,745    |       |
|                                                                             |       | 1,804,206 |       | 1,552,606 |       | 1,309,595 |       |
| Direct costs and operating expenses                                              |       | 1,007,050 |       | 909,923   |       | 796,887   |       |
| Amortization                                                                     |       | 214,281   |       | 206,083   |       | 185,115   |       |
| Financial expenses (note 2)                                                 |       | 90,924    |       | 76,147    |       | 81,779    |       |
| Loss (gain) on valuation and translation of  financial instruments (note 3) |       | 24,673    |       | (9,095    | )          | (2,193    | )          |
| Impairment of goodwill and other items  (note 4)                            |       | (1,414    | )          | 5,425     |       | —    |       |
| Income before income taxes and  non-controlling interest                         |       | 468,692   |       | 364,123   |       | 248,007   |       |
| Income taxes (note 6)                                                       |       | 73,102    |       | 38,258    |       | 64,230    |       |
|                                                                             |       | 395,590   |       | 325,865   |       | 183,777   |       |
| Non-controlling interest                                                         |       | 148       |       | 173       |       | 86        |       |
| Net income                                                                       |       | $         | 395,442    |      | $          | 325,692   |       | $ | 183,691 |   |

 

*See accompanying notes to consolidatedfinancial statements.*

 

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**VIDEOTRON LTD.**

**CONSOLIDATED STATEMENTS OF COMPREHENSIVEINCOME**

**Years ended December 31, 2008, 2007 and2006**

**(in thousands of Canadian dollars)**

 
| ** **                                                    | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net income                                                    |       | $        | 395,442    |     | $          | 325,692  |       | $ | 183,691 |   |
| Other comprehensive income:                                   |       |     |       |     |       |     |       |
| Gain (loss) on valuation of derivative  financial instruments |       | (4,076   | )          | 17,172   |       | —   |       |
| Income taxes                                                  |       | (15,720  | )          | (2,028   | )          | —   |       |
|                                                          |       | (19,796  | )          | 15,144   |       | —   |       |
| Comprehensive income                                          |       | $        | 375,646    |     | $          | 340,836  |       | $ | 183,691 |   |

 

*See accompanying notes to consolidatedfinancial statements.*

 

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**VIDEOTRON LTD.**

**CONSOLIDATED STATEMENTS OF SHAREHOLDER’SEQUITY**

**Years ended December 31, 2008, 2007 and2006**

**(in thousands of Canadian dollars)**

 
| ** **                                                                                                                              | ** ** | **Share  capital** | ** ** | **Contributed  surplus** | ** ** | **Deficit** | ** ** | **Accumulated  other  comprehensive  loss  (note 18)** | ** ** | **Total  shareholder’s  equity** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|--------------------------|------------|-------------|------------|-------------------------------------------------------------|------------|---------------------------------------|------------|
| Balance as at December 31, 2005                                                                                                    |       | $                  | 342,940    |                     | $          | 576,957     |       | $                                                           | (843,534   | )                                     | $          | — |   | $ | 76,363 |   |
| Transfer of tax deductions from a company  controlled by the ultimate parent company (note 22)                                     |       | —             |       | 22                       |       | —      |       | —                                                      |       | 22                                    |       |
| Issuance of shares (note 16)                                                                                                       |       | 111,536            |       | —                   |       | —      |       | —                                                      |       | 111,536                               |       |
| Reduction of paid-up capital (note 16)                                                                                             |       | (108,749           | )          | —                   |       | —      |       | —                                                      |       | (108,749                              | )          |
| Excess of consideration paid over the  carrying value of debt transferred to the parent company (note 13)                          |       | —             |       | —                   |       | (3,282      | )          | —                                                      |       | (3,282                                | )          |
| Net income for the year                                                                                                                 |       | —             |       | —                   |       | 183,691     |       | —                                                      |       | 183,691                               |       |
| Dividend                                                                                                                                |       | —             |       | —                   |       | (10,000     | )          | —                                                      |       | (10,000                               | )          |
| Balance as at December 31, 2006, as  previously reported                                                                           |       | 345,727            |       | 576,979                  |       | (673,125    | )          | —                                                      |       | 249,581                               |       |
| Cumulative effect of changes in accounting  policies                                                                                    |       | —             |       | —                   |       | (9,311      | )          | (22,446                                                     | )          | (31,757                               | )          |
| Balance as at January 1, 2007, as  restated                                                                                        |       | 345,727            |       | 576,979                  |       | (682,436    | )          | (22,446                                                     | )          | 217,824                               |       |
| Reduction of paid-up capital (note 16)                                                                                             |       | (299,550           | )          | —                   |       | —      |       | —                                                      |       | (299,550                              | )          |
| Net income for the year                                                                                                                 |       | —             |       | —                   |       | 325,692     |       | —                                                      |       | 325,692                               |       |
| Other comprehensive income, net of income  taxes                                                                                        |       | —             |       | —                   |       | —      |       | 15,144                                                      |       | 15,144                                |       |
| Balance as at December 31, 2007                                                                                                    |       | $                  | 46,177     |                     | $          | 576,979     |       | $                                                           | (356,744   | )                                     | $          | (7,302 | ) | $ | 259,110 |   |
| Reduction of paid-up capital (note 16)                                                                                             |       | (46,176            | )          | (73,824                  | )          | —      |       | —                                                      |       | (120,000                              | )          |
| Excess of the carrying value over  consideration paid for the purchase of an affiliated company from the parent  company (note 11) |       | —             |       | —                   |       | 952         |       | —                                                      |       | 952                                   |       |
| Excess of consideration paid over the  carrying value of assets transferred from affiliated companies (note 22)                    |       | —             |       | —                   |       | (2,054      | )          | —                                                      |       | (2,054                                | )          |
| Net income for the year                                                                                                                 |       | —             |       | —                   |       | 395,442     |       | —                                                      |       | 395,442                               |       |
| Other comprehensive income, net of income  taxes                                                                                        |       | —             |       | —                   |       | —      |       | (19,796                                                     | )          | (19,796                               | )          |
| Dividend                                                                                                                                |       | —             |       | —                   |       | (110,000    | )          | —                                                      |       | (110,000                              | )          |
| Balance as at December 31, 2008                                                                                                    |       | $                  | 1          |                     | $          | 503,155     |       | $                                                           | (72,404    | )                                     | $          | (27,098 | ) | $ | 403,654 |   |

 

*See accompanying notes to consolidatedfinancial statements.*

 

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**VIDEOTRON LTD.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**Years ended December 31, 2008, 2007 and2006**

**(in thousands of Canadian dollars)**

 
| ** **                                                                            | ** ** | **2008**   | ** ** | **2007**   | ** ** | **2006** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|----------|------------|
| Cash flows related to operating activities:                                           |       |       |       |       |       |     |       |
| Net income                                                                            |       | $          | 395,442    |       | $          | 325,692  |       | $ | 183,691 |   |
| Adjustments:                                                                          |       |       |       |       |       |     |       |
| Amortization of fixed assets                                                          |       | 212,861    |       | 203,902    |       | 183,619  |       |
| Amortization of other assets                                                          |       | 28,754     |       | 21,435     |       | 17,835   |       |
| Impairment of goodwill (note 4)                                                  |       | —     |       | 5,425      |       | —   |       |
| Loss on disposal of fixed assets                                                      |       | 450        |       | 3,245      |       | 1,416    |       |
| Loss (gain) on valuation and translation of  financial instruments (note 3)      |       | 19,677     |       | (10,510    | )          | (3,305   | )          |
| Amortization of financing costs and  long-term debt premium or discount (note 2) |       | 1,623      |       | 441        |       | 432      |       |
| Future income taxes (note 6)                                                     |       | 72,031     |       | 38,191     |       | 64,669   |       |
| Non-controlling interest                                                              |       | 148        |       | 173        |       | 86       |       |
| Other                                                                                 |       | (1,315     | )          | 1,142      |       | 755      |       |
|                                                                                  |       | 729,671    |       | 589,136    |       | 449,198  |       |
| Net change in non-cash balances related to  operating activities:                     |       |       |       |       |       |     |       |
| Accounts receivable                                                                   |       | (2,217     | )          | (26,832    | )          | (22,187  | )          |
| Amounts receivable from and payable to  affiliated companies                          |       | (15,913    | )          | 3,715      |       | 3,606    |       |
| Inventories                                                                           |       | (10,477    | )          | 104        |       | (10,225  | )          |
| Prepaid expenses                                                                      |       | 4,490      |       | (7,824     | )          | (1,363   | )          |
| Accounts payable and accrued liabilities                                              |       | 51,399     |       | (1,044     | )          | 19,015   |       |
| Deferred revenue                                                                      |       | 12,233     |       | 15,298     |       | 19,013   |       |
| Other assets                                                                          |       | (36,303    | )          | (20,973    | )          | (18,902  | )          |
| Other liabilities                                                                     |       | (21,349    | )          | 1,343      |       | 2,464    |       |
|                                                                                  |       | (18,137    | )          | (36,213    | )          | (8,579   | )          |
| Cash flows provided by operating activities                                           |       | 711,534    |       | 552,923    |       | 440,619  |       |
| Cash flows related to investing activities:                                           |       |       |       |       |       |     |       |
| Acquisition of fixed assets                                                           |       | (404,759   | )          | (330,075   | )          | (302,629 | )          |
| Acquisition of shares of a company under  common control (note 9)                |       | (60,000    | )          | (1,995,000 | )          | —   |       |
| Acquisition of a company under common  control (note 11)                         |       | (554,549   | )          | —     |       | —   |       |
| Decrease in temporary investments                                                     |       | —     |       | 987        |       | 39,509   |       |
| Acquisition of tax deductions from the  ultimate parent company (note 22)        |       | (18,378    | )          | (14,863    | )          | —   |       |
| Other                                                                                 |       | (5,534     | )          | 787        |       | (1,981   | )          |
| Cash flows used in investing activities                                               |       | (1,043,220 | )          | (2,338,164 | )          | (265,101 | )          |
| Sub-total, balance carried forward                                                    |       | (331,686   | )          | (1,785,241 | )          | 175,518  |       |
|                                                                                       |            |            |            |            |            |          |            |  |  |  |

 

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**VIDEOTRON LTD.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS,Continued**

**Years ended December 31, 2008, 2007 and2006**

**(in thousands of Canadian dollars)**

 
| ** **                                                | ** ** | **2008** | ** ** | **2007**  | ** ** | **2006**   | ** ** |
|-----------------------------------------------------------|------------|----------|------------|-----------|------------|------------|------------|
| Sub-total, balance brought forward                        |       | $        | (331,686   | )         | $          | (1,785,241 | )          | $ | 175,518 |   |
| Cash flows related to financing activities:               |       |     |       |      |       |       |       |
| Net change in bank indebtedness                           |       | (5,892   | )          | (8,965    | )          | 18,470     |       |
| Net borrowings under bank credit facility  (note 14) |       | 59,949   |       | 98,721    |       | 49,000     |       |
| Issuance of long-term debt, net of  financing costs       |       | 447,629  |       | —    |       | —     |       |
| Subordinated loan from parent company  (note 9)      |       | 60,000   |       | 1,995,000 |       | —     |       |
| Issuance of shares                                        |       | —   |       | —    |       | 111,536    |       |
| Transfer of Additional Amount payable to  parent company  |       | —   |       | —    |       | (111,536   | )          |
| Repayment of subordinated loan to parent  company         |       | —   |       | —    |       | (150,000   | )          |
| Dividends                                                 |       | (110,000 | )          | —    |       | (10,000    | )          |
| Reduction in paid-up capital                              |       | (120,000 | )          | (299,550  | )          | (108,749   | )          |
| Other                                                     |       | —   |       | 35        |       | (938       | )          |
| Cash flows provided by (used in) financing  activities    |       | 331,686  |       | 1,785,241 |       | (202,217   | )          |
| Net change in cash and cash equivalents                   |       | —   |       | —    |       | (26,699    | )          |
| Cash and cash equivalents at beginning of  year           |       | —   |       | —    |       | 26,699     |       |
| Cash and cash equivalents at end of year                  |       | $        | —     |      | $          | —     |       | $ | — |   |
| Cash interest payments                                    |       | $        | 109,298    |      | $          | 80,143     |       | $ | 80,514 |   |
| Cash interest payments to parent company                  |       | 269,571  |       | 159,078   |       | 17,951     |       |
| Cash income tax payments (net of  refunds)           |       | 274      |       | (206      | )          | 988        |       |

 

*See accompanying notes to consolidatedfinancial statements.*

 

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**VIDEOTRON LTD.**

**CONSOLIDATED BALANCE SHEETS**

**As at December 31**

**(in thousands of Canadian dollars)**

 
| ** **                                                   | ** ** | **2008**  | ** ** | **2007**  | ** ** |
|--------------------------------------------------------------|------------|-----------|------------|-----------|------------|
| **Assets**                                                   |       |      |       |      |       |
| Current assets:                                              |       |      |       |      |       |
| Accounts receivable (note 7)                            |       | $         | 164,375    |      | $          | 161,366 |   |
| Income taxes                                                 |       | 189       |       | 220       |       |
| Amounts receivable from affiliated  companies (note 22) |       | 15,611    |       | 32,843    |       |
| Inventories (note 8)                                    |       | 48,296    |       | 39,445    |       |
| Prepaid expenses                                             |       | 11,756    |       | 16,316    |       |
| Future income taxes (note 6)                            |       | 35,982    |       | 31,585    |       |
|                                                         |       | 276,209   |       | 281,775   |       |
| Investments (note 9)                                    |       | 2,055,000 |       | 1,995,000 |       |
| Fixed assets (note 10)                                  |       | 1,612,475 |       | 1,408,805 |       |
| Future income taxes (note 6)                            |       | 1,038     |       | 2,970     |       |
| Derivative financial instruments  (note 21)             |       | 124,187   |       | —    |       |
| Intangible assets (note 11)                             |       | 567,065   |       | —    |       |
| Other assets (note 12)                                  |       | 36,080    |       | 30,466    |       |
| Goodwill                                                     |       | 433,878   |       | 433,759   |       |
|                                                         |       | $         | 5,105,932  |      | $          | 4,152,775 |   |
| **Liabilities and Shareholder’s Equity**                |       |      |       |      |       |
| Current liabilities:                                         |       |      |       |      |       |
| Bank indebtedness                                            |       | $         | 3,613      |      | $          | 9,505 |   |
| Accounts payable and accrued charges                         |       | 343,283   |       | 267,432   |       |
| Amounts payable to affiliated companies  (note 22)      |       | 19,358    |       | 75,260    |       |
| Deferred revenue                                             |       | 164,779   |       | 151,928   |       |
| Income taxes                                                 |       | 1,317     |       | 119       |       |
|                                                         |       | 532,350   |       | 504,244   |       |
| Long-term debt (note 14)                                |       | 1,807,997 |       | 950,988   |       |
| Subordinated loan from parent company  (note 9)         |       | 2,055,000 |       | 1,995,000 |       |
| Derivative financial instruments  (note 21)             |       | 45,688    |       | 245,556   |       |
| Future income taxes (note 6)                            |       | 229,654   |       | 166,162   |       |
| Other liabilities (note 15)                             |       | 31,589    |       | 31,715    |       |
|                                                         |       | 4,702,278 |       | 3,893,665 |       |
| Shareholder’s equity:                                   |       |      |       |      |       |
| Capital stock (note 16)                                 |       | 1         |       | 46,177    |       |
| Contributed surplus                                          |       | 503,155   |       | 576,979   |       |
| Deficit                                                      |       | (72,404   | )          | (356,744  | )          |
| Accumulated other comprehensive loss  (note 18)         |       | (27,098   | )          | (7,302    | )          |
|                                                         |       | 403,654   |       | 259,110   |       |
|                                                         |       | $         | 5,105,932  |      | $          | 4,152,775 |   |
| Commitments and contingencies  (note 19)                |       |      |       |      |       |
| Guarantees (note 20)                                    |       |      |       |      |       |
| Subsequent events (note 25)                             |       |      |       |      |       |

 

On behalf of the Board ofDirectors

 
| Jean La Couture, Director | Michel Lavigne, Director |
|---------------------------|--------------------------|

 

*See accompanying notes to consolidatedfinancial statements.*

 

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**VIDEOTRON LTD.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**Years ended December 31, 2008, 2007 and2006**

**(tabular amounts are in thousands of Canadiandollars)**

 

Videotron Ltd. (the “Company”)is a wholly owned subsidiary of Quebecor Media Inc. (the parentcompany) and is a subsidiary of Quebecor Inc. (the ultimate parentcompany). The Company is a cable service provider in the province of Québec forpay-television services, Internet access and telephony services. The Companyalso provides business telecommunication services, wireless communicationservices and operates a chain of video stores.

 

**1.****                                      SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES:**

 

Theconsolidated financial statements have been prepared in accordance withCanadian generally accepted accounting principles (“GAAP”). The significantdifferences between generally accepted accounting principles in Canada and inthe United States are described in note 24. 

 

(a)                                  Basisof presentation:

 

Theseconsolidated financial statements include the accounts of the Company and allits subsidiaries. Intercompany transactions and balances are eliminated onconsolidation.

 

Certaincomparative figures for the years 2007 and 2006 have been reclassified toconform to the presentation adopted for the year ended December 31, 2008.

 

(b)                                 Changein accounting policies:

 

On January 1,2008, the Company adopted the Canadian Institute of Chartered Accountants (“CICA”)Section 3031, *Inventories,*which provides more extensive guidance on the recognition and measurement ofinventories and related disclosures. The adoption of this new section had noimpact on the consolidated financial statements. The new accounting policy isdescribed in note 1(j).

 

On January 1,2008, the Company adopted the CICA Handbook Section 1535, *Capital Disclosures,* Section 3862, *Financial Instruments — Disclosures*,and Section 3863, *FinancialInstruments — Presentation*. These sections relate todisclosures and presentation of information and did not affect the consolidatedfinancial results. All the disclosure requirements related to these newaccounting standards are presented in note 21.

 

(c)                                  Changesin accounting estimates:

 

The Companyestimates the fair value of its derivative financial instruments using adiscounted cash flow valuation technique, since no quoted market prices existfor such instruments. In the second quarter of 2008, the Company made someamendments to the technique used in measuring the fair value of its derivativesin a liability position and in an asset position. These amendments change theway the Company factors counterparty and its own non-performance risk in itsvaluation technique, considering market developments and recent accountingguidelines. The cumulative impact of these changes as of December 31,2008, is a decrease of the fair value of these derivatives by$10.8 million and an increase of the comprehensive loss by$10.8 million (before income taxes). 

 

(d)                                 Foreigncurrency translation:

 

Foreigncurrency transactions are translated using the temporal method. Translationgains and losses are included in gain or loss on valuation and translation offinancial instruments unless hedge accounting is used. 

 

(e)                                  Useof estimates:

 

The preparationof consolidated financial statements in accordance with Canadian GAAP requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities, related amounts of revenues and expenses, anddisclosure of contingent assets and liabilities. Significant areas requiringthe use of management estimates relate to the determination of pension andpost-retirement benefit costs, key economic assumptions used in determining theallowance for doubtful accounts, the provision for obsolescence, legalcontingencies, the useful life of assets for amortization and evaluation ofexpected future cash flows to be generated by those assets, the determinationof implied fair value of goodwill and fair value of assets and liabilities for businesspurchase price allocations purposes and goodwill impairment tests purposes,provisions for income taxes and determination of future income tax assets andliabilities, and the determination of fair value of financial instruments andderivative instruments. Actual results could differ from these estimates. 

 

(f)                                    Impairmentof long-lived assets:

 

The Companyreviews long-lived assets with definite useful lives whenever events or changesin circumstances indicate that the carrying amount of such assets may not berecoverable. An impairment loss is recognized when the carrying amount of anasset or a 

 

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**VIDEOTRON LTD.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,Continued**

**Years ended December 31, 2008, 2007 and2006**

**(tabular amounts are in thousands of Canadiandollars)**

 

**1.****                                      SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES (Continued):**

 

(f)                                    Impairment oflong-lived assets (Continued):

 

group ofassets held for use exceeds the sum of the undiscounted cash flows expectedfrom its use and eventual disposition. Measurement of an impairment loss isbased on the amount by which the carrying amount of a group of assets exceedsits fair value. Fair value is determined using quoted market prices, whenavailable, or using accepted valuation techniques such as the discounted futurecash flows method. 

 

(g)                                 Revenuerecognition:

 

The Companyrecognizes its operating revenues when the following criteria are met:

 

·                  persuasive evidence of an arrangementexists;

 

·                  delivery has occurred or serviceshave been rendered;

 

·                  the seller’s price to the buyer isfixed or determinable; and

 

·                  the collection of the sale isreasonably assured.

 

The portion ofrevenue that is unearned is recorded under “Deferred revenue” when customersare invoiced.

 

Revenuerecognition policies for each of the Company’s main product lines areas follows:

 

Cable andwireless services are provided under arrangements with multiple deliverables,for which there are two separate accounting units: one for subscriber services(operating services and connecting fees) and the other, for equipment sales tosubscribers, including activation fees related to wireless telephones.Components of multiple deliverable arrangements are separately accounted forprovided the delivered elements have stand-alone value to the customers and thefair value of any undelivered elements can be objectively and reliablydetermined.

 

Cable connectionfee revenues are deferred and recognized as revenues over the estimated averageperiod that subscribers are expected to remain connected to the network. Theincremental and direct costs related to cable connection fees, in an amount notexceeding the revenue, are deferred and recognized as an operating expense overthe same period. The excess of these costs over the related revenues isrecognized immediately. Operating revenues from cable and other services, suchas Internet access, IP telephony and wireless telephone, are recognized whenservices are rendered. Revenue from equipment sales to subscribers and theircosts are recognized in income when the equipment is delivered and in the caseof wireless telephones, revenues from equipment sales are recognized in incomewhen the telephone is delivered and activated. Revenues from video rentals arerecorded as revenue when services are provided. Promotional offers related tosubscriber services are accounted for as a reduction in the related service revenueover the period of performance of the service contract. Promotional offersrelated to equipment sales, including wireless telephones, are accounted for asa reduction in the related equipment sales when the equipment is delivered.Operating revenues related to service contracts are recognized in income overthe life of the specific contracts on a straight-line basis over the period inwhich the services are provided. 

 

(h)                                 Financialinstruments:

 

Classification,recognition and measurement:

 

Effective January 1,2007, financial instruments must be classified as held-for-trading,available-for-sale, held-to-maturity, loans and receivables, or other financialliabilities and measurement in subsequent periods depends on theirclassification. The Company has classified its cash and cash equivalents, itstemporary investments and its bank indebtedness as held-for-trading. Amountsreceivable from affiliated companies, loans and other long-term receivablesincluded in other assets have been classified as loans and receivables. Allinvestments were classified as available-for-sale.

 

All of theCompany’s financial liabilities, except for bank indebtedness, were classifiedas other liabilities.

 

Financialinstruments held-for-trading are measured at fair value with changes recognizedin income as a loss or gain on valuation and translation of financialinstruments. Available-for-sale financial assets are measured at fair value orat cost in the case of equity instruments that do not have a quoted marketprice in an active market and changes in fair value recorded in comprehensiveincome. Financial assets classified as loans and receivables and otherfinancial liabilities are measured at amortized cost, using the effectiveinterest method of amortization.

 

F-11

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Tableof Contents

 

**VIDEOTRON LTD.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,Continued**

**Years ended December 31, 2008, 2007 and2006**

**(tabular amounts are in thousands of Canadiandollars)**

 

**1.****                                      SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES (Continued):**

 

(h)                                 Financial instruments (Continued):

 

Financing feesrelated to long-term financing are capitalized in reduction of long-term debtand amortized using the effective interest rate method.

 

Derivativefinancial instruments and hedge accounting:

 

The Companyuses various derivative financial instruments to manage its exposure tofluctuations in foreign currency exchange rates and interest rates. The Companydoes not hold or use any derivative instruments for trading purposes. Underhedge accounting, the Company documents all hedging relationships betweenderivative financial instruments and hedged items, as well as its strategy forusing hedges and its risk-management objective. The Company also designates itsderivative financial instruments as either fair value hedges or cash flowhedges. The Company assesses the effectiveness of derivative financialinstruments when the hedge is put in place and on an ongoing basis.

 

The Companyenters into the following types of derivative financial instruments:

 

·                  The Company uses foreign exchangeforward contracts to hedge the foreign currency rate exposure on anticipatedequipment or inventory purchases in a foreign currency. These foreign exchangeforward contracts are designated as cash flow hedges.

 

·                  The Company uses cross-currencyinterest rate swaps to hedge (i) the foreign currency rate exposure oninterest and principal payments on certain foreign currency denominated debtand/or (ii) the fair value exposure on certain debt resulting from changesin interest rates. The cross-currency interest rate swaps that set all futureinterest and principal payments on U.S. denominated debt in fixed Canadiandollars are designated as cash flow hedges. The Company’s cross-currencyinterest rate swaps that set all future interest and principal payments onU.S. denominated debt in fixed Canadian dollars, in addition to convertingthe interest rate from a fixed rate to a floating rate, or converting afloating rate index to another floating rate index, are designated as fairvalue hedges.

 

Effective January 1,2007, under hedge accounting, the Company applies the following accountingpolicies:

 

·                  For derivative financial instrumentsdesignated as fair value hedges, changes in the fair value of the hedgingderivative recorded in income are substantially offset by changes in the fairvalue of the hedged item to the extent that the hedging relationship iseffective. When a fair value hedge is discontinued, the carrying value of thehedged item is no longer adjusted and the cumulative fair value adjustments tothe carrying value of the hedged item are amortized to income over theremaining term of the original hedging relationship.

 

·                  For derivative financial instrumentsdesignated as cash flow hedges, the effective portion of a hedge is reported inother comprehensive income until it is recognized in income during the sameperiod in which the hedged item affects income, while the ineffective portionis immediately recognized in the consolidated statement of income. When a cashflow hedge is discontinued, the amounts previously recognized in accumulatedother comprehensive income are reclassified to income when the variability inthe cash flows of the hedged item affects income.

 

Prior to 2007,under hedge accounting, the Company recorded its hedge relationshipsas follows:

 

·                  For purchases of equipment orinventory hedged by foreign exchange forward contracts, foreign exchangetranslation gains and losses were recognized as an adjustment to the cost ofthe hedged item, when the transaction was recorded.

 

·                  For long-term debt in foreigncurrency hedged by foreign exchange forward contracts and cross-currencyinterest rate swaps, foreign exchange translation gains and losses on long-termdebt were offset by corresponding gains and losses on a derivative instrumentrecorded under other assets or other liabilities. The fees on forward foreignexchange contracts and on cross-currency swaps were recognized as an adjustmentto interest expense over the term of the agreement.

 

·                  In addition, realized and unrealizedgains or losses associated with derivative financial instruments that wereterminated or ceased to be effective prior to maturity, for hedge accountingpurposes, were deferred under other current or non-current assets orliabilities on the consolidated balance sheets and recognized in income in theperiod in which the underlying hedged transaction was recognized. In the eventa designated hedged item  was sold,extinguished or matured prior to the termination of the related derivativeinstrument, any realized or unrealized gain or loss on such derivativefinancial instrument, was recognized in income.

 

Any change inthe fair value of these derivative financial instruments recorded in income isincluded in the loss or gain on valuation and translation of financialinstruments. Interest expense on hedged long-term debt is reported at thehedged interest and foreign currency rates.

 

F-12

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Table of Contents

 

**VIDEOTRON LTD.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,Continued**

**Years ended December 31, 2008, 2007 and2006**

**(tabular amounts are in thousands of Canadiandollars)**

 

**1.****                                      SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES (Continued):**

 

(h)                                 Financial instruments (Continued):

 

Derivativefinancial instruments and hedge accounting:(Continued):

 

Derivativefinancial instruments that are ineffective or that are not designated ashedges, including derivatives that are embedded in financial or non-financialcontracts that are not closely related to the host contracts, are reported on amarket-to-market basis in the consolidated balance sheets. Any change in thefair value of these derivative financial instruments is recorded in theconsolidated statements of income as a loss or gain on valuation andtranslation of financial instruments. 

 

(i)                                     Cashand cash equivalents:

 

Cash and cashequivalents include highly liquid investments purchased three months or lessfrom maturity and are recorded at fair value. 

 

(j)                                     Inventories:

 

Inventoriesare valued at the lower of cost, determined by the weighted average costmethod, and net realizable value. Net realizable value represents the estimatedselling price in the ordinary course of business less the estimated costs ofcompletion and the estimated costs necessary to make the sale. 

 

(k)                                  Incometaxes:

 

The Companyuses the liability method of accounting for income taxes. Under this method,future income tax assets and liabilities are recognized for the estimatedfuture tax consequences attributable to differences between the carryingamounts of existing assets and liabilities in the consolidated financialstatements and their respective tax bases. Future income tax assets and liabilitiesare measured using substantively enacted tax rates in effect for the year inwhich those temporary differences are expected to be recovered or settled. Theeffect of a change in tax rates on future income tax assets and liabilities isrecognized in income in the period that includes the substantive enactmentdate. A valuation allowance is established, if necessary, to reduce any futureincome tax asset to an amount that is more likely than not to be realized.

 

In the courseof the Company’s operations, there are a number of uncertain tax positions dueto the complexity of certain transactions and due to the fact that related taxinterpretations and legislation are continually changing. When a tax positionis uncertain, the Company recognizes an income tax benefit or reduces an incometax liability only when it is probable that the tax benefit will be realized inthe future or that the income tax liability is no longer probable. 

 

(l)                                     Fixedassets:

 

Fixed assetsare stated at cost, net of government grants and investment tax credits. Costrepresents acquisition or construction costs, including preparation,installation and testing costs and interest incurred with respect to the fixedassets until they are ready for commercial production. In the case of projectsto construct and connect receiving and distribution networks of cable andwireless, cost includes equipment, direct labour and direct overhead costs.Projects under development may also include advances for equipment underconstruction. Expenditures for additions, improvements and replacements arecapitalized, whereas maintenance and repair expenditures are expensedas incurred.

 

Amortizationis calculated using the following depreciation bases and periods or rates:

 
| **Asset**                           | ** ** | **Basis**          | ** ** | **Period/rate**                 | ** ** |
|-------------------------------------|------------|--------------------|------------|---------------------------------|------------|
| Buildings                           |       | Declining  balance |       | 5%                              |       |
| Furniture and equipment             |       | Declining  balance |       | 20% to 30%                      |       |
|                                |       | and  straight-line |       | 3 years  to 7 years   |       |
| Receiving and distribution networks |       | Straight-line      |       | 3 years  to 20 years  |       |
| Terminals and operating system      |       | Straight-line      |       | 5 years  and 10 years |       |
| Coding and transmission material    |       | Declining  balance |       | 20%                             |       |

 

Leaseholdimprovements are amortized over the lower of the term of the lease andeconomic life.

 

F-13

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Table of Contents

 

**VIDEOTRON LTD.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,Continued**

**Years ended December 31, 2008, 2007 and2006**

**(tabular amounts are in thousands of Canadiandollars)**

 

**1.****                                      SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES (Continued):**

 

The Companydoes not record an asset retirement obligation in connection with its cabledistribution networks. The Company expects to renew all of its agreements withutility companies to access their support structures in the future, making theretirement date undeterminable for these assets. 

 

(m)                               Goodwilland other intangible assets:

 

Goodwill isnot amortized.

 

Goodwill istested for impairment annually or more frequently if events or changes incircumstances indicate that the asset might be impaired. The impairment test iscarried out in two steps. In the first step, the carrying amount of thereporting unit is compared to its fair value. When the fair value of areporting unit exceeds its carrying amount, then the goodwill of the reportingunit is considered not to be impaired and the second step is not required. Thesecond step of the impairment test is carried out when the carrying amount of areporting unit exceeds its fair value, in which case the implied fair value ofthe reporting unit’s goodwill is compared with its carrying amount to measurethe amount of the impairment loss, if any. When the carrying amount of thereporting unit’s goodwill exceeds the implied fair value of the goodwill, animpairment loss is recognized in an amount equal to the excess.

 

Intangibleassets are comprised of Advanced Wireless Services (“AWS”) licences and thecost of these licences includes acquisition costs and interest incurred duringthe development period of the wireless network project. 

 

(n)                                 Stock-basedcompensation:

 

Thecompensation cost attributable to stock-based awards to employees that call forsettlement in cash or other assets, at the option of the employee is recognizedin operating expense over the vesting period. Changes in the intrinsic value ofthe stock option awards between the grant date and the measurement date resultin a change in the liability and of the compensation cost. 

 

(o)                                 Pensionplans and postretirement benefits:

 

(i)                                     Pensionplans:

 

The Companyoffers defined benefit pension plans and defined contribution pension plans tosome of its employees. Defined benefit pension plan costs are determined usingactuarial methods and are funded through contributions determined in accordancewith the projected benefit method pro-rated on service, which incorporatesmanagement’s best estimate of future salary levels, other cost escalations,retirement ages of employees and other actuarial factors. Pension plan expenseis charged to operations and includes:

 

·                  Cost of pension plan benefitsprovided in exchange for employee services rendered during the year.

 

·                  Amortization of the initial nettransition asset, prior service costs and amendments on a straight-line basisover the expected average remaining service period of the active employee groupcovered by the plans.

 

·                  Interest cost of pension planobligations, expected return on pension fund assets, and amortization ofcumulative unrecognized net actuarial gains and losses, in excess of 10% of thegreater of the accrued benefit obligation or the fair value of plan assets,over the expected average remaining service period of the active employee groupcovered by the plans.

 

When an eventgives rise to both a curtailment and a settlement, the curtailment is accountedfor prior to the settlement.

 

Actuarialgains and losses arise from the difference between the actual rate of return onplan assets for a period and the expected return on plan assets for thatperiod, or from changes in actuarial assumptions used to determine the accruedbenefit obligation.

 

The Companyuses the fair value of plan assets as of the end of the year to evaluate planassets for the purpose of calculating the expected return on plan assets. 

 

(ii)                                  Postretirementbenefits: 

 

The Company offershealth, life and dental insurance plans to some of its retired employees. Thecost of postretirement benefits is determined using actuarial methods and therelated benefits are funded by the Company as they become due. The Companyamortizes the cumulative unrecognized net actuarial gains and losses, in excessof 10% of the accrued benefit obligation, over the expected average remainingservice life of the active employee group covered by the plans. 

 

F-14

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Table of Contents

 

**VIDEOTRON LTD.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,Continued**

**Years ended December 31, 2008, 2007 and2006**

**(tabular amounts are in thousands of Canadiandollars)**

 

**1.****                                      SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES (Continued):**

 

(p)                                 Rates subject to CTRCregulation:

 

The Company’soperations are subject to rate regulations on certain services based ongeographical regions, mainly by the *BroadcastingAct (Canada)* and the *TelecommunicationsAct (Canada)*, both managed by the Canadian Radio-television andTelecommunication Commission (“CRTC”). Accordingly, the Company’s operatingrevenues could be affected by changes in regulations or decisions made by thisregulating body. The Company does not select accounting policies that differfrom GAAP, even though the Company is subject to these regulations.

 

(q)                                 Futurechanges in accounting standards:

 

In January 2008,the CICA issued Section 3064, *Goodwilland Intangible Assets*, which will replace Section 3062, *Goodwill and Other Intangible Assets*,and which results in the withdrawal of Section 3450, *Research and Development Costs* andEmerging Issues Committee (“EIC”) Abstract 27, *Revenuesand Expenditures During the Pre-operating Period*, and amendments toAccounting Guideline (“AcG”) 11, *Enterprisesin the Development Stage*. The new standard provides guidance on therecognition of intangible assets in accordance with the definition of an assetand the criteria for asset recognition, as well as clarifying the applicationof the concept of matching revenues and expenses, whether those assets areseparately acquired or internally developed. This standard applies to interimand annual financial statements relating to fiscal years beginning on or after October 1,2008. The Company is currently evaluating the effects of adopting thisstandard, although it does not expect the adoption will have a material impacton its consolidated financial statements.

 

**2.****                                      FINANCIALEXPENSES:**

 
| ** **                                                              | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Third parties:                                                          |       |     |       |     |       |     |       |
| Interest on long-term debt                                              |       | $        | 111,601    |     | $          | 81,218   |       | $ | 81,316 |   |
| Amortization of financing costs and  long-term debt premium or discount |       | 1,623    |       | 441      |       | 432      |       |
| Other                                                                   |       | (605     | )          | (68      | )          | (441     | )          |
|                                                                    |       | 112,619  |       | 81,591   |       | 81,307   |       |
| Affiliated parties:                                                     |       |     |       |     |       |     |       |
| Interest expense (net of income)                                   |       | 269,822  |       | 165,460  |       | 472      |       |
| Dividend income                                                         |       | (278,753 | )          | (170,904 | )          | —   |       |
|                                                                    |       | (8,931   | )          | (5,444   | )          | 472      |       |
| Interest capitalized to the cost of:                                    |       |     |       |     |       |     |       |
| Fixed assets                                                            |       | (249     | )          | —   |       | —   |       |
| Intangible assets                                                       |       | (12,515  | )          | —   |       | —   |       |
|                                                                    |       | (12,764  | )          | —   |       | —   |       |
|                                                                    |       | $        | 90,924     |     | $          | 76,147   |       | $ | 81,779 |   |

 

**3.****                                      LOSS(GAIN) ON VALUATION AND TRANSLATION OF FINANCIAL INSTRUMENTS:**

 
| ** **                                                                                                      | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Loss (gain) on embedded derivatives and  derivative financial instruments to which hedge accounting is not used |       | $        | 6,829      |     | $          | 2,031    |       | $ | (19 | ) |
| Loss (gain) on ineffective portion of fair  value hedges                                                        |       | 12,848   |       | (12,541  | )          | —   |       |
| Gain on revaluation of Additional Amount  payable                                                               |       | —   |       | —   |       | (3,286   | )          |
| Loss on foreign currency translation of  short-term monetary items                                              |       | 4,996    |       | 1,415    |       | 1,112    |       |
|                                                                                                            |       | $        | 24,673     |     | $          | (9,095   | )          | $ | (2,193 | ) |

 

F-15

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Table of Contents

 

**VIDEOTRON LTD.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,Continued**

**Years ended December 31, 2008, 2007 and2006**

**(tabular amounts are in thousands of Canadiandollars)**

 

**4.****                                      IMPAIRMENTOF GOODWILL:**

 

In the fourthquarter of 2007, the Company concluded that the goodwill of its subsidiary, LeSuperClub Vidéotron Ltée, related to the DVDs and games rental operations inOntario was impaired. Accordingly, an impairment charge of $5.4 millionwas recorded.

 

**5.****                                      BUSINESSREORGANIZATION:**

 

On January 1,2006, a company under common control, Videotron Telecom Ltd., merged withthe Company. On July 1, 2006, the Company also merged with its parent,9101-0827 Québec Inc. Those transactions have been accounted forusing the continuity of interest method, and the results of operations andfinancial position of Videotron Telecom Ltd. and9101-0827 Québec Inc. have been included in these consolidatedfinancial statements as if the three companies had always been combined.

 

**6.****                                      INCOMETAXES:**

 

Income taxeson operations are as follows:

 
| ** ** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
| Current    |       | $        | 1,071      |     | $          | 67       |       | $ | (439 | ) |
| Future     |       | 72,031   |       | 38,191   |       | 64,669   |       |
|       |       | $        | 73,102     |     | $          | 38,258   |       | $ | 64,230 |   |

 

The followingtable reconciles income taxes at the Company’s domestic statutory tax rate of30.9% in 2008 (32.02% in 2007 and in 2006) and income taxes in the consolidatedstatements of income:

 
| ** **                                                                                                      | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Income taxes at domestic statutory tax rate                                                                     |       | $        | 144,826    |     | $          | 116,592  |       | $ | 79,412 |   |
| Increase (reduction) resulting from:                                                                            |       |     |       |     |       |     |       |
| Effect of non-deductible charges,  non-taxable income and differences between current and future tax rates |       | 10,038   |       | (4,207   | )          | (1,001   | )          |
| Change in valuation allowance                                                                                   |       | 9,718    |       | —   |       | —   |       |
| Change in future income tax balances due to  a change in substantively enacted tax rates                        |       | —   |       | (18,808  | )          | (14,914  | )          |
| Tax consolidation transactions with the  parent company                                                         |       | (86,135  | )          | (54,723  | )          | —   |       |
| Recognition of a deferred tax credit                                                                            |       | (5,690   | )          | —   |       | —   |       |
| Other                                                                                                           |       | 345      |       | (596     | )          | 733      |       |
| Income taxes                                                                                                    |       | $        | 73,102     |     | $          | 38,258   |       | $ | 64,230 |   |

 

The taxeffects of significant items comprising the Company’s net future tax positionsare as follows:

 
| ** **                                           | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|
| Loss carry-forwards                                  |       | $        | 33,028     |     | $          | 21,650 |   |
| Other provisions                                     |       | 3,279    |       | 10,093   |       |
| Long-term debt and derivative financial  instruments |       | (3,171   | )          | 13,614   |       |
| Fixed assets                                         |       | (190,833 | )          | (165,808 | )          |
| Other assets                                         |       | (16,905  | )          | (11,156  | )          |
|                                                 |       | (174,602 | )          | (131,607 | )          |
| Valuation allowance                                  |       | (18,032  | )          | —   |       |
| Net future income tax liabilities                    |       | $        | (192,634   | )        | $          | (131,607 | ) |

 

F-16

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Table of Contents

 

**VIDEOTRON LTD.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,Continued**

**Years ended December 31, 2008, 2007 and2006**

**(tabular amounts are in thousands of Canadiandollars)**

 

**6.****                                      INCOMETAXES (Continued):**

 

The currentand long-term future income tax assets and liabilities are as follows:

 
| ** **                        | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|
| Future income tax assets:         |       |     |       |     |       |
| Current                           |       | $        | 35,982     |     | $          | 31,585 |   |
| Long-term                         |       | 1,038    |       | 2,970    |       |
|                              |       | 37,020   |       | 34,555   |       |
| Future income tax liability:      |       |     |       |     |       |
| Long-term                         |       | (229,654 | )          | (166,162 | )          |
| Net future income tax liabilities |       | $        | (192,634   | )        | $          | (131,607 | ) |

 

As at December 31,2008, the Company had operating loss carry-forwards for income tax purposesavailable to reduce future taxable income of approximately $106.4 millionwhich will expire in 2028. As at December 31, 2008, the Company also hadcapital loss carry-forwards of approximately $2.1 million that can becarried forward indefinitely and applied only against futurecapital gains.

 

**7.****                                      ACCOUNTSRECEIVABLE:**

 
| ** ** | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------|------------|----------|------------|----------|------------|
| Trade      |       | $        | 163,014    |     | $          | 159,197 |   |
| Other      |       | 1,361    |       | 2,169    |       |
|       |       | $        | 164,375    |     | $          | 161,366 |   |

 

**8.****                                      INVENTORIES:**

 
| ** **                  | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|
| Subscribers’ equipment |       | $        | 26,109     |     | $          | 20,855 |   |
| Network materials           |       | 19,472   |       | 12,932   |       |
| Video store materials       |       | 2,715    |       | 5,658    |       |
|                        |       | $        | 48,296     |     | $          | 39,445 |   |

 

**9.****                                      SUBORDINATEDLOAN FROM PARENT COMPANY:**

 
| ** **                                              | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------------------------------|------------|----------|------------|----------|------------|
| Subordinated loan — Quebecor  Media Inc. |       | $        | 2,055,000  |     | $          | 1,995,000 |   |
|                                                         |            |          |            |          |            |  |  |

 

On January 3,2007, the Company contracted a subordinated loan of $1.0 billion fromQuebecor Media Inc., bearing interest at a rate of 10.5%, payable everysix months on June 20 and December 20, and maturing on January 3,2022. On May 31, 2007, the Company increased the subordinated loan by$870.0 million, maturing on May 31, 2022. The Company invested thetotal proceeds of $1.0 billion and $870.0 million into 1,000,000 and870,000 preferred shares, Series B, of9101-0835 Québec Inc., a subsidiary of Quebecor Media Inc. Theseshares carry the right to receive an annual dividend of 10.85%, payablesemi-annually.

 

On May 31,2007, CF Cable TV Inc., a wholly-owned subsidiary of the Company,contracted a subordinated loan of $125.0 million from QuebecorMedia Inc., bearing interest at a rate of 10.5%, payable every six monthson June 20 and December 20, and maturing on May 31, 2022. On thesame day, CF Cable TV Inc. invested the total proceeds of$125.0 million into 125,000 preferred shares, Series B, of9101-0835 Québec Inc., a subsidiary of Quebecor Media Inc. Theseshares carry the right to receive an annual dividend of 10.85%, payable semi-annually.

 

F-17

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Table of Contents

 

**VIDEOTRON LTD.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,Continued**

**Years ended December 31, 2008, 2007 and2006**

**(tabular amounts are in thousands of Canadiandollars)**

 

**9.****                                      SUBORDINATEDLOAN FROM PARENT COMPANY (Continued):**

 

On January 4,2008, the Company contracted a subordinated loan of $415.0 million fromQuebecor Media Inc., bearing interest at a rate of 10.5%, payable everysix months on June 20 and December 20, and maturing on January 4,2023. On the same day, the Company invested the total proceeds of$415.0 million into 415,000 preferred shares, Series B, of9101-0835 Québec Inc., a subsidiary of Quebecor Media Inc. Theseshares carry the right to receive an annual dividend of 10.85%, payablesemi-annually.

 

On January 4,2008, CF Cable TV Inc., a wholly-owned subsidiary of the Company,contracted a subordinated loan of $170.0 million from QuebecorMedia Inc., bearing interest at a rate of 10.5%, payable every six monthson June 20 and December 20, and maturing on January 4, 2023. Onthe same day, CF Cable TV Inc. invested the total proceeds of$170.0 million into 170,000 preferred shares, Series B, of9101-0835 Québec Inc., a subsidiary of Quebecor Media Inc. Theseshares carry the right to receive an annual dividend of 10.85%, payablesemi-annually.

 

On December 23,2008, 9101-0835 Québec Inc., a subsidiary of QuebecorMedia Inc., redeemed 525,000 preferred shares, Series B, for atotal cash consideration of $525.5 million, including cumulative dividendsof $0.5 million. On the same day, the Company used the total proceeds of$525.0 million to repay part of its subordinated loan contracted fromQuebecor Media Inc. on January 3, 2007.

 

The abovetransactions were carried out for tax consolidation purposes of QuebecorMedia Inc. and its subsidiaries.

 

**10.****                               FIXEDASSETS:**

 
| ** **                              | ** ** | **2008**  | ** ** |
|-----------------------------------------|------------|-----------|------------|
| ** **                              | ** ** | **Cost**  | ** ** | **Accumulated  amortization** | ** ** | **Net book  value** | ** ** |
| Land                                    |       | $         | 2,999      |   | $ | — |   | $ | 2,999 |   |
| Buildings                               |       | 53,681    |       | 18,819 |   | 34,862 |   |
| Furniture and equipment                 |       | 475,432   |       | 310,248 |   | 165,184 |   |
| Receiving and distribution networks     |       | 2,795,434 |       | 1,497,900 |   | 1,297,534 |   |
| Terminals and operating system          |       | 145,795   |       | 64,914 |   | 80,881 |   |
| Coding and transmission material        |       | 7,716     |       | 3,407 |   | 4,309 |   |
| Projects under development (3G Network) |       | 26,706    |       | — |   | 26,706 |   |
|                                    |       | $         | 3,507,763  |   | $ | 1,895,288 |   | $ | 1,612,475 |   |

 
| ** **                          | ** ** | **2007**  | ** ** |
|-------------------------------------|------------|-----------|------------|
| ** **                          | ** ** | **Cost**  | ** ** | **Accumulated  amortization** | ** ** | **Net book  value** | ** ** |
| Land                                |       | $         | 2,840      |   | $ | — |   | $ | 2,840 |   |
| Buildings                           |       | 50,140    |       | 17,216 |   | 32,924 |   |
| Furniture and equipment             |       | 413,637   |       | 291,776 |   | 121,861 |   |
| Receiving and distribution networks |       | 2,512,273 |       | 1,345,774 |   | 1,166,499 |   |
| Terminals and operating system      |       | 138,583   |       | 58,439 |   | 80,144 |   |
| Coding and transmission material    |       | 7,541     |       | 3,004 |   | 4,537 |   |
|                                |       | $         | 3,125,014  |   | $ | 1,716,209 |   | $ | 1,408,805 |   |

 

**11.****                               INTANGIBLEASSETS:**

 

In May 2008,the Company subscribed to 200,000,000 preferred shares Series B of9193-2962 Québec Inc., a subsidiary of Quebecor Media Inc., fora cash consideration of $200.0 million. In September 2008, theCompany subscribed to an additional 336,601,953 preferred shares, Series B,of 9193-2962 Québec Inc. for a cash consideration of$336.6 million. On September 23, 2008, the Company acquired all thecommon shares of 9193-2962 Québec Inc. for a cash consideration of$17.9 million and issuance of one common share of the Company. Thesetransactions were recorded at the carrying amount and resulted in an adjustmentof $1.0 million to the deficit for the difference between the carryingamount and the consideration paid.

 

As a result ofthe spectrum auction for AWS that ended July 21, 2008, 17 newspectrum licences for AWS, covering all of the province of Québec and certainareas of Ontario, were acquired for an aggregate amount of $554.5 million,which was fully paid in the third quarter of 

 

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Table of Contents

 

**VIDEOTRON LTD.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,Continued**

**Years ended December 31, 2008, 2007 and2006**

**(tabular amounts are in thousands of Canadiandollars)**

 

**11.****                               INTANGIBLEASSETS (Continued):**

 

2008. Inaddition, interest costs of $12.5 million were capitalized to the cost ofthese licences in 2008. The spectrum licenses were issued by Industry Canada onDecember 23, 2008, for an initial term of 10 years.

 

**12.****                               OTHERASSETS:**

 
| ** **                              | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|
| Deferred connection fees                |       | $        | 19,251     |     | $          | 18,794 |   |
| Deferred pension charges (note 23) |       | 2,915    |       | 3,035    |       |
| Other                                   |       | 13,914   |       | 8,637    |       |
|                                    |       | $        | 36,080     |     | $          | 30,466 |   |

 

**13.****                               ADDITIONALAMOUNT PAYABLE:**

 

Until itstransfer in 2006, the value of the Additional Amount payable, resulting fromthe repurchase of redeemable preferred shares in 2003, fluctuated based on aformula established as per the repurchase agreement.

 

On June 30,2006, the Additional Amount payable of $108.2 million was transferred tothe parent company in exchange for a cash consideration of $111.5 million.The excess of the consideration paid in the amount of $3.3 million wasrecorded to the deficit.

 

**14.****                               LONG-TERMDEBT:**

 
| ** **                                                 | ** ** | **Effective  interest rate as of  December 31,  2008** | ** ** | **Year of  maturity** | ** ** | **2008**  | ** ** | **2007** | ** ** |
|------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|----------------------------|------------|-----------|------------|----------|------------|
| Bank credit facility (i)                                   |       | 3.39%                                                                      |       | 2012                       |       | $         | 207,670    |     | $          | 147,721 |   |
| Senior Notes (ii)                                     |       | 6.59%                                                                      |       | 2014                       |       | 800,397   |       | 652,816  |       |
| Senior Notes (iii)                                    |       | 6.44%                                                                      |       | 2015                       |       | 212,449   |       | 172,818  |       |
| Senior Notes (iv)                                     |       | 9.38%                                                                      |       | 2018                       |       | 546,152   |       | —   |       |
| Total long-term debt                                       |       |                                                                       |       |                       |       | 1,766,668 |       | 973,355  |       |
| Change in fair value related to hedged  interest rate risk |       |                                                                       |       |                       |       | 49,402    |       | (14,477  | )          |
| Adjustments related to embedded derivatives                |       |                                                                       |       |                       |       | 11,465    |       | 4,636    |       |
| Financing fees, net of amortization                        |       |                                                                       |       |                       |       | (19,538   | )          | (12,526  | )          |
|                                                       |       |                                                                       |       |                       |       | $         | 1,807,997  |     | $          | 950,988 |   |

 

----

(i)                                     OnApril 7, 2008, the Company entered into amendments to its Senior SecuredCredit Facility pursuant to which commitments under the Senior Secured CreditFacility were increased from $450.0 million to $575.0 million and thematurity was extended to April 2012. Pursuant to these amendments, theCompany may, subject to certain conditions, increase the commitments under theSenior Secured Credit Facility by an additional $75.0 million(for aggregate commitments of $650.0 million). The credit facilitybears interest at Bankers’ acceptance or Canadian prime rates, plus a margin,depending on the Company’s leverage ratio. The credit facility is secured by afirst ranking hypothec on the universality of all tangible and intangibleassets, current and future, of the Company and its subsidiaries. As of December 31,2008, the credit facility was secured by assets with a carrying value of$5,105.9 million ($4,152.8 million in 2007). The credit facilitycontains covenants such as maintaining certain financial ratios and somerestrictions on the payment of dividends and asset acquisitions anddispositions.

 

(ii)                                  InOctober 2003, a first series of US$335.0 million in aggregateprincipal amount of Senior Notes was issued at a discount price of 99.0806% fornet proceeds of US$331.9 million, before issuance fees ofUS$5.7 million. In November 2004, a second series ofUS$315.0 million in aggregate principal amount of Senior Notes was issuedat a premium price of 105.0% for net proceeds of US$330.8 million, beforeissuance fees of US$4.1 million. These Notes bear interest at a rate of6.875%, payable every six months on January 15 and July 15, and willmature in January 2014. The Notes contain certain restrictions on theCompany, including limitations on its ability to incur additional indebtedness,and are unsecured. The Senior Notes are guaranteed by specific subsidiaries ofthe

 

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Table of Contents

 

**VIDEOTRON LTD.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,Continued**

**Years ended December 31, 2008, 2007 and2006**

**(tabular amounts are in thousands of Canadiandollars)**

 

**14.****                               LONG-TERMDEBT (Continued):**

 

Company. These Notes are redeemable at the option of the Company, inwhole or in part, at any time on or after January 15, 2009, at adecreasing premium.

 

(iii)                               InSeptember 2005, US$175.0 million in aggregate principal amount ofSenior Notes was issued at a discount price of 99.5% for net proceeds ofUS$174.1 million, before issuance fees of US$3.2 million. These Notesbear interest at a rate of 6.375%, payable every six months on December 15and June 15, and will mature on December 15, 2015. The Notes containcertain restrictions on the Company, including limitations on its ability toincur additional indebtedness, and are unsecured. The Senior Notes areguaranteed by specific subsidiaries of the Company. These Notes are redeemableat the option of the Company, in whole or in part, at any time on or after December 15,2010, at a decreasing premium.

 

(iv)                              OnApril 15, 2008, the Company issued US$455.0 million in aggregateprincipal amount of Senior Notes at a discount price of 98.432% for netproceeds of US$447.9 million, before financing fees ofUS$7.7 million. The new Senior Notes bear interest at a rate of 9.125% foran effective interest rate of 9.64% payable every six months on June 15and December 15, and will mature on April 15, 2018. The Notes containcertain restrictions on the Company, including limitations on its ability toincur additional indebtedness, to pay dividends and make other distributions,and are unsecured. The Senior Notes are guaranteed by specific subsidiaries ofthe Company. These Notes are redeemable at the option of the Company, in wholeor in part, at any time on or after April 15, 2013, at a decreasingpremium.

 

On December 31,2008, the Company and its subsidiaries were in compliance with alldebt covenants.

 

Principalrepayments on long-term debt over the coming years are as follows:

 
| 2009                |   | $         | — |   |
|---------------------|--------|-----------|--------|--------|
| 2010                |   | —    |   |
| 2011                |   | —    |   |
| 2012                |   | 207,670   |   |
| 2013                |   | —    |   |
| 2014 and thereafter |   | 1,558,998 |   |

 

**15.****                               OTHERLIABILITIES:**

 
| ** **                                                             | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Accrued pension and post-retirement  benefits liability (note 23) |       | $        | 9,831      |     | $          | 9,656 |   |
| Deferred revenues                                                      |       | 20,494   |       | 21,112   |       |
| Non-controlling interest                                               |       | 1,047    |       | 947      |       |
| Other                                                                  |       | 217      |       | —   |       |
|                                                                   |       | $        | 31,589     |     | $          | 31,715 |   |

 

**16.****                               CAPITALSTOCK:**

 

(a)                                  Authorizedcapital stock:

 

In December 2008,the Company amended its articles in order to add a new class of preferredshares, Series H.

 

As at December 31,2008, the authorized capital stock is as follows:

 

An unlimitednumber of common shares, without par value, voting and participating

 

An unlimitednumber of preferred shares, Series B, Series C, Series D, Series E,Series F, and Series H, without par value, ranking prior to thecommon shares with regards to payment of dividends and repayment of capital,non-voting, non-participating, a fixed monthly non-cumulative dividend of 1%,retractable and redeemable

 

An unlimitednumber of preferred shares, Series G, ranking prior to all other shareswith regards to payment of dividends and repayment of capital, non-voting,non-participating carrying the rights and restrictions attached to the class aswell as a fixed annual cumulative preferred dividend of 11.25%, retractableand redeemable.

 

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Table of Contents

 

**VIDEOTRON LTD.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,Continued**

**Years ended December 31, 2008, 2007 and2006**

**(tabular amounts are in thousands of Canadiandollars)**

 

**16.****                               CAPITALSTOCK (Continued):**

 

(b)                                 Issuedcapital stock and paid:

 
| ** **                                                                                 | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| 2,515,277 common shares, Series A  (2,515,276 as at December 31, 2007) |       | $        | 1          |     | $          | 46,177 |   |
|                                                                                            |            |          |            |          |            |  |  |

 

On January 1,2006, 2,657,400,000 common shares were issued by9101-0827 Québec Inc. to its parent company in exchange of theinvestment of 11,174,813 common shares of Videotron Ltd.

 

On January 1,2006, as a result of the merger of Videotron Ltd. and VideotronTelecom Ltd., the previously issued common shares were converted into2,515,276 common shares of the new authorized share capital; the 2 Class Cshares of Videotron Telecom Ltd. previously issued were converted into2 preferred shares, Series B of the new authorized share capital; the170,000 preferred shares, Series G of Videotron Ltd. wereconverted into 170,000 preferred shares, Series G of the newauthorized share capital.

 

In June 2006and in December 2007, the Company redeemed 105,000 and65,000 preferred shares, Series G, respectively, from Groupe deDivertissement SuperClub Inc. for total cash considerations of$105.0 million and $65.0 million, respectively. Series G shareswere eliminated upon consolidation.

 

On June 30,2006, 9101-0827 Québec inc. issued 103,274 common shares to itsparent company for a total consideration of $111.5 million(see note 13).

 

On July 1,2006, as a result of the merger of Videotron Ltd. and9101-0827 Québec Inc., the previously issued common shares wereconverted into 2,515,276 common shares of the new authorized sharecapital; the 2 preferred shares, Series B of Videotron Ltd. werecancelled; the 65,000 preferred shares, Series G were converted into65,000 preferred shares, Series G of the new authorizedshare capital.

 

On severaloccasions during the years ended December 31, 2008, 2007 and 2006, theCompany reduced the paid-up capital of its common shares by total cashdistributions of $120.0 million, $299.6 million and$108.7 million, respectively. In 2008, $73.8 million of the$120.0 million were recorded as a reduction of contributed surplus.

 

On September 23,2008, as part of the acquisition of 9193-2962 Québec Inc., theCompany issued one common share for a cash consideration of one dollar.

 

**17.****                               STOCK-BASEDCOMPENSATION PLAN:**

 

Under a stockoption plan established by the parent company, a number of Common shares of theparent company have been set aside for officers, senior employees, directorsand other key employees of the Company and its subsidiaries. Each option may beexercised within a maximum period of 10 years following the date of grantat an exercise price not lower than, as the case may be, the fair market valueof the Common shares of the parent company, at the date of grant, as determinedby the parent company’s Board of Directors (if the Common shares of theparent company are not listed on a stock exchange at the time of the grant) orthe five-day weighted average market price ending on the day preceding the dateof grant of the Common shares of the parent company on the stock exchangeswhere such shares are listed at the time of grant. As long as the Common sharesof the parent company have not been listed on a recognized stock exchange,optionees may exercise their vested options during one of the followingperiods: from March 1 to March 30, from June 1 to June 29,from September 1 to September 29 and from December 1 to December 30of each year. Holders of options under the plan have the choice at the time ofexercising their options to receive an amount in cash (equal to the differencebetween either the five-day weighted average market price ending on the daypreceding the date of exercise of the Common Shares of the parent company onthe stock exchanges where such shares are listed at the time of exercise or thefair market value, as determined by the parent company’s Board of Directors,and the exercise price of their vested options) or, subject to certain statedconditions, exercise their options to purchase Common shares of the parentcompany at the exercise price. Except under specific circumstances, and unlessthe Compensation Committee decides otherwise, options vest over a five-yearperiod in accordance with one of the following vesting schedules as determinedby the Compensation Committee at the time of grant: (i) equally over fiveyears with the first 20% vesting on the first anniversary of the date of thegrant; (ii) equally over four years with the first 25% vesting on thesecond anniversary of the date of grant; and (iii) equally over threeyears with the first 331/3%vesting on the third anniversary of the date of grant. The acquisition of the “rightto profit” on certain options may also be subject to performance criteria.

 

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Table of Contents

 

**VIDEOTRON LTD.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,Continued**

**Years ended December 31, 2008, 2007 and2006**

**(tabular amounts are in thousands of Canadiandollars)**

 

**17.****                               STOCK-BASEDCOMPENSATION PLAN (Continued):**

 

The followingtable gives summary information on outstanding options granted by the parentcompany to the employees of the Company as at December 31, 2008and 2007:

 
| ** **                    | ** ** | **2008**    | ** ** | **2007**                               | ** ** |
|-------------------------------|------------|-------------|------------|----------------------------------------|------------|
| ** **                    | ** ** | **Options** | ** ** | **Weighted  average  exercise  price** | ** ** | **Options** | ** ** | **Weighted  average  exercise  price** | ** ** |
| Balance at beginning of year  |       | 2,101,226   |       | $                                      | 35.95      |   | 861,767 |   | $ | 23.43 |   |
| Granted                       |       | 70,000      |       | 45.82                                  |       | 1,255,000 |   | 44.45 |   |
| Exercised                     |       | (610,962    | )          | 20.38                                  |       | (1,936 | ) | 22.73 |   |
| Cancelled                     |       | (178,229    | )          | 43.53                                  |       | (13,605 | ) | 28.74 |   |
| Balance at end of year        |       | 1,382,035   |       | $                                      | 42.35      |   | 2,101,226 |   | $ | 35.95 |   |
| Vested options at end of year |       | 27,999      |       | $                                      | 27.75      |   | 558,096 |   | $ | 19.44 |   |

 

During theyear ended December 31, 2008, 610,962 stock options were exercisedand resulted in cash payments of $19.1 million for the Company.

 

The followingtable gives summary information on outstanding options as at December 31, 2008:

 
| ** **                                 | ** ** | **Outstanding options** | ** ** | **Vested options**                        | ** ** |
|--------------------------------------------|------------|------------------------------|------------|------------------------------------------------|------------|
| **Range of exercise price** | ** ** | **Number**                   | ** ** | **Weighted  average  years to  maturity** | ** ** | **Weighted  average  exercise  price** | ** ** | **Number** | ** ** | **Weighted  average  exercise  price** | ** ** |
| $15.19 to 21.75                            |       | 13,013                       |       | 5.08                                           |       | $ | 20.82 |   | 10,026 |   | $ | 20.55 |   |
|  22.98 to 33.41                       |       | 209,022                      |       | 7.43                                           |       | 31.62 |   | 17,973 |   | 31.77 |   |
|  44.45 to 45.82                       |       | 1,160,000                    |       | 8.67                                           |       | 44.53 |   | — |   | — |   |
| $15.19 to 45.82                            |       | 1,382,035                    |       | 8.44                                           |       | $ | 42.35 |   | 27,999 |   | $ | 27.75 |   |

 

For the yearended December 31, 2008, a net reversal of $2.4 million related tothe stock-based plan is included in income (a net charge of$11.6 million and $5.1 million in 2007 and 2006, respectively).

 

**18.****                               ACCUMULATEDOTHER COMPREHENSIVE LOSS:**

 

Amountsaccounted for in the accumulated comprehensive loss relate solely to cash flow hedges.

 

No significantamount is expected to be reclassified to income over the next 12 months inconnection with derivatives designated as cash flow hedges. The balance isexpected to reverse over a 91/2-year period.

 

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Table of Contents

 

**VIDEOTRON LTD.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,Continued**

**Years ended December 31, 2008, 2007 and2006**

**(tabular amounts are in thousands of Canadiandollars)**

 

**19.****                               COMMITMENTSAND CONTINGENCES:**

 

(a)                                  Leasesand purchasing agreements:

 

Under theterms of operating leases or purchasing agreements, the Company is committed tomake the following minimum annual payments over the next years:

 
| ** **          | ** ** | **Leases** | ** ** | **Other  commitments** | ** ** |
|---------------------|------------|------------|------------|------------------------|------------|
| 2009                |       | $          | 22,764     |                   | $          | 10,980 |   |
| 2010                |       | 14,440     |       | 6,247                  |       |
| 2011                |       | 11,079     |       | 5,410                  |       |
| 2012                |       | 9,484      |       | 236                    |       |
| 2013                |       | 7,901      |       | —                 |       |
| 2014 and thereafter |       | 58,507     |       | —                 |       |
|                     |            |            |            |                        |            |  |  |

 

Operatinglease expenses amounted to $20.9 million, $20.8 million and $21.0 millionfor the years ended December 31, 2008, 2007 and 2006, respectively. 

 

(b)                                 Contingencies:

 

A number oflegal proceedings against the Company and its subsidiaries are pending. In theopinion of the management of the Company and its subsidiaries, the outcome ofthese proceedings is not expected to have a material adverse effect on theCompany’s results or on its financial position.

 

**20.****                               GUARANTEES:**

 

In the normalcourse of business, the Company enters into numerous agreements containingguarantees, including the following:

 

*Operating leases:*

 

The Companyhas guaranteed a portion of the residual values of certain assets underoperating leases for the benefit of the lessor. Should the Company terminatethese leases prior to term (or at the end of the lease term) and shouldthe fair value of the leased assets be less than the guaranteed residual value,the Company must, under certain conditions, compensate the lessor for a portionof the shortfall. In addition, a subsidiary of the Company has provided guaranteesto the lessor under premise leases for certain videostore franchisees, withexpiry dates through 2017. Should the lessee default under the agreement, theCompany must, under certain conditions, compensate the lessor. As at December 31,2008, the maximum exposure in respect of these guarantees was$16.3 million and no liability has been recorded in the consolidatedbalance sheet. In prior years, the Company has not made any payments relatingto these guarantees.

 

*Outsourcing companies and suppliers:*

 

In the normalcourse of its operations, the Company enters into contractual agreements withoutsourcing companies and suppliers. In some cases, the Company agrees toprovide indemnifications in the event of legal procedures initiated againstthem. In other cases, the Company provides indemnification to counterpartiesfor damages resulting from the outsourcing companies and suppliers. The natureof the indemnification agreements prevents the Company from estimating themaximum potential liability it could be required to pay. No amount has beenaccrued in the consolidated financial statements with respect to theseindemnifications. In prior years, the Company has not made any paymentsrelating to these guarantees.

 

**21.****                               FINANCIALINSTRUMENTS AND FINANCIAL RISK MANAGEMENT:**

 

The Company’sfinancial risk management policies have been established to identify andanalyze the risks faced by the Company, to set appropriate risk limits andcontrols, and to monitor risks and adherence to limits. Risk management policiesare reviewed regularly to reflect changes in market conditions and in theCompany’s activities.

 

From its useof financial instruments, the Company is exposed to credit risk, liquidityrisk, and market risks relating to foreign exchange fluctuations, interest ratefluctuations and equity prices. In order to manage its foreign exchange andinterest rate risks, the Company and its subsidiaries use derivative financialinstruments (i) to achieve a targeted balance of fixed andvariable rate debts and (ii) to set in Canadian dollars all futurepayments on debts denominated in U.S. dollars (interest and principal) andcertain purchases of inventory and other capital expenditures denominated in aforeign currency. The Company does not intend to settle its financialderivative instruments prior to their 

 

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Table of Contents

 

**VIDEOTRON LTD.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,Continued**

**Years ended December 31, 2008, 2007 and2006**

**(tabular amounts are in thousands of Canadiandollars)**

 

**21.****                               FINANCIALINSTRUMENTS AND FINANCIAL RISK MANAGEMENT (Continued):**

 

maturity, asnone of these instruments are held or issued for speculative purposes. TheCompany designates its derivative financial instruments either as fair valuehedges or cash flow hedges when they quality for hedge accounting.

 

(a)                                  Descriptionof derivative financial instruments: 

 

(i)                                     Foreignexchange forward contracts:

 
| **Currencies (sold/bought)** | ** ** | **Maturing**           | ** ** | **Weighted average  exchange rate** | ** ** | **Notional amount  (in millions  of dollars)** | ** ** |
|-----------------------------------|------------|------------------------|------------|-----------------------------------------------|------------|---------------------------------------------------------------|------------|
| $/US$                             |       | Less than  1 year |       | 1.0865                                        |       | 75.5                                                          |       |

 

(ii)                                  Cross-currencyinterest rate swaps:

 
| ** **   | ** ** | **Period  covered** | ** ** | **Notional  amount  (in millions  of dollars)** | ** ** | **Annual  effective  interest rate  using  hedged rate** | ** **                                          | **Annual  nominal  interest  rate of  debt** | ** ** | **CDN dollar  exchange rate  on interest and  capital  payments per  one U.S. dollar** | ** ** |
|--------------|------------|---------------------|------------|-----------------------------------------------------------|------------|--------------------------------------------------------------------|-----------------------------------------------------|---------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------|------------|
| Senior Notes |       | 2004 to 2014        |       | US$                                                       | 190.0      |                                                               | Bankers’  acceptances 3 months plus 2.80% |                                              | 6.875      | %                                                                                                                         | 1.2000     |   |
| Senior Notes |       | 2004 to 2014        |       | US$                                                       | 125.0      |                                                               | 7.45%                                               |                                              | 6.875      | %                                                                                                                         | 1.1950     |   |
| Senior Notes |       | 2003 to 2014        |       | US$                                                       | 200.0      |                                                               | Bankers’  acceptances 3 months plus 2.73% |                                              | 6.875      | %                                                                                                                         | 1.3425     |   |
| Senior Notes |       | 2003 to 2014        |       | US$                                                       | 135.0      |                                                               | 7.66%                                               |                                              | 6.875      | %                                                                                                                         | 1.3425     |   |
| Senior Notes |       | 2005 to 2015        |       | US$                                                       | 175.0      |                                                               | 5.98%                                               |                                              | 6.375      | %                                                                                                                         | 1.1781     |   |
| Senior Notes |       | 2008 to 2018        |       | US$                                                       | 455.0      |                                                               | 9.65%                                               |                                              | 9.125      | %                                                                                                                         | 1.0210     |   |

 

Certaincross-currency interest rate swaps entered into by the Company include anoption that allows each party to unwind the transaction on a specific date atthe then settlement amount. 

 

(b)                                 Fairvalue of financial instruments:

 

The carryingamount of accounts receivable from external or related parties (classified asloans and receivables), bank indebtedness, accounts payable and accrued chargesto external or related parties (classified as other liabilities) approximatestheir fair value since these items will be realized or paid within one year orare due on demand.

 

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Table of Contents

 

**VIDEOTRON LTD.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,Continued**

**Years ended December 31, 2008, 2007 and2006**

**(tabular amounts are in thousands of Canadiandollars)**

 

**21.****                               FINANCIALINSTRUMENTS AND FINANCIAL RISK MANAGEMENT (Continued):**

 

(b)                                 Fairvalue of financial instruments (Continued):

 

The carryingvalues and fair values of long-term debt and derivative financial instrumentsas of December 31, 2008 and 2007 are as follows:

 
| ** **                         | ** ** | **2008**            | ** ** | **2007**        | ** ** |
|------------------------------------|------------|---------------------|------------|-----------------|------------|
| ** **                         | ** ** | **Carrying  value** | ** ** | **Fair  value** | ** ** | **Carrying  value** | ** ** | **Fair  value** | ** ** |
| Long-term debt(1)                  |       | $                   | (1,766,668 | )               | $          | (1,577,000 | ) | $ | (973,355 | ) | $ | (938,158 | ) |
| Cross currency interest rate swaps |       | 69,486              |       | 69,486          |       | (241,320 | ) | (241,320 | ) |
| Forward foreign exchange contract  |       | 9,013               |       | 9,013           |       | (4,236 | ) | (4,236 | ) |
|                                    |            |                     |            |                 |            |  |  |  |  |  |  |  |  |

 

----

(1)                                  The carrying value of long-term debt excludesadjustments to record changes in the fair value of long-term debt related tohedged interest risk, the embedded derivatives or the financing fees.

 

The fair valueof long-term debt is estimated based on discounted cash flows using year-endmarket yields or the market value of similar instruments with the samematurity, or quoted market prices when available. The majority of derivativefinancial instruments (e.g. cross currency interest rate swaps) are tradedover the counter and, as such, there are no quoted prices. The fair value ofderivative financial instruments is therefore estimated using valuation modelsthat project future cash flows and discount the future amounts to a presentvalue using the contractual terms of the derivative instrument and factorsobservable in external markets, such as period-end swap rates and foreignexchange rates. An adjustment is also included to reflect non-performance risk,impacted by the financial and economic environment prevailing at the date ofthe valuation, in the recognized measure of the fair value of the derivativeinstruments by applying a credit default premium to the net exposure of thecounterparty or the Company. The fair value of early settlement optionsrecognized as embedded derivatives is determined by option pricing models usingmarket inputs and assumptions, including volatility and discount factors.

 

Due to thejudgment used in applying a wide range of acceptable techniques and estimatesin calculating fair value amounts, fair values are not necessarily comparableamong financial institutions or other market participants and may not berealized in an actual sale or the immediate settlement of the instrument. 

 

(c)                                  Creditrisk management:

 

Credit risk isthe risk of financial loss to the Company if a customer or counterparty to afinancial asset fails to meet its contractual obligations.

 

In the normalcourse of business, the Company continuously monitors the financial conditionof its customers and reviews the credit history of each new customer. As of December 31,2008, no customer balance represented a significant portion of the Company’sconsolidated trade receivables. The Company establishes an allowance for doubtfulaccounts based on the specific credit risk of its customers and historicaltrends. The allowance for doubtful accounts amounted to $16.0 million asof December 31, 2008 ($11.7 million as of December 31, 2007). Asof December 31, 2008, 8.9% of trade receivables were 90 days pasttheir billing date (7.0% as of December 31, 2007).

 

The Companybelieves that its product lines and the diversity of its customer base areinstrumental in reducing its credit risk, as well as the impact of fluctuationsin product-line demand. The Company does not believe that it is exposed to anunusual level of customer credit risk.

 

From their useof derivative financial instruments, the Company is exposed to the risk ofnon-performance by a third party. When the Company enters into derivativecontracts, the counterparties (either foreign or Canadian) must have creditratings at least in accordance with the Company’s credit risk management policyand are subject to concentration limits. Given the high minimum credit ratingsrequired under the Company’s policy, the Company does not foresee any failureby counterparties to meet their obligations. 

 

(d)                                 Liquidityrisk management:

 

Liquidity riskis the risk that the Company will not be able to meet its financial obligationsas they fall due or the risk that those financial obligations have to be met atexcessive cost. The Company manages this exposure through staggered debtmaturities. The weighted average term of the Company’s consolidated debt wasapproximately 6.3 years as at December 31, 2008.

 

F-25

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Table of Contents

 

**VIDEOTRON LTD.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,Continued**

**Years ended December 31, 2008, 2007 and2006**

**(tabular amounts are in thousands of Canadiandollars)**

 

**21.****                               FINANCIALINSTRUMENTS AND FINANCIAL RISK MANAGEMENT (Continued):**

 

(d)                                 Liquidityrisk management (Continued):

 

Companymanagement believes that cash flows from continuing operations and availablesources of financing should be sufficient to cover committed cash requirementsfor capital investments, working capital, interest payments, debt repayments,pension plan contributions, and dividends (or distributions) in the future.The Company has access to cash flows generated by its subsidiaries throughdividends (or distributions) and cash advances paid by its wholly-ownedsubsidiaries.

 

As of December 31,2008, material contractual obligations related to financial instruments includedcapital repayment and interest on long-term debt and obligations related toderivative financial instruments, less estimated future receipts on derivativeinstruments.

 

Theseobligations and their maturities are as follows:

 
| ** **                              | ** ** | **Total** | ** ** | **1 year** | ** ** | **Less than  1-3 years** | ** ** | **3-5 years** | ** ** | **5 years  and more** | ** ** |
|-----------------------------------------|------------|-----------|------------|-----------------|------------|------------------------------------|------------|--------------------|------------|---------------------------------|------------|
| Bank indebtedness                       |       | $         | 3,613      |            | $          | 3,613                              |       | $                  | —     |                            | $          | — |   | $ | — |   |
| Accounts payable and accrued charges    |       | 322,568   |       | 322,568         |       | —                             |       | —             |       | —                          |       |
| Amounts payable to affiliated companies |       | 19,358    |       | 19,358          |       | —                             |       | —             |       | —                          |       |
| Long-term debt                          |       | 1,766,668 |       | —          |       | —                             |       | 207,670            |       | 1,558,998                       |       |
| Interest payments(1)                    |       | 829,706   |       | 120,659         |       | 241,319                            |       | 228,684            |       | 239,044                         |       |
| Derivative financial instruments(2)     |       | (60,269   | )          | —          |       | —                             |       | —             |       | (60,269                         | )          |
| Total contractual obligations           |       | $         | 2,881,644  |            | $          | 466,198                            |       | $                  | 241,319    |                            | $          | 436,354 |   | $ | 1,737,773 |   |

 

----

(1)                                  Estimate of interest to be paid on long-termdebt is based on the hedged and unhedged interest rates and hedged foreignexchange rates at December 31, 2008.

 

(2)                                  Estimated future receipts, net of futuredisbursements on derivative financial instruments related to foreign exchangehedging.

 

The tableabove excludes obligations under subordinated loans to the parent company forwhich proceeds are used to invest in preferred shares of an affiliated companyfor tax consolidation purposes of Quebecor Media Inc. and its subsidiaries(see note 9). 

 

(e)                                  Marketrisk:

 

Market risk isthe risk that changes in market prices due to foreign exchange rates, interestrates and/or equity prices will affect the value of the Company’s financialinstruments. The objective of market risk management is to mitigate and controlexposures within acceptable parameters while optimizing the returnon risk.

 

*Foreigncurrency risk*

 

Most of theCompany’s consolidated revenues and expenses, other than interest expense onU.S. dollar-denominated debt, purchases of set-top boxes and cable modemsand certain capital expenditures, are received or denominated in Canadiandollars. A large portion of the interest, principal and premium, if any,payable on the Company’s debt is payable in U.S. dollars. The Company hasentered into transactions to hedge the foreign currency risk exposure on 100%of its U.S. dollar-denominated debt obligations outstanding as of December 31,2008 and to hedge its exposure on certain purchases of set-top boxes, cablemodems and capital expenditures. Accordingly, the Company’s sensitivity to thevariation of foreign exchange rates is economically limited.

 

F-26

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Table of Contents

 

**VIDEOTRON LTD.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,Continued**

**Years ended December 31, 2008, 2007 and2006**

**(tabular amounts are in thousands of Canadiandollars)**

 

**21.****                               FINANCIALINSTRUMENTS AND FINANCIAL RISK MANAGEMENT (Continued):**

 

(e)                                  Marketrisk (Continued):

 

*Foreigncurrency risk (Continued):*

 

The followingtable summarizes the estimated sensitivity on income and other comprehensiveincome, before income tax, of a $0.10 variance in the year-end exchange rate ofthe Canadian dollar per one U.S. dollar:

 
| ** **                                                                                                 | ** ** | **Income** | ** ** | **Other  comprehensive  income** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------------------------------|------------|
| **Increase of $0.10**                                                                                      |       |       |       |                             |       |
| U.S. dollar-denominated accounts  payable                                                             |       | $          | (680       | )                                | —     |   |
| Gain (loss) on valuation and translation of  financial instruments and of derivative financial instruments |       | (2,250     | )          | 44,905                           |       |
|                                                                                                       |       |       |       |                             |       |
| **Decrease of $0.10**                                                                                      |       |       |       |                             |       |
| U.S. dollar-denominated accounts  payable                                                             |       | 680        |       | —                           |       |
| Gain (loss) on valuation and translation of  financial instruments and of derivative financial instruments |       | 2,250      |       | (44,905                          | )          |
|                                                                                                            |            |            |            |                                  |            |  |

 

*Interestrate risk and non-performance risk*

 

The Company’sbank credit facilities bear interest at floating rates based on the followingreference rates: (i) bankers’ acceptance rate (BA) and (ii) bankprime rate (Prime). The Senior Notes issued by the Company bear interest atfixed rates. The Company has entered into various cross-currency interest rateswap agreements in order to manage cash flow and fair value risk exposure dueto changes in interest rates. After taking into account the hedginginstruments, the long-term debt is comprised of 58.7% of fixed rate debt and41.3% of floating rate debt as of December 31, 2008.

 

The estimatedsensitivity on financial expense, before income tax, of a 100 basis pointvariance in the year-end Canadian Banker’s acceptance rate is$7.0 million.

 

The estimatedsensitivity on income and other comprehensive income, before income tax, of a100 basis point variance in the discount rate used to calculate the fairvalue of financial instruments, as per the Company’s valuation model, isas follows:

 
| ** **                       | ** ** | **Income** | ** ** | **Other  comprehensive  income** | ** ** |
|----------------------------------|------------|------------|------------|----------------------------------|------------|
| Increase of 100 basis point |       | $          | 2,609      |                             | $          | (3,908 | ) |
| Decrease of 100 basis point |       | (2,609     | )          | 3,908                            |       |
|                                  |            |            |            |                                  |            |  |  |

 

(f)                                    Capitalmanagement:

 

The Company’sprimary objective in managing capital is to maintain an optimal capital base inorder to support the capital requirements of its various activities, includinggrowth opportunities.

 

In managingits capital structure, the Company takes into account the asset characteristicsof its subsidiaries and planned requirements for funds, leveraging theirindividual borrowing capacities in the most efficient manner to achieve thelowest cost of financing. Management of the capital structure involves theissuance of new debt, the repayment of existing debt using cash generated byoperations and the level of distributions to the parent company. The Companyhas not significantly changed its strategy regarding management of its capitalstructure since the last financial year.

 

The Company’scapital structure is composed of shareholder’s equity, bank indebtedness,long-term debt, assets and liabilities related to derivative financialinstruments, and non-controlling interest, less cash and cash equivalents.

 

F-27

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Table of Contents

 

**VIDEOTRON LTD.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,Continued**

**Years ended December 31, 2008, 2007 and2006**

**(tabular amounts are in thousands of Canadiandollars)**

 

**21.****                               FINANCIALINSTRUMENTS AND FINANCIAL RISK MANAGEMENT (Continued):**

 

(f)                                    Capitalmanagement (Continued):

 

The capitalstructure is as follows:

 
| ** **                                                            | ** ** | **2008**  | ** ** | **2007**  | ** ** |
|-----------------------------------------------------------------------|------------|-----------|------------|-----------|------------|
| Bank indebtedness                                                     |       | $         | 3,613      |      | $          | 9,505 |   |
| Long-term debt                                                        |       | 1,807,997 |       | 950,988   |       |
| Net (assets) liabilities related to  derivative financial instruments |       | (78,499   | )          | 245,556   |       |
| Non-controlling interest                                              |       | 1,047     |       | 947       |       |
| Net debt                                                              |       | 1,734,158 |       | 1,206,996 |       |
| Shareholder’s equity                                             |       | $         | 403,654    |      | $          | 259,110 |   |

 

The Company isnot subject to externally imposed capital requirements other than certainrestrictions under the term of its borrowing agreements which relate topermitted investments, inter-company transactions or the declaration andpayment of dividends and other distributions.

 

**22.****                               Relatedparty transactions:**

 

In addition tothe related party transactions disclosed elsewhere in these consolidatedfinancial statements, the Company entered into the following transactions withaffiliated companies. These transactions have been recorded at the exchange valuein the normal course of business, which is the amount established and agreed toby the related parties:

 
| ** **                          | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Ultimate Parent and Parent company: |       |     |       |     |       |     |       |
| Operating revenue                   |       | $        | 104        |     | $          | 139      |       | $ | 150 |   |
| Direct costs and operating expenses |       | 4,535    |       | 3,908    |       | 4,110    |       |
| Operating expenses recovered        |       | (373     | )          | (23      | )          | (23      | )          |
| Affiliated companies:               |       |     |       |     |       |     |       |
| Operating revenue                   |       | 10,165   |       | 22,164   |       | 25,146   |       |
| Direct costs and operating expenses |       | 51,942   |       | 60,590   |       | 60,066   |       |
|                                     |            |          |            |          |            |          |            |  |  |  |

 

*Managementfee:*

 

The Company paysannual management fees to the parent company for services rendered to theCompany, including internal audit, legal and corporate, financial planning andtreasury, tax, real estate, human resources, risk management, public relationsand other services. Management fees amounted to $25.4 million in 2008,$46.9 million in 2007 and $23.4 million in 2006. The agreementprovides for an annual management fee to be agreed upon for the year 2009. Inaddition, the parent company is entitled to the reimbursement of out-of-pocketexpenses incurred in connection with the services provided underthe agreement.

 

*Operatingtransactions:*

 

The Companyentered into an affiliation agreement with Groupe Archambault Inc. (“Archambault”),a company under common control, a subsidiary of Quebecor Media Inc. Thisagreement provided that the Company pay Archambault 54% of all revenuesgenerated from the fees paid by customers to use Archambault’s video-on-demandservices. In connection with this affiliation agreement, the Company enteredinto a video-on-demand services agreement with Archambault. Under thisagreement, various technical services were provided to Archambault. Inconsideration of these services, Archambault paid a fee of 8% of all revenuesgenerated from fees paid by customers to use Archambault’s video-on-demandservices. The acquisition of the video-on-demand licence by the Company fromGroupe Archambault Inc., for a total cash consideration of$0.8 million, put an end to these agreements on May 1, 2008.

 

Under the affiliationagreement, the Company paid fees to Archambault of $5.5 million,$13.3 million and $9.0 million and received fees from Archambault of$0.8 million, $2.6 million and $1.9 million for the years 2008,2007 and 2006, respectively. 

 

F-28

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Table of Contents

 

**VIDEOTRON LTD.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued**

**Years ended December 31, 2008, 2007 and 2006**

**(tabular amounts are in thousands of Canadian dollars)**

 

**22.          Related party transactions (Continued):**

** **

*Taxtransactions:*

** **

During theyear ended December 31, 2006, the Company acquired from a company undercommon control of the ultimate parent company income tax deductions of$0.3 million that were recorded as income taxes receivable. Thistransaction allowed the Company to realize a gain of $0.02 million whichwas credited to contributed surplus.

 

On December 18and 21, 2007, the Company’s ultimate parent company, Quebecor Inc.,transferred to the Company a total of $57.1 million of non-capital taxlosses in exchange for a net cash consideration of $12.8 million. Thistransaction was recorded at the exchange amount. As a result, the Companyrecorded an income tax asset of $17.7 million and the difference of$4.9 million, between the net cash consideration and the income tax asset,was recorded as a deferred credit, included in accounts payable and accruedcharges, which reduced income tax expense in 2008 as these tax deductionswere used.

 

On December 21,2007, the Company’s ultimate parent company, Quebecor Inc., transferred toCF Cable TV Inc., a wholly-owned subsidiary of the Company,$9.4 million of non-capital tax losses in exchange for a net cashconsideration of $2.1 million. This transaction was recorded at theexchange amount. As a result, CF Cable TV Inc. recorded an income taxasset of $2.9 million and the difference of $0.8 million between thenet cash consideration and the income tax asset was recorded as a deferredcredit, included in accounts payable and accrued charges, which reduced incometax expense in 2008 as these tax deductions were used.

 

On December 18,2008, the Company’s ultimate parent company, Quebecor Inc., transferred tothe Company a total of $104.9 million of non-capital tax losses inexchange for net cash consideration of $18.4 million. This transaction wasrecorded at the exchange amount. As a result, the Company recorded an incometax asset of $32.4 million and the difference of $14.0 million,between the net cash consideration and the income tax asset, was recorded as adeferred credit, included in accounts payable and accrued charges, which willreduce the income tax expense in the future as these tax deductionsare used.

 

*Quebecor World Inc.:*

 

On January 21,2008, Quebecor World Inc. and its U.S. subsidiaries were grantedcreditor protection under the Companies’ Creditors Arrangement Act in Canada.On the same date, its U.S. subsidiaries also filed a petition underChapter 11 of the United States Bankruptcy Code. Quebecor World Inc.outsourced its corporate information technology services which generated$3.0 million in revenues for the Company in 2008 ($9.8 million in2007 and $13.0 million in 2006). This agreement was terminated in 2008 andsince January 21, 2008, Quebecor World Inc. is no longer considered arelated company under Canadian GAAP.

 

*Acquisition of assets:*

 

On December 15,2008, the Company acquired fixed assets from Les Editions CEC Inc., awholly-owned subsidiary of Quebecor Media Inc., for a total considerationof $1.6 million. This transaction was recorded at the carrying amount. Asa result, the Company recorded fixed assets of a net book value of$0.4 million, and the difference between the cash consideration and thenet book value, of $1.2 million was charged to the deficit.

 

**23.****                               PENSIONPLANS AND POSTRETIREMENT BENEFITS:**

 

The Companyand some of its subsidiaries maintain various defined benefit plans and definedcontribution plans. The Company’s policy is to maintain its contribution at alevel sufficient to cover benefits. Actuarial valuations of the Company’snumerous pension plans were performed once at least in the last three years andthe next required valuations will be performed at least once over the nextthree years.

 

The Companyprovides postretirement benefits to eligible retired employees. The costs ofthese benefits, principally health care, are accounted for during the employee’sactive service period.

 

F-29

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Table of Contents

 

**VIDEOTRON LTD.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,Continued**

**Years ended December 31, 2008, 2007 and2006**

**(tabular amounts are in thousands of Canadiandollars)**

 

**23.          PENSION PLANS AND POSTRETIREMENTBENEFITS (continued):**

 

The followingtables provide a reconciliation of the changes in the plans’ benefitobligations and the fair value of plan assets for the years ended December 31,2008 and 2007, along with a statement of funded status as of those dates:

 
| ** **                             | ** ** | **2008**              | ** ** | **2007**                      | ** ** |
|----------------------------------------|------------|-----------------------|------------|-------------------------------|------------|
| ** **                             | ** ** | **Pension  benefits** | ** ** | **Post-retirement  benefits** | ** ** | **Total** | ** ** | **Pension  benefits** | ** ** | **Post-retirement  benefits** | ** ** | **Total** | ** ** |
| **Change in benefit obligations:**     |       |                  |       |                          |       |   |   |   |   |   |   |   |   |
| Benefit obligations, beginning of year |       | $                     | 90,339     |                          | $          | 9,848 |   | $ | 100,187 |   | $ | 87,523 |   | $ | 9,822 |   | $ | 97,345 |   |
| Service costs                          |       | 5,348                 |       | 347                           |       | 5,695 |   | 6,217 |   | 375 |   | 6,592 |   |
| Interest costs                         |       | 5,313                 |       | 548                           |       | 5,861 |   | 4,730 |   | 504 |   | 5,234 |   |
| Plan participants’ contributions  |       | 4,445                 |       | —                        |       | 4,445 |   | 3,428 |   | — |   | 3,428 |   |
| Actuarial gain                         |       | (29,230               | )          | (3,468                        | )          | (32,698 | ) | (6,574 | ) | (855 | ) | (7,429 | ) |
| Benefits and settlement paid           |       | (4,664                | )          | (113                          | )          | (4,777 | ) | (4,985 | ) | (108 | ) | (5,093 | ) |
| Other                                  |       | —                |       | (1                            | )          | (1 | ) | — |   | 110 |   | 110 |   |
| **Benefit obligations, end of year**   |       | $                     | 71,551     |                          | $          | 7,161 |   | $ | 78,712 |   | $ | 90,339 |   | $ | 9,848 |   | $ | 100,187 |   |

 
| ** **                                      | ** ** | **2008**              | ** ** | **2007**                      | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|-------------------------------|------------|
| ** **                                      | ** ** | **Pension  benefits** | ** ** | **Post-retirement  benefits** | ** ** | **Total** | ** ** | **Pension**

**benefits** | ** ** | **Post-retirement  benefits** | ** ** | **Total** | ** ** |
| **Change in plan assets:**                      |       |                  |       |                          |       |   |   |   |   |   |   |   |   |
| Fair value of plan assets at beginning of  year |       | $                     | 91,247     |                          | $          | — |   | $ | 91,247 |   | $ | 87,261 |   | $ | — |   | $ | 87,261 |   |
| Actual return on plan assets                    |       | (14,487               | )          | —                        |       | (14,487 | ) | 1,084 |   | — |   | 1,084 |   |
| Employer contributions                          |       | 4,534                 |       | 113                           |       | 4,647 |   | 4,459 |   | 108 |   | 4,567 |   |
| Plan participants’ contributions           |       | 4,445                 |       | —                        |       | 4,445 |   | 3,428 |   | — |   | 3,428 |   |
| Benefits and settlement paid                    |       | (4,664                | )          | (113                          | )          | (4,777 | ) | (4,985 | ) | (108 | ) | (5,093 | ) |
| **Fair value of plan assets, end of year**      |       | $                     | 81,075     |                          | $          | — |   | $ | 81,075 |   | $ | 91,247 |   | $ | — |   | $ | 91,247 |   |

 

The definedbenefit plan assets are comprised of:

 
| ** **             | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------|------------|----------|------------|----------|------------|
| Equity securities |       | 50.0     | %          | 61.7     | %          |
| Debt securities        |       | 39.3     | %          | 29.3     | %          |
| Other                  |       | 10.7     | %          | 9.0      | %          |

 

As at December 31,2008, defined contribution plan assets included shares of the ultimate parentcompany representing an amount of $0.5 million ($1.0 million as at December 31,2007, including shares of a company under common control).

 
| ** **                                                                             | ** ** | **2008**              | ** ** | **2007**                      | ** ** |
|----------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------------------|------------|
| ** **                                                                             | ** ** | **Pension  benefits** | ** ** | **Post-retirement  benefits** | ** ** | **Total** | ** ** | **Pension  benefits** | ** ** | **Post-retirement  benefits** | ** ** | **Total** | ** ** |
| Reconciliation of funded status:                                                       |       |                  |       |                          |       |   |   |   |   |   |   |   |   |
| Excess (deficit) of fair value of plan assets  over benefit obligations at end of year |       | $                     | 9,524      |                          | $          | (7,161 | ) | $ | 2,363 |   | $ | 908 |   | $ | (9,848 | ) | $ | (8,940 | ) |
| Past service cost gain                                                                 |       | —                |       | (898                          | )          | (898 | ) | — |   | (965 | ) | (965 | ) |
| Unrecognized actuarial (gain) loss                                                     |       | (7,537                | )          | (844                          | )          | (8,381 | ) | 566 |   | 2,718 |   | 3,284 |   |
| Net amount recognized                                                                  |       | $                     | 1,987      |                          | $          | (8,903 | ) | $ | (6,916 | ) | $ | 1,474 |   | $ | (8,095 | ) | $ | (6,621 | ) |

 

F-30

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Table of Contents

 

**VIDEOTRON LTD.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,Continued**

**Years ended December 31, 2008, 2007 and2006**

**(tabular amounts are in thousands of Canadiandollars)**

 

**23.          PENSION PLANS AND POSTRETIREMENTBENEFITS (continued):**

 

Included inthe above benefits and fair value of plan assets at year-end are the followingamounts in respect of plans that are not fully funded:

 
| ** **                             | ** ** | **2008**              | ** ** | **2007**                      | ** ** |
|----------------------------------------|------------|-----------------------|------------|-------------------------------|------------|
| ** **                             | ** ** | **Pension  benefits** | ** ** | **Post-retirement  benefits** | ** ** | **Total** | ** ** | **Pension  benefits** | ** ** | **Post-retirement  benefits** | ** ** | **Total** | ** ** |
| Benefit obligations                    |       | $                     | —     |                          | $          | (7,161 | ) | $ | (7,161 | ) | $ | (83,750 | ) | $ | (9,848 | ) | $ | (93,598 | ) |
| Fair value of plan assets              |       | —                |       | —                        |       | — |   | 83,460 |   | — |   | 83,460 |   |
| Funded status — plan deficit |       | $                     | —     |                          | $          | (7,161 | ) | $ | (7,161 | ) | $ | (290 | ) | $ | (9,848 | ) | $ | (10,138 | ) |

 

Amountsrecognized in the consolidated balance sheets are as follows:

 
| ** **                | ** ** | **2008**              | ** ** | **2007**                      | ** ** |
|---------------------------|------------|-----------------------|------------|-------------------------------|------------|
| ** **                | ** ** | **Pension  benefits** | ** ** | **Post-retirement  benefits** | ** ** | **Total** | ** ** | **Pension  benefits** | ** ** | **Post-retirement  benefits** | ** ** | **Total** | ** ** |
| Deferred pension charges  |       | $                     | 3,034      |                          | $          | (119 | ) | $ | 2,915 |   | $ | 3,149 |   | $ | (114 | ) | $ | 3,035 |   |
| Accrued benefit liability |       | (1,047                | )          | (8,784                        | )          | (9,831 | ) | (1,675 | ) | (7,981 | ) | (9,656 | ) |
| Net amount recognized     |       | $                     | 1,987      |                          | $          | (8,903 | ) | $ | (6,916 | ) | $ | 1,474 |   | $ | (8,095 | ) | $ | (6,621 | ) |

 

Components ofthe net benefit costs are as follows:

 
| ** **                                                                                          | ** ** | **2008**              | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                          | ** ** | **Pension  benefits** | ** ** | **Post-retirement  benefits** | ** ** | **Total** | ** ** |
| Service costs                                                                                       |       | $                     | 5,348      |   | $ | 347 |   | $ | 5,695 |   |
| Interest costs                                                                                      |       | 5,313                 |       | 548 |   | 5,861 |   |
| Actual return on plan assets                                                                        |       | 14,487                |       | — |   | 14,487 |   |
| Current actuarial gain                                                                              |       | (29,230               | )          | (3,468 | ) | (32,698 | ) |
| Elements of net benefit cost adjustments to  recognize the long-term nature and valuation allowance |       | (4,082                | )          | (2,573 | ) | (6,655 | ) |
| Difference between actual and expected  return on plan assets                                       |       | (21,188               | )          | — |   | (21,188 | ) |
| Deferral of current actuarial gain                                                                  |       | 29,230                |       | 3,468 |   | 32,698 |   |
| Amortization of previously deferred  actuarial loss                                                 |       | 62                    |       | 94 |   | 156 |   |
| Other                                                                                               |       | —                |       | (67 | ) | (67 | ) |
| Total adjustments to recognize the  long-term nature of benefit costs                               |       | 8,104                 |       | 3,495 |   | 11,599 |   |
| Net benefit costs                                                                                   |       | $                     | 4,022      |   | $ | 922 |   | $ | 4,944 |   |

 

F-31

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Table of Contents

 

**VIDEOTRON LTD.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,Continued**

**Years ended December 31, 2008, 2007 and2006**

**(tabular amounts are in thousands of Canadiandollars)**

 

**23.          PENSION PLANS AND POSTRETIREMENTBENEFITS (continued):**

 
| ** **                                                                                          | ** ** | **2007**              | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                          | ** ** | **Pension  benefits** | ** ** | **Post-retirement  benefits** | ** ** | **Total** | ** ** |
| Service costs                                                                                       |       | $                     | 6,217      |   | $ | 375 |   | $ | 6,592 |   |
| Interest costs                                                                                      |       | 4,730                 |       | 504 |   | 5,234 |   |
| Actual return on plan assets                                                                        |       | (1,084                | )          | — |   | (1,084 | ) |
| Current actuarial gain                                                                              |       | (6,574                | )          | (855 | ) | (7,429 | ) |
| Elements of net benefit cost adjustments to  recognize the long-term nature and valuation allowance |       | 3,289                 |       | 24 |   | 3,313 |   |
| Difference between actual and expected  return on plan assets                                       |       | (5,311                | )          | — |   | (5,311 | ) |
| Deferral of current actuarial gain                                                                  |       | 6,574                 |       | 855 |   | 7,429 |   |
| Amortization of previously deferred  actuarial loss                                                 |       | 62                    |       | 141 |   | 203 |   |
| Other                                                                                               |       | —                |       | (67 | ) | (67 | ) |
| Total adjustments to recognize the  long-term nature of benefit costs                               |       | 1,325                 |       | 929 |   | 2,254 |   |
| Net benefit costs                                                                                   |       | $                     | 4,614      |   | $ | 953 |   | $ | 5,567 |   |

 
| ** **                                                                                          | ** ** | **2006**              | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                          | ** ** | **Pension  benefits** | ** ** | **Post-retirement  benefits** | ** ** | **Total** | ** ** |
| Service costs                                                                                       |       | $                     | 5,876      |   | $ | 355 |   | $ | 6,231 |   |
| Interest costs                                                                                      |       | 4,265                 |       | 403 |   | 4,668 |   |
| Actual return on plan assets                                                                        |       | (13,616               | )          | — |   | (13,616 | ) |
| Current actuarial (gain) loss                                                                       |       | (1,220                | )          | 1,309 |   | 89 |   |
| Elements of net benefit cost adjustments to  recognize the long-term nature and valuation allowance |       | (4,695                | )          | 2,067 |   | (2,628 | ) |
| Difference between actual and expected  return on plan assets                                       |       | 8,388                 |       | — |   | 8,388 |   |
| Deferral of current actuarial gain (loss)                                                           |       | 1,220                 |       | (1,309 | ) | (89 | ) |
| Amortization of previously deferred  actuarial loss                                                 |       | (676                  | )          | 135 |   | (541 | ) |
| Other                                                                                               |       | —                |       | (67 | ) | (67 | ) |
| Total adjustments to recognize the  long-term nature of benefit costs                               |       | 8,932                 |       | (1,241 | ) | 7,691 |   |
| Net benefit costs                                                                                   |       | $                     | 4,237      |   | $ | 826 |   | $ | 5,063 |   |

 

The expenserelated to defined contribution pension plans amounts to $5.7 million in2008 ($5.2 million in 2007 and $4.8 million in 2006).

 

The total cashamount paid or payable for employee future benefits for all plans, consistingof cash contributed by the Company to its funded pension plans, cash paymentdirectly to beneficiaries for its unfunded other benefit plans, and cashcontributed to its defined contribution plans, totaled $9.7 million forthe year ended December 31, 2008 ($9.8 million in 2007 and$7.5 million in 2006).

 

F-32

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Table of Contents

 

**VIDEOTRON LTD.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,Continued**

**Years ended December 31, 2008, 2007 and2006**

**(tabular amounts are in thousands of Canadiandollars)**

 

**23.          PENSION PLANS AND POSTRETIREMENTBENEFITS (continued):**

 

The weightedaverage rates used in measuring the Company’s benefit obligations as at December 31,2008, 2007 and 2006 and current periodic costs are as follows:

 
| ** **                        | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Benefit obligations:              |       |     |       |     |       |     |       |
|                              |       |     |       |     |       |     |       |
| Rates at end of year:             |       |     |       |     |       |     |       |
| Discount rate                     |       | 7.50     | %          | 5.50     | %          | 5.00     | %          |
| Expected return on plan assets(1) |       | 7.25     |       | 7.25     |       | 7.25     |       |
| Rate of compensation increase     |       | 3.75     |       | 3.75     |       | 3.50     |       |
|                              |       |     |       |     |       |     |       |
| Current periodic costs:           |       |     |       |     |       |     |       |
|                              |       |     |       |     |       |     |       |
| Rates at beginning of year:       |       |     |       |     |       |     |       |
| Discount rate                     |       | 5.50     | %          | 5.00     | %          | 5.00     | %          |
| Expected return on plan assets(1) |       | 7.25     |       | 7.25     |       | 7.50     |       |
| Rate of compensation increase     |       | 3.75     |       | 3.50     |       | 3.50     |       |

 

----

(1)                                  After management and professional fees.

 

The assumedhealth care cost trend rate used in measuring the accumulated postretirementbenefit obligations was 8.6% at the end of 2008. The cost, as per an estimate,is expected to decrease gradually for the next seven years to 5% and remain atthat level thereafter. A one-percentage point change in the assumed health carecost trend would have the following effects:

 
| ** **                    | ** ** | **Post-retirement  benefits** | ** ** |
|-------------------------------|------------|-------------------------------|------------|
| **Sensitivity analysis** | ** ** | **1%  Increase**              | ** ** | **1%  Decrease** | ** ** |
| Effect on benefit cost        |       | $                             | 1          |   | $ | (1 | ) |
| Effect on benefit obligations |       | 21                            |       | (18 | ) |
|                               |            |                               |            |  |  |  |  |

 

**24.****                               SIGNIFICANTDIFFERENCES BETWEEN GAAP IN CANADA AND THE UNITED STATES:**

 

The Company’sconsolidated financial statements are prepared in accordance with CanadianGAAP, which differ in some respects from those applicable in theUnited States (“U.S. GAAP”). The following tables set forth theimpact of material differences between Canadian and U.S. GAAP on theCompany’s consolidated financial statements of income, comprehensive income andshareholder’s equity:

 

(a)          Consolidatedstatements of income

 
| ** **                                                                                     | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net income as per Canadian GAAP                                                                |       | $        | 395,442    |     | $          | 325,692  |       | $ | 183,691 |   |
| Adjustments:                                                                                   |       |     |       |     |       |     |       |
| Push-down basis of accounting (i)                                                              |       | (10,607  | )          | (5,249   | )          | (6,253   | )          |
| Development and pre-operating costs (iii)                                                      |       | 1,963    |       | 1,522    |       | (1,454   | )          |
| Change in the fair value and ineffective  portion of derivative financial instruments (v) |       | (5,432   | )          | 5,006    |       | (8,185   | )          |
| Share-based compensation (vi)                                                                  |       | 1,800    |       | (1,900   | )          | (900     | )          |
| Income taxes (vii)                                                                             |       | (8,128   | )          | (1,354   | )          | 1,866    |       |
|                                                                                           |       | (20,404  | )          | (1,975   | )          | (14,926  | )          |
| Net income as adjusted per U.S. GAAP                                                      |       | $        | 375,038    |     | $          | 323,717  |       | $ | 168,765 |   |

 

F-33

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Table of Contents

 

**VIDEOTRON LTD.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued**

**Years ended December 31, 2008, 2007 and2006**

**(tabular amounts are in thousands of Canadiandollars)**

 

**24.****                               SIGNIFICANTDIFFERENCES BETWEEN GAAP IN CANADA AND THE UNITED STATES (Continued):**

 

(b)         Consolidatedstatements of comprehensive income

 
| ** **                                       | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Comprehensive income as per Canadian GAAP        |       | $        | 375,646    |     | $          | 340,836  |       | $ | 183,691 |   |
| Adjustments to net income as per  (a) above |       | (20,404  | )          | (1,975   | )          | (14,926  | )          |
| Adjustments to other comprehensive income:       |       |     |       |     |       |     |       |
| Pension and postretirement benefits (iv)         |       | 11,598   |       | 2,254    |       | 153      |       |
| Derivative financial instruments (v)        |       | 4,674    |       | 302      |       | 1,963    |       |
| Income taxes (vii)                               |       | (3,705   | )          | (851     | )          | (1,704   | )          |
|                                             |       | 12,567   |       | 1,705    |       | 412      |       |
| Comprehensive income as per U.S. GAAP       |       | $        | 367,809    |     | $          | 340,566  |       | $ | 169,177 |   |

 

Accumulatedother comprehensive loss as at December 31, 2008, 2007 and 2006 isas follows:

 
| ** **                                                  | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Accumulated comprehensive loss as per  Canadian GAAP        |       | $        | (27,098    | )        | $          | (7,302   | )          | $ | — |   |
| Adjustments:                                                |       |     |       |     |       |     |       |
| Pension and postretirement benefits (iv)                    |       | 9,359    |       | (2,239   | )          | (4,493   | )          |
| Derivative financial instruments (v)                   |       | 4,976    |       | 302      |       | (31,624  | )          |
| Income taxes (vii)                                          |       | (3,223   | )          | 482      |       | 10,511   |       |
|                                                        |       | 11,112   |       | (1,455   | )          | (25,606  | )          |
| Accumulated other comprehensive loss as per  U.S. GAAP |       | $        | (15,986    | )        | $          | (8,757   | )          | $ | (25,606 | ) |

 

(c)          ConsolidatedShareholder’s Equity

 
| ** **                                                   | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|--------------------------------------------------------------|------------|------------|------------|------------|------------|
| Shareholder’s equity based on Canadian GAAP             |       | $          | 403,654    |       | $          | 259,110 |   |
| Cumulative adjustments:                                      |       |       |       |       |       |
| Push-down basis of accounting (i)                            |       | 4,479,048  |       | 4,487,655  |       |
| Goodwill impairment (ii)                                     |       | (2,276,627 | )          | (2,274,627 | )          |
| Development and pre-operating costs (iii)                    |       | (661       | )          | (2,624     | )          |
| Pension and postretirement benefits (iv)                     |       | 9,359      |       | (2,239     | )          |
| Derivative financial instruments and  hedging accounting (v) |       | 4,194      |       | 4,952      |       |
| Share-based compensation (vi)                                |       | (1,000     | )          | (2,800     | )          |
| Income taxes (vii)                                           |       | 8,627      |       | 6,426      |       |
| Shareholder’s equity based on  U.S. GAAP           |       | $          | 2,626,594  |       | $          | 2,475,853 |   |

 

F-34

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Table of Contents

 

**VIDEOTRON LTD.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,****Continued**

**Years ended December 31, 2008, 2007 and2006**

**(tabular amounts are in thousands of Canadiandollars)**

 

**24.****                               SIGNIFICANTDIFFERENCES BETWEEN GAAP IN CANADA AND THE UNITED STATES (Continued):**

 

(i)                                     Push-downbasis of accounting:

 

The basis ofaccounting used in the preparation of this reconciliation of Canadian GAAP toU.S. GAAP reflects the push-down resulting from the acquisition of theCompany and its subsidiaries on October 23, 2000 by QuebecorMedia Inc. Under Canadian GAAP, each entity has retained the historicalcarrying value basis of its assets and liabilities. The excess of the purchaseprice over the value assigned to the net assets of the Company at the date ofacquisition has been allocated to goodwill and has been amortized, up to December 31,2001, on the straight-line basis over 40 years.

 

As at December 31,2008, the push-down resulted in an increase in fixed assets of$85.0 million, an increase in goodwill of $2,141.8 million, anincrease in future income tax liability of $24.4 million, an increase incontributed surplus of $4,577.0 million, an increase in the deficit of$2,373.8 million and an increase in other comprehensive loss of$0.8 million. 

 

(ii)                                  Goodwillimpairment:

 

The accountingrequirements for goodwill under Canadian GAAP and U.S. GAAP are similar inall material respects. However, in accordance with the transitional provisionscontained in Section 3062 of the CICA Handbook, an impairment lossrecognized during the financial year in which the new recommendations areinitially applied is recognized as the effect of a change in accounting policyand charged to opening retained earnings, without restatement of prior periods.Under U.S. GAAP, an impairment loss recognized as a result of atransitional goodwill impairment test is recognized as the effect of a changein accounting principles in the statement of operations above the caption “net income”.

 

(iii)                               Developmentand pre-operating costs:

 

Under CanadianGAAP, certain development and pre-operating costs that satisfy specifiedcriteria for recoverability are deferred and amortized. Under U.S. GAAP,these costs must be included in income as incurred.

 

(iv)                              Pensionand postretirement benefits:

 

UnderU.S. GAAP, SFAS No. 158, *Employer’sAccounting for Defined Benefit Pension and Other Postretirement Plans*requires the recognition of the over- or under-funded positions of defined benefitpension and other postretirement plans on the balance sheet, along with acorresponding non-cash adjustment to be recorded in accumulated othercomprehensive income (loss).

 

Under CanadianGAAP, a company is not required to recognize the over- or under-fundedpositions or to recognize an additional minimum liability. However, when adefined benefit plan gives rise to an accrued benefit asset, a company mustrecognize a valuation allowance for the excess of the adjusted benefit assetover the expected future benefit to be realized from the plan assets.U.S. GAAP does not provide for a valuation allowance againstpension assets.

 

(v)                                 Derivativefinancial instruments and hedging accounting:

 

Since January 1,2007, standards for hedge accounting under Canadian GAAP are now similar tothose under U.S. GAAP, as established by SFAS No. 133, *Accounting for Derivative Instruments and HedgingActivities*.

 

However, underCanadian GAAP, certain embedded derivatives, such as early settlement optionsincluded in some of the Company’s borrowing agreements, do not meet thecriteria to be considered closely related to their host contracts and,therefore must be recorded at their fair value with changes in income. UnderU.S. GAAP, these embedded derivatives are considered closely related totheir host contract and do not have to be recorded separately at their fairvalues. Accordingly, the measurement of ineffective hedging relationshipsrecorded in income under U.S. GAAP differs from the measurement underCanadian GAAP.

 

(vi)                              Stock-basedcompensation:

 

UnderU.S. GAAP, in accordance with SFAS 123(R), *Share-Based Payment,* the liability related to stock-basedawards that call for settlement in cash or other assets must be measured at itsfair value based on the fair value of stock option awards and is re-measured atthe end of each reporting period. Under Canadian GAAP, the liability ismeasured and re-measured based on the intrinsic values of the stock optionawards instead of the fair values.

 

F-35

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Table of Contents

 

**VIDEOTRON LTD.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,****Continued**

**Years ended December 31, 2008, 2007 and2006**

**(tabular amounts are in thousands of Canadiandollars)**

 

**24.****                               SIGNIFICANTDIFFERENCES BETWEEN GAAP IN CANADA AND THE UNITED STATES (Continued):**

 

(vii)                           Incometaxes:

 

UnderU.S. GAAP, the FASB issued interpretation No. 48, *Accounting for Uncertainty in Income Taxes* (FIN 48), aninterpretation of SFAS 109, *Accounting for IncomeTaxes.* FIN 48 clarifies the accounting for uncertainty inincome taxes recognized in an enterprise’s financial statements in accordancewith SFAS 109 and prescribes a recognition threshold and measurement attributefor the financial statement recognition and measurement of a tax position takenor expected to be taken in a tax return. This interpretation also providesguidance as to derecognition, classification, interest and penalties,accounting in interim periods, disclosure and transition.

 

Under CanadianGAAP, there is no such interpretation and, therefore, the reserve related toincome tax contingencies is not based on the same level of likelihood asprescribed by FIN 48.

 

Further, underCanadian GAAP, income taxes are measured using substantively enacted tax rates,while under U.S. GAAP measurement is based on enacted tax rates.

 

During theyears ended December 31, 2008 and 2007, the Company and a subsidiaryentered into tax consolidation transactions with a parent company by which taxlosses have been transferred between the parties. Under Canadian GAAP, thosetransactions resulted in the recognition of a deferred credit, included inaccounts payable and accrued charges, of $14.0 million and $5.7 million,respectively. Under U.S. GAAP, since those transactions are related toasset transfers between related parties, the difference between the carryingvalue of the tax benefits transferred and the cash consideration received orpaid is recognized in contributed surplus.

 

(viii)                        Fairvalue measurements:

 

On January 1,2008, the Company adopted the provisions of SFAS 157, Fair Value *Measurements* which enhance guidance for using fair value tomeasure assets and liabilities. In February 2008, the FASB issued FASBStaff Position (FSP) FAS-157-1, *Application ofSFAS 157 to FASB Statement No. 13 and Other AccountingPronouncements that Address Fair Value Measurements for Purposes of LeaseClassification or Measurement Under Statement No. 13,* whichremoves certain leasing transactions from the scope of SFAS 157. The FASBalso issued FSP FAS 157-2, *Effective Date ofSFAS 157,* which defers the effective date of SFAS 157 forone year for certain non-financial assets and non-financial liabilities, exceptthose that are recognized or disclosed at fair value in the financialstatements on a recurring basis. The Company is still in the process ofevaluating this standard with respect to its effect on non-financial assets andliabilities and has not yet determined the impact that it will have on itsconsolidated financial statements upon full adoption in 2009.

 

(ix)                                Businesscombinations and non-controlling interest:

 

In December 2007,the FASB issued SFAS 141 (Revised 2007), Business Combinations(SFAS 141R), and SFAS 160, Non-controlling Interests in ConsolidatedFinancial Statements (SFAS 160), to improve and internationally convergethe accounting for business combinations, the reporting of non-controllinginterests in consolidated financial statements, the accounting and reportingstandards for a non-controlling interest in a subsidiary and for thedeconsolidation of a subsidiary. The provisions of SFAS 141R applyprospectively to business combinations for which the acquisition date is on orafter December 31, 2008, and SFAS 160 will be effective as of thebeginning of 2009. The Company is currently evaluating the impact of adoptingSFAS 141R and SFAS 160 on its consolidated financial statements.

 

(x)                                   Guaranteeddebt:

 

Theconsolidated information below has been presented in accordance with therequirements of the Securities and Exchange Commission for guarantor financialstatements.

 

The Company’sSenior Notes due 2014, 2015 and 2018 described in note 14 are guaranteedby specific subsidiaries of the Company (the “Subsidiary Guarantors”). Theaccompanying condensed consolidated financial information as at December 31,2008 and 2007 and for the years ended 2008, 2007 and 2006 has been prepared inaccordance with U.S. GAAP. The information under the column headed “SubsidiaryGuarantors” is for all the Subsidiary Guarantors. Investments in the SubsidiaryGuarantors are accounted for by the equity method in the separate column headed“Videotron Ltd.” Each Subsidiary Guarantor is wholly-owned by the Company.All guarantees are full and unconditional and joint and several (to theextent permitted by applicable law).

 

F-36

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Table of Contents

 

**VIDEOTRON LTD.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,****Continued**

**Years ended December 31, 2008, 2007 and2006**

**(tabular amounts are in thousands of Canadiandollars)**

 

**24.****                               SIGNIFICANTDIFFERENCES BETWEEN GAAP IN CANADA AND THE UNITED STATES (Continued):**

 

(x)                                   Guaranteeddebt (Continued):

 

Thesubsidiaries included under the column “Subsidiary Guarantors” are CF CableTV Inc., Videotron US Inc., 9193-2962 Québec Inc. and LeSuperClub Vidéotron Ltée, and its subsidiary, Groupe de DivertissementSuperClub Inc.

 

The “SubsidiaryNon-Guarantors” is SETTE Inc.

 

**Revisionof U.S. GAAP Guarantors Financial Statements Relating to valuationof investments**

 

The Companyrevised the value of its investments in “Subsidiary Guarantors” and in “SubsidiaryNon-Guarantors”, in order to conform fully to the equity method of accounting.These changes affected only the columns titled “Videotron Ltd.” and “Adjustmentsand Eliminations”.

 

The following2007 and 2006 U.S. GAAP financial information from the consolidatedstatements of operations, consolidated statements of cash flows andconsolidated balance sheets have been revised to reflect this change.

 

For the yearended December 31, 2007, equity income from subsidiaries under theVideotron Ltd. column was increased by $25.6 million to$29.9 million ($11.9 million to $23.3 million for 2006) and anoffsetting adjustment was recorded in the Adjustments and eliminations column.

 

Other assetsand shareholder’s equity under the Videotron Ltd. column, as at December 31,2007, were increased by $795.0 million to $854.6 million and$2,475.9 million, respectively. Offsetting adjustments were recorded inthe Adjustments and eliminations column.

 

ConsolidatedStatement of Income

In accordancewith United States GAAP

For the yearended December 31, 2008

 
| ** **                                                  | ** ** | **Videotron  Ltd.** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-  Guarantors** | ** ** | **Adjustments  and  eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------|------------|---------------------|------------|----------------------------|------------|----------------------------------|------------|------------------------------------|------------|------------------|------------|
| Revenues                                                    |       | $                   | 1,528,224  |                       | $          | 271,213                          |       | $                                  | 7,008      |             | $          | (1,782 | ) | $ | 1,804,663 |   |
| Direct costs and operating expenses                         |       | 827,346             |       | 174,945                    |       | 4,473                            |       | (1,782                             | )          | 1,004,982        |       |
| Amortization                                                |       | 193,996             |       | 30,417                     |       | 1,207                            |       | (33                                | )          | 225,587          |       |
| Financial expenses                                          |       | 88,947              |       | 2,001                      |       | (24                              | )          | —                             |       | 90,924           |       |
| Loss on valuation and translation of  financial instruments |       | 30,105              |       | —                     |       | —                           |       | —                             |       | 30,105           |       |
| Other                                                       |       | —              |       | 586                        |       | —                           |       | —                             |       | 586              |       |
| Income before the undernoted                                |       | 387,830             |       | 63,264                     |       | 1,352                            |       | 33                                 |       | 452,479          |       |
| Income taxes                                                |       | 67,335              |       | 9,539                      |       | 419                              |       | —                             |       | 77,293           |       |
|                                                        |       | 320,495             |       | 53,725                     |       | 933                              |       | 33                                 |       | 375,186          |       |
| Equity income from subsidiaries                             |       | 54,543              |       | 206                        |       | —                           |       | (54,749                            | )          | —           |       |
| Non-controlling interest                                    |       | —              |       | —                     |       | —                           |       | (148                               | )          | (148             | )          |
| Net income (loss)                                           |       | $                   | 375,038    |                       | $          | 53,931                           |       | $                                  | 933        |             | $          | (54,864 | ) | $ | 375,038 |   |

 

F-37

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Table of Contents

 

**VIDEOTRON LTD.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,****Continued**

**Years ended December 31, 2008, 2007 and2006**

**(tabular amounts are in thousands of Canadiandollars)**

 

**24.****                               SIGNIFICANTDIFFERENCES BETWEEN GAAP IN CANADA AND THE UNITED STATES****(Continued):**

 

ConsolidatedStatement of Cash Flows

In accordancewith United States GAAP

For the yearended December 31, 2008

 
| ** **                                                       | ** ** | **Videotron  Ltd.** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-  Guarantors** | ** ** | **Adjustments  and  eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------|------------|---------------------|------------|----------------------------|------------|----------------------------------|------------|------------------------------------|------------|------------------|------------|
| Cash flows related to operating activities:                      |       |                |       |                       |       |                             |       |                               |       |             |       |
| Net income (loss)                                                |       | $                   | 375,038    |                       | $          | 53,931                           |       | $                                  | 933        |             | $          | (54,864 | ) | $ | 375,038 |   |
| Adjustments:                                                     |       |                |       |                       |       |                             |       |                               |       |             |       |
| Amortization of fixed assets                                     |       | 192,759             |       | 30,234                     |       | 1,207                            |       | (33                                | )          | 224,167          |       |
| Amortization of other assets                                     |       | 20,692              |       | 8,062                      |       | —                           |       | —                             |       | 28,754           |       |
| Impairment of goodwill                                           |       | —              |       | 2,000                      |       | —                           |       | —                             |       | 2,000            |       |
| Loss (gain) on disposal of fixed assets                          |       | 1,514               |       | (1,094                     | )          | 30                               |       | —                             |       | 450              |       |
| Loss on valuation and translation financial  instruments         |       | 25,109              |       | —                     |       | —                           |       | —                             |       | 25,109           |       |
| Amortization of financing costs and debt  premium or discount    |       | 1,623               |       | —                     |       | —                           |       | —                             |       | 1,623            |       |
| Future income taxes                                              |       | 67,335              |       | 8,958                      |       | (71                              | )          | —                             |       | 76,222           |       |
| Equity income from subsidiaries                                  |       | (54,543             | )          | (206                       | )          | —                           |       | 54,749                             |       | —           |       |
| Other                                                            |       | 18,151              |       | —                     |       | —                           |       | 148                                |       | 18,299           |       |
| Net change in non-cash balances related to  operating activities |       | (35,830             | )          | (3,426                     | )          | (144                             | )          | (3                                 | )          | (39,403          | )          |
|                                                             |       | 611,848             |       | 98,459                     |       | 1,955                            |       | (3                                 | )          | 712,259          |       |
| Cash flows related to investing activities:                      |       |                |       |                       |       |                             |       |                               |       |             |       |
| Acquisition of fixed assets                                      |       | (363,939            | )          | (39,564                    | )          | (1,256                           | )          | —                             |       | (404,759         | )          |
| Acquisition of shares of a company under  common control         |       | 110,000             |       | (170,000                   | )          | —                           |       | —                             |       | (60,000          | )          |
| Acquisition of a company under common  control                   |       | (554,564            | )          | (554,549                   | )          | —                           |       | 554,564                            |       | (554,549         | )          |
| Acquisition of tax deductions from the  ultimate parent company  |       | (18,378             | )          | —                     |       | —                           |       | —                             |       | (18,378          | )          |
| Dividends                                                        |       | 110,187             |       | 66                         |       | (300                             | )          | (110,000                           | )          | (47              | )          |
| Other                                                            |       | (13,032             | )          | 5,408                      |       | —                           |       | 1,412                              |       | (6,212           | )          |
|                                                             |       | (729,726            | )          | (758,639                   | )          | (1,556                           | )          | 445,976                            |       | (1,043,945       | )          |
| Cash flows related to financing activities:                      |       |                |       |                       |       |                             |       |                               |       |             |       |
| Net change in bank indebtedness                                  |       | (3,831              | )          | —                     |       | —                           |       | (2,061                             | )          | (5,892           | )          |
| Net borrowings under bank credit facility                        |       | 59,949              |       | —                     |       | —                           |       | —                             |       | 59,949           |       |
| Issuance of long-term debt, net of  financing costs              |       | 447,629             |       | —                     |       | —                           |       | —                             |       | 447,629          |       |
| Subordinated loan from parent company                            |       | (110,000            | )          | 170,000                    |       | —                           |       | —                             |       | 60,000           |       |
| Issuance of shares                                               |       | —              |       | 556,919                    |       | —                           |       | (556,919                           | )          | —           |       |
| Dividends                                                        |       | (110,000            | )          | (22,944                    | )          | —                           |       | 22,944                             |       | (110,000         | )          |
| Reduction in paid-up capital                                     |       | (120,000            | )          | (88,000                    | )          | —                           |       | 88,000                             |       | (120,000         | )          |
| Advance (to) from an affiliated company                          |       | (45,869             | )          | 45,869                     |       | —                           |       | —                             |       | —           |       |
|                                                             |       | 117,878             |       | 661,844                    |       | —                           |       | (448,036                           | )          | 331,686          |       |
| Net change in cash and cash equivalents                          |       | —              |       | 1,664                      |       | 399                              |       | (2,063                             | )          | —           |       |
| Cash and cash equivalents, beginning of  year                    |       | —              |       | 314                        |       | 557                              |       | (871                               | )          | —           |       |
| Cash and cash equivalents, end of year                           |       | $                   | —     |                       | $          | 1,978                            |       | $                                  | 956        |             | $          | (2,934 | ) | $ | — |   |

 

F-38

----

Table of Contents

 

**VIDEOTRON LTD.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,****Continued**

**Years ended December 31, 2008, 2007 and2006**

**(tabular amounts are in thousands of Canadiandollars)**

 

**24.****                               SIGNIFICANTDIFFERENCES BETWEEN GAAP IN CANADA AND THE UNITED STATES****(Continued):**

 

ConsolidatedBalance Sheet

In accordancewith United States GAAP

As at December 31,2008

 
| ** **                                    | ** ** | **Videotron  Ltd.** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-  Guarantors** | ** ** | **Adjustments  and  eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------|------------|---------------------|------------|----------------------------|------------|----------------------------------|------------|------------------------------------|------------|------------------|------------|
| **Assets**                                    |       |                |       |                       |       |                             |       |                               |       |             |       |
| Current assets:                               |       |                |       |                       |       |                             |       |                               |       |             |       |
| Cash and cash equivalents                     |       | $                   | 95         |                       | $          | 2,003                            |       | $                                  | 1,010      |             | $          | (3,108 | ) | $ | — |   |
| Accounts receivable                           |       | 154,145             |       | 9,359                      |       | 871                              |       | —                             |       | 164,375          |       |
| Amounts receivable from affiliated  companies |       | 145,053             |       | 110,456                    |       | 1,065                            |       | (240,963                           | )          | 15,611           |       |
| Income taxes                                  |       | 163                 |       | —                     |       | —                           |       | 26                                 |       | 189              |       |
| Inventories and prepaid expenses              |       | 55,873              |       | 4,128                      |       | 51                               |       | —                             |       | 60,052           |       |
| Future income taxes                           |       | 34,884              |       | 1,367                      |       | —                           |       | —                             |       | 36,251           |       |
|                                          |       | 390,213             |       | 127,313                    |       | 2,997                            |       | (244,045                           | )          | 276,478          |       |
| Investments                                   |       | 1,758,542           |       | 296,458                    |       | —                           |       | —                             |       | 2,055,000        |       |
| Fixed assets                                  |       | 1,430,013           |       | 262,442                    |       | 5,326                            |       | (292                               | )          | 1,697,489        |       |
| Future income taxes                           |       | —              |       | 1,038                      |       | —                           |       | —                             |       | 1,038            |       |
| Derivative financial instruments              |       | 124,187             |       | —                     |       | —                           |       | —                             |       | 124,187          |       |
| Other assets                                  |       | 1,377,817           |       | 560,654                    |       | —                           |       | (1,356,642                         | )          | 581,829          |       |
| Goodwill                                      |       | 1,903,756           |       | 438,236                    |       | —                           |       | 233,711                            |       | 2,575,703        |       |
|                                          |       | $                   | 6,984,528  |                       | $          | 1,686,141                        |       | $                                  | 8,323      |             | $          | (1,367,268 | ) | $ | 7,311,724 |   |
| **Liabilities and Shareholder’s Equity** |       |                |       |                       |       |                             |       |                               |       |             |       |
| Current liabilities:                          |       |                |       |                       |       |                             |       |                               |       |             |       |
| Bank indebtedness                             |       | $                   | 6,642      |                       | $          | 25                               |       | $                                  | 54         |             | $          | (3,108 | ) | $ | 3,613 |   |
| Accounts payable and accrued charges          |       | 280,729             |       | 47,135                     |       | 973                              |       | (137                               | )          | 328,700          |       |
| Amounts payable to affiliated companies       |       | 128,103             |       | 132,063                    |       | 13                               |       | (240,821                           | )          | 19,358           |       |
| Deferred revenue                              |       | 123,087             |       | 41,692                     |       | —                           |       | —                             |       | 164,779          |       |
| Income taxes                                  |       | (16                 | )          | 998                        |       | 309                              |       | 26                                 |       | 1,317            |       |
|                                          |       | 538,545             |       | 221,913                    |       | 1,349                            |       | (244,040                           | )          | 517,767          |       |
| Long-term debt                                |       | 1,804,003           |       | —                     |       | —                           |       | —                             |       | 1,804,003        |       |
| Subordinated loan to parent company           |       | 1,760,000           |       | 295,000                    |       | —                           |       | —                             |       | 2,055,000        |       |
| Derivative financial instruments              |       | 45,688              |       | —                     |       | —                           |       | —                             |       | 45,688           |       |
| Future income taxes                           |       | 198,614             |       | 51,358                     |       | 363                              |       | —                             |       | 250,335          |       |
| Other liabilities                             |       | 11,084              |       | 206                        |       | —                           |       | 1,047                              |       | 12,337           |       |
|                                          |       | 4,357,934           |       | 568,477                    |       | 1,712                            |       | (242,993                           | )          | 4,685,130        |       |
| Shareholder’s Equity:                    |       |                |       |                       |       |                             |       |                               |       |             |       |
| Capital stock                                 |       | 1                   |       | 701,735                    |       | 25                               |       | (701,760                           | )          | 1                |       |
| Contributed surplus                           |       | 5,118,353           |       | 792,495                    |       | 488                              |       | (792,983                           | )          | 5,118,353        |       |
| (Deficit) retained earnings                   |       | (2,475,774          | )          | (375,534                   | )          | 6,098                            |       | 369,436                            |       | (2,475,774       | )          |
| Accumulated other comprehensive loss          |       | (15,986             | )          | (1,032                     | )          | —                           |       | 1,032                              |       | (15,986          | )          |
|                                          |       | 2,626,594           |       | 1,117,664                  |       | 6,611                            |       | (1,124,275                         | )          | 2,626,594        |       |
|                                          |       | $                   | 6,984,528  |                       | $          | 1,686,141                        |       | $                                  | 8,323      |             | $          | (1,367,268 | ) | $ | 7,311,724 |   |

 

F-39

----

Table of Contents

 

**VIDEOTRON LTD.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,****Continued**

**Years ended December 31, 2008, 2007 and2006**

**(tabular amounts are in thousands of Canadiandollars)**

 

**24.****                               SIGNIFICANTDIFFERENCES BETWEEN GAAP IN CANADA AND THE UNITED STATES (Continued):**

 

ConsolidatedStatement of Income

In accordancewith United States GAAP

For the yearended December 31, 2007

 
| ** **                                                  | ** ** | **Videotron  Ltd.** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-  Guarantors** | ** ** | **Adjustments  and  eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------|------------|---------------------|------------|----------------------------|------------|----------------------------------|------------|------------------------------------|------------|------------------|------------|
| ** **                                                  | ** ** | **(Revised)**       | ** ** | ** **                 | ** ** | ** **                       | ** ** | **(Revised)**                      | ** ** | ** **       | ** ** |
| Revenues                                                    |       | $                   | 1,291,726  |                       | $          | 256,651                          |       | $                                  | 6,602      |             | $          | (1,779 | ) | $ | 1,553,200 |   |
| Direct costs and operating expenses                         |       | 729,005             |       | 181,435                    |       | 4,150                            |       | (1,779                             | )          | 912,811          |       |
| Amortization                                                |       | 187,372             |       | 28,208                     |       | 1,164                            |       | (33                                | )          | 216,711          |       |
| Financial expenses                                          |       | 66,378              |       | 9,769                      |       | —                           |       | —                             |       | 76,147           |       |
| Gain on valuation and translation of  financial instruments |       | (14,101             | )          | —                     |       | —                           |       | —                             |       | (14,101          | )          |
| Dividend income from related companies                      |       | —              |       | (7,092                     | )          | —                           |       | 7,092                              |       | —           |       |
| Impairment of goodwill                                      |       | —              |       | 5,425                      |       | —                           |       | —                             |       | 5,425            |       |
| Income (loss) before the undernoted                         |       | 323,072             |       | 38,906                     |       | 1,288                            |       | (7,059                             | )          | 356,207          |       |
| Income taxes                                                |       | 29,220              |       | 2,892                      |       | 205                              |       | —                             |       | 32,317           |       |
|                                                        |       | 293,852             |       | 36,014                     |       | 1,083                            |       | (7,059                             | )          | 323,890          |       |
| Equity income from subsidiaries                             |       | 29,865              |       | 241                        |       | —                           |       | (30,106                            | )          | —           |       |
| Non-controlling interest                                    |       | —              |       | —                     |       | —                           |       | (173                               | )          | (173             | )          |
| Net income (loss)                                           |       | $                   | 323,717    |                       | $          | 36,255                           |       | $                                  | 1,083      |             | $          | (37,338 | ) | $ | 323,717 |   |

 

F-40

----

Tableof Contents

 

**VIDEOTRON LTD.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,****Continued**

**Years ended December 31, 2008, 2007 and2006**

**(tabular amounts are in thousands of Canadiandollars)**

 

**24.****                               SIGNIFICANTDIFFERENCES BETWEEN GAAP IN CANADA AND THE UNITED STATES (Continued):**

 

ConsolidatedStatement of Cash Flows

In accordancewith United States GAAP

For the yearended December 31, 2007

 
| ** **                                                       | ** ** | **Videotron  Ltd.** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-  Guarantors** | ** ** | **Adjustments  and  eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------|------------|---------------------|------------|----------------------------|------------|----------------------------------|------------|------------------------------------|------------|------------------|------------|
| ** **                                                       | ** ** | **(Revised)**       | ** ** | ** **                 | ** ** | ** **                       | ** ** | **(Revised)**                      | ** ** | ** **       | ** ** |
| Cash flows related to operating activities:                      |       |                |       |                       |       |                             |       |                               |       |             |       |
| Net income (loss)                                                |       | $                   | 323,717    |                       | $          | 36,255                           |       | $                                  | 1,083      |             | $          | (37,338 | ) | $ | 323,717 |   |
| Adjustments:                                                     |       |                |       |                       |       |                             |       |                               |       |             |       |
| Amortization of fixed assets                                     |       | 185,368             |       | 28,031                     |       | 1,164                            |       | (33                                | )          | 214,530          |       |
| Amortization of other assets                                     |       | 13,363              |       | 8,072                      |       | —                           |       | —                             |       | 21,435           |       |
| Impairment of goodwill                                           |       | —              |       | 5,425                      |       | —                           |       | —                             |       | 5,425            |       |
| Loss on disposal of fixed assets                                 |       | 2,391               |       | 777                        |       | 77                               |       | —                             |       | 3,245            |       |
| Gain on valuation and translation financial  instruments         |       | (15,516             | )          | —                     |       | —                           |       | —                             |       | (15,516          | )          |
| Amortization of financing costs and debt  premium or discount    |       | 441                 |       | —                     |       | —                           |       | —                             |       | 441              |       |
| Future income taxes                                              |       | 29,228              |       | 2,932                      |       | 90                               |       | —                             |       | 32,250           |       |
| Equity income from subsidiaries                                  |       | (29,865             | )          | (241                       | )          | —                           |       | 30,106                             |       | —           |       |
| Other                                                            |       | (524                | )          | 2,360                      |       | —                           |       | 173                                |       | 2,009            |       |
| Net change in non-cash balances related to  operating activities |       | (26,927             | )          | (6,065                     | )          | (98                              | )          | (1,917                             | )          | (35,007          | )          |
|                                                             |       | 481,676             |       | 77,546                     |       | 2,316                            |       | (9,009                             | )          | 552,529          |       |
| Cash flows related to investing activities:                      |       |                |       |                       |       |                             |       |                               |       |             |       |
| Acquisition of fixed assets                                      |       | (292,541            | )          | (36,419                    | )          | (3,032                           | )          | 1,917                              |       | (330,075         | )          |
| Acquisition of shares of a company under  common control         |       | (1,870,000          | )          | (125,000                   | )          | —                           |       | —                             |       | (1,995,000       | )          |
| Acquisition of tax deductions from the  ultimate parent company  |       | (12,763             | )          | (2,100                     | )          | —                           |       | —                             |       | (14,863          | )          |
| Decrease in temporary investments                                |       | —              |       | —                     |       | 987                              |       | —                             |       | 987              |       |
| Net change in investment in a subsidiary                         |       | 330,733             |       | —                     |       | —                           |       | (330,733                           | )          | —           |       |
| Dividends                                                        |       | 4,000               |       | (4,000                     | )          | —                           |       | —                             |       | —           |       |
| Advance from (to) an affiliated company                          |       | 65,000              |       | (65,000                    | )          | —                           |       | —                             |       | —           |       |
| Other                                                            |       | 2,125               |       | (945                       | )          | 1                                |       | —                             |       | 1,181            |       |
|                                                             |       | (1,773,446          | )          | (233,464                   | )          | (2,044                           | )          | (328,816                           | )          | (2,337,770       | )          |
| Cash flows related to financing activities:                      |       |                |       |                       |       |                             |       |                               |       |             |       |
| Net change in bank indebtedness                                  |       | (8,489              | )          | —                     |       | —                           |       | (476                               | )          | (8,965           | )          |
| Net borrowings under bank credit facility                        |       | 98,721              |       | —                     |       | —                           |       | —                             |       | 98,721           |       |
| Subordinated loan from parent company                            |       | 1,870,000           |       | 125,000                    |       | —                           |       | —                             |       | 1,995,000        |       |
| Repayment of subordinated loan to parent  company                |       | —              |       | (25,969                    | )          | —                           |       | 25,969                             |       | —           |       |
| Reduction in paid-up capital                                     |       | (299,550            | )          | (145,816                   | )          | —                           |       | 145,816                            |       | (299,550         | )          |
| Redemption of shares                                             |       | (65,000             | )          | 65,000                     |       | —                           |       | —                             |       | —           |       |
| Dividends                                                        |       | (7,092              | )          | (158,948                   | )          | —                           |       | 166,040                            |       | —           |       |
| Advance (to) from an affiliated company                          |       | (296,855            | )          | 296,855                    |       | —                           |       | —                             |       | —           |       |
| Other                                                            |       | 35                  |       | —                     |       | —                           |       | —                             |       | 35               |       |
|                                                             |       | 1,291,770           |       | 156,122                    |       | —                           |       | 337,349                            |       | 1,785,241        |       |
| Net change in cash and cash equivalents                          |       | —              |       | 204                        |       | 272                              |       | (476                               | )          | —           |       |
| Cash and cash equivalents, beginning of  year                    |       | —              |       | 110                        |       | 285                              |       | (395                               | )          | —           |       |
| Cash and cash equivalents, end of year                           |       | $                   | —     |                       | $          | 314                              |       | $                                  | 557        |             | $          | (871 | ) | $ | — |   |

 

F-41

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Tableof Contents

 

**VIDEOTRON LTD.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,****Continued**

**Years ended December 31, 2008, 2007 and2006**

**(tabular amounts are in thousands of Canadiandollars)**

 

**24.****                               SIGNIFICANTDIFFERENCES BETWEEN GAAP IN CANADA AND THE UNITED STATES (Continued):**

 

ConsolidatedBalance Sheet

In accordancewith United States GAAP

As at December 31,2007

 
| ** **                                    | ** ** | **Videotron  Ltd.** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-  Guarantors** | ** ** | **Adjustments  and  eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------|------------|---------------------|------------|----------------------------|------------|----------------------------------|------------|------------------------------------|------------|------------------|------------|
| ** **                                    | ** ** | **(Revised)**       | ** ** | ** **                 | ** ** | ** **                       | ** ** | **(Revised)**                      | ** ** | ** **       | ** ** |
| **Assets**                                    |       |                |       |                       |       |                             |       |                               |       |             |       |
| Current assets:                               |       |                |       |                       |       |                             |       |                               |       |             |       |
| Cash and cash equivalents                     |       | $                   | 493        |                       | $          | 315                              |       | $                                  | 583        |             | $          | (1,391 | ) | $ | — |   |
| Accounts receivable                           |       | 150,597             |       | 9,234                      |       | 1,535                            |       | —                             |       | 161,366          |       |
| Amounts receivable from affiliated  companies |       | 80,792              |       | 59,490                     |       | 165                              |       | (107,604                           | )          | 32,843           |       |
| Income taxes                                  |       | 199                 |       | 21                         |       | —                           |       | —                             |       | 220              |       |
| Inventories and prepaid expenses              |       | 49,161              |       | 6,579                      |       | 21                               |       | —                             |       | 55,761           |       |
| Future income taxes                           |       | 26,866              |       | 5,599                      |       | 7                                |       | —                             |       | 32,472           |       |
|                                          |       | 308,108             |       | 81,238                     |       | 2,311                            |       | (108,995                           | )          | 282,662          |       |
| Investments                                   |       | 1,870,000           |       | 125,000                    |       | —                           |       | —                             |       | 1,995,000        |       |
| Fixed assets                                  |       | 1,246,995           |       | 254,035                    |       | 5,658                            |       | (325                               | )          | 1,506,363        |       |
| Future income taxes                           |       | —              |       | 2,970                      |       | —                           |       | —                             |       | 2,970            |       |
| Other assets                                  |       | 854,568             |       | 7,383                      |       | —                           |       | (854,835                           | )          | 7,116            |       |
| Goodwill                                      |       | 1,903,756           |       | 440,117                    |       | —                           |       | 233,711                            |       | 2,577,584        |       |
|                                          |       | $                   | 6,183,427  |                       | $          | 910,743                          |       | $                                  | 7,969      |             | $          | (730,444 | ) | $ | 6,371,695 |   |
| **Liabilities and Shareholder’s Equity** |       |                |       |                       |       |                             |       |                               |       |             |       |
| Current liabilities:                          |       |                |       |                       |       |                             |       |                               |       |             |       |
| Bank indebtedness                             |       | $                   | 10,869     |                       | $          | 1                                |       | $                                  | 26         |             | $          | (1,391 | ) | $ | 9,505 |   |
| Accounts payable and accrued charges          |       | 235,515             |       | 31,755                     |       | 653                              |       | (126                               | )          | 267,797          |       |
| Amounts payable to affiliated companies       |       | 134,168             |       | 50,691                     |       | 676                              |       | (107,475                           | )          | 78,060           |       |
| Deferred revenue                              |       | 113,510             |       | 38,302                     |       | 116                              |       | —                             |       | 151,928          |       |
| Income taxes                                  |       | 34                  |       | (10                        | )          | 95                               |       | —                             |       | 119              |       |
|                                          |       | 494,096             |       | 120,739                    |       | 1,566                            |       | (108,992                           | )          | 507,409          |       |
| Long-term debt                                |       | 946,236             |       | —                     |       | —                           |       | —                             |       | 946,236          |       |
| Subordinated loan to parent company           |       | 1,870,000           |       | 125,000                    |       | —                           |       | —                             |       | 1,995,000        |       |
| Derivative financial instruments              |       | 245,556             |       | —                     |       | —                           |       | —                             |       | 245,556          |       |
| Future income taxes                           |       | 139,857             |       | 48,429                     |       | 435                              |       | —                             |       | 188,721          |       |
| Other liabilities                             |       | 11,829              |       | 144                        |       | —                           |       | 947                                |       | 12,920           |       |
|                                          |       | 3,707,574           |       | 294,312                    |       | 2,001                            |       | (108,045                           | )          | 3,895,842        |       |
| Shareholder’s Equity:                    |       |                |       |                       |       |                             |       |                               |       |             |       |
| Capital stock                                 |       | 46,177              |       | 232,817                    |       | 25                               |       | (232,842                           | )          | 46,177           |       |
| Contributed surplus                           |       | 5,178,143           |       | 792,495                    |       | 488                              |       | (792,983                           | )          | 5,178,143        |       |
| (Deficit) retained earnings                   |       | (2,739,710          | )          | (407,463                   | )          | 5,455                            |       | 402,008                            |       | (2,739,710       | )          |
| Accumulated other comprehensive loss          |       | (8,757              | )          | (1,418                     | )          | —                           |       | 1,418                              |       | (8,757           | )          |
|                                          |       | 2,475,853           |       | 616,431                    |       | 5,968                            |       | (622,399                           | )          | 2,475,853        |       |
|                                          |       | $                   | 6,183,427  |                       | $          | 910,743                          |       | $                                  | 7,969      |             | $          | (730,444 | ) | $ | 6,371,695 |   |

 

F-42

----

Tableof Contents

 

**VIDEOTRON LTD.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,****Continued**

**Years ended December 31, 2008, 2007 and2006**

**(tabular amounts are in thousands of Canadiandollars)**

 

**24.****                               SIGNIFICANTDIFFERENCES BETWEEN GAAP IN CANADA AND THE UNITED STATES (Continued):**

 

ConsolidatedStatement of Income

In accordancewith United States GAAP

For the yearended December 31, 2006

 
| ** **                                                  | ** ** | **Videotron  Ltd.** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-  Guarantors** | ** ** | **Adjustments  and  eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------|------------|---------------------|------------|----------------------------|------------|----------------------------------|------------|------------------------------------|------------|------------------|------------|
| ** **                                                  | ** ** | **(Revised)**       | ** ** | ** **                 | ** ** | ** **                       | ** ** | **(Revised)**                      | ** ** | ** **       | ** ** |
| Revenues                                                    |       | $                   | 1,066,286  |                       | $          | 241,527                          |       | $                                  | 5,610      |             | $          | (1,158 | ) | $ | 1,312,265 |   |
| Direct costs and operating expenses                         |       | 631,230             |       | 169,000                    |       | 4,163                            |       | (1,158                             | )          | 803,235          |       |
| Amortization                                                |       | 170,246             |       | 25,448                     |       | 674                              |       | (33                                | )          | 196,335          |       |
| Financial expenses                                          |       | 61,973              |       | 19,806                     |       | —                           |       | —                             |       | 81,779           |       |
| Loss on valuation and translation of  financial instruments |       | 5,992               |       | —                     |       | —                           |       | —                             |       | 5,992            |       |
| Dividend income from related companies                      |       | —              |       | (13,170                    | )          | —                           |       | 13,170                             |       | —           |       |
| Income (loss) before the undernoted                         |       | 196,845             |       | 40,443                     |       | 773                              |       | (13,137                            | )          | 224,924          |       |
| Income taxes                                                |       | 51,350              |       | 4,492                      |       | 231                              |       | —                             |       | 56,073           |       |
|                                                        |       | 145,495             |       | 35,951                     |       | 542                              |       | (13,137                            | )          | 168,851          |       |
| Equity income from subsidiaries                             |       | 23,270              |       | 119                        |       | —                           |       | (23,389                            | )          | —           |       |
| Non-controlling interest                                    |       | —              |       | —                     |       | —                           |       | (86                                | )          | (86              | )          |
| Net income (loss)                                           |       | $                   | 168,765    |                       | $          | 36,070                           |       | $                                  | 542        |             | $          | (36,612 | ) | $ | 168,765 |   |

 

F-43

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Tableof Contents

 

**VIDEOTRON LTD.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,****Continued**

**Years ended December 31, 2008, 2007 and2006**

**(tabular amounts are in thousands of Canadiandollars)**

 

**24.****                               SIGNIFICANTDIFFERENCES BETWEEN GAAP IN CANADA AND THE UNITED STATES (Continued):**

 

ConsolidatedStatement of Cash Flows

In accordancewith United States GAAP

For the yearended December 31, 2006

 
| ** **                                                       | ** ** | **Videotron  Ltd.** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-  Guarantors** | ** ** | **Adjustments  and  eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------|------------|---------------------|------------|----------------------------|------------|----------------------------------|------------|------------------------------------|------------|------------------|------------|
| ** **                                                       | ** ** | **(Revised)**       | ** ** | ** **                 | ** ** | ** **                       | ** ** | **(Revised)**                      | ** ** | ** **       | ** ** |
| Cash flows related to operating activities:                      |       |                |       |                       |       |                             |       |                               |       |             |       |
| Net income (loss)                                                |       | $                   | 168,765    |                       | $          | 36,070                           |       | $                                  | 542        |             | $          | (36,612 | ) | $ | 168,765 |   |
| Adjustments:                                                     |       |                |       |                       |       |                             |       |                               |       |             |       |
| Amortization of fixed assets                                     |       | 168,910             |       | 25,288                     |       | 674                              |       | (33                                | )          | 194,839          |       |
| Amortization of other assets                                     |       | 10,506              |       | 7,329                      |       | —                           |       | —                             |       | 17,835           |       |
| Loss on disposal of fixed assets                                 |       | 700                 |       | 167                        |       | 549                              |       | —                             |       | 1,416            |       |
| Loss on valuation and translation financial  instruments         |       | 4,880               |       | —                     |       | —                           |       | —                             |       | 4,880            |       |
| Amortization of financing costs and debt  premium or discount    |       | 432                 |       | —                     |       | —                           |       | —                             |       | 432              |       |
| Future income taxes                                              |       | 51,997              |       | 4,482                      |       | 33                               |       | —                             |       | 56,512           |       |
| Equity income from subsidiaries                                  |       | (23,270             | )          | (119                       | )          | —                           |       | 23,389                             |       | —           |       |
| Other                                                            |       | 1,129               |       | 1,240                      |       | —                           |       | 86                                 |       | 2,455            |       |
| Net change in non-cash balances related to  operating activities |       | (40,490             | )          | 28,593                     |       | 95                               |       | 2,509                              |       | (9,293           | )          |
|                                                             |       | 343,559             |       | 103,050                    |       | 1,893                            |       | (10,661                            | )          | 437,841          |       |
| Cash flows related to investing activities:                      |       |                |       |                       |       |                             |       |                               |       |             |       |
| Acquisition of fixed assets                                      |       | (260,720            | )          | (37,665                    | )          | (1,793                           | )          | (2,451                             | )          | (302,629         | )          |
| Net decrease (increase) in temporary  investments                |       | 40,000              |       | —                     |       | (491                             | )          | —                             |       | 39,509           |       |
| Dividends                                                        |       | 19,000              |       | (19,000                    | )          | —                           |       | —                             |       | —           |       |
| Other                                                            |       | 514                 |       | 283                        |       | —                           |       | —                             |       | 797              |       |
|                                                             |       | (201,206            | )          | (56,382                    | )          | (2,284                           | )          | (2,451                             | )          | (262,323         | )          |
| Cash flows related to financing activities:                      |       |                |       |                       |       |                             |       |                               |       |             |       |
| Net change in bank indebtedness                                  |       | 18,865              |       | —                     |       | —                           |       | (395                               | )          | 18,470           |       |
| Net borrowings under bank credit facility                        |       | 49,000              |       | —                     |       | —                           |       | —                             |       | 49,000           |       |
| Repayment of subordinated loan to parent  company                |       | (150,000            | )          | —                     |       | —                           |       | —                             |       | (150,000         | )          |
| Issuance of shares                                               |       | 111,536             |       | —                     |       | —                           |       | —                             |       | 111,536          |       |
| Transfer of Additional Amount payable to  parent company         |       | (111,536            | )          | —                     |       | —                           |       | —                             |       | (111,536         | )          |
| Reduction in paid-up capital                                     |       | (108,749            | )          | —                     |       | —                           |       | —                             |       | (108,749         | )          |
| Dividends                                                        |       | (23,170             | )          | —                     |       | —                           |       | 13,170                             |       | (10,000          | )          |
| Advance from (to) an affiliated company                          |       | 47,094              |       | (47,036                    | )          | —                           |       | (58                                | )          | —           |       |
| Other                                                            |       | (938                | )          | —                     |       | —                           |       | —                             |       | (938             | )          |
|                                                             |       | (167,898            | )          | (47,036                    | )          | —                           |       | 12,717                             |       | (202,217         | )          |
| Net change in cash and cash equivalents                          |       | (25,545             | )          | (368                       | )          | (391                             | )          | (395                               | )          | (26,699          | )          |
| Cash and cash equivalents, beginning of  year                    |       | 25,545              |       | 478                        |       | 676                              |       | —                             |       | 26,699           |       |
| Cash and cash equivalents, end of year                           |       | $                   | —     |                       | $          | 110                              |       | $                                  | 285        |             | $          | (395 | ) | $ | — |   |

 

**25.****                               SUBSEQUENTEVENTS:**

 

(a)                                  InJanuary and February 2009, the Company paid dividends to its parentcompany, Quebecor Media Inc., for total cash distributions of$55.0 million.

 

(b)                                 OnJanuary 9, 2009, CF Cable TV Inc., a wholly-owned subsidiary of theCompany, increased the subordinated loan by $190.0 million from QuebecorMedia Inc., bearing interest at a rate of 10.5%, payable every six monthson June 20 and December 20, and maturing on January 9, 2024. Onthe same day, CF Cable TV Inc. invested the total proceeds of$190.0 million into 190,000 preferred shares, Series B, of9101-0835 Québec Inc. These shares carry the right to receive anannual dividend of 10.85%, payable semi-annually.

 

**26.          Event (Unaudited) Subsequent to theDate of the Report of Independent Registered Public Accounting Firm:**

 

On March 5,2009, the Company issued US$260.0 million in aggregate principal amount ofSenior Notes at a discount price of 98.625% for net proceeds of US$256.4million, before financing fees of US$5.3 million.  These Notes bear interest at a rate of 9.125%for an effective interest rate of 9.35% payable every six months on June 15 andDecember 15, and mature on April 15, 2018. The Notes contain certain restrictions on the Company, including limitationson its ability to incur additional indebtedness, pay dividends and make otherdistributions, and are unsecured.  TheSenior Notes are guaranteed by specific subsidiaries of the Company.  These Notes are redeemable at the option ofthe Company, in whole or in part, at any time on or after April 15, 2013, at adecreasing premium.

 

F-44

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