Sun Media 6K Current report

TABLE OF CONTENTS


SIGNATURE
	COMPANY PROFILE
	RECENT DEVELOPMENTS
	NEW ACCOUNTING STANDARDS
	OPERATING RESULTS
	LIQUIDITY AND CAPITAL RESOURCES
	NATURE OF BUSINESS

FORM 6-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

REPORT OF FOREIGN ISSUER

Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934

For the month of August, 2007

SUN MEDIA CORPORATION

(Translation of registrant’s name into English)

333 King Street East, Toronto, Ontario M5A 3X5 CANADA
(Address of principal executive offices)

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.


Form 20-Fþ		Form 40-Fo

Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.


Yeso		Noþ

Quarterly Report for the Period Ending
June 30, 2007 of
SUN MEDIA CORPORATION
Filed in this Form 6-K

Documents index

1. Quarterly report for the period ending June 30, 2007 for Sun Media Corporation

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.




	SUN MEDIA CORPORATION


	By:	/s/ Michel Slight
Date: August 29, 2007		Name:	Michel Slight
		Title:	Executive Vice President, Finance

SUN MEDIA CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SECOND QUARTER 2007

COMPANY PROFILE

Sun Media Corporation (“Sun Media” or “the Company”), a subsidiary of Quebecor Media Inc. (“Quebecor Media”), itself a subsidiary of Quebecor Inc., is the second largest newspaper publishing company in Canada, publishing eight paid urban daily newspapers, seven free urban daily newspapers and 195 weekly newspapers and specialty publications across Canada. Sun Media operates its newspaper businesses in urban and community markets. The Urban Daily Group consists of eight paid daily newspapers, and three weekly publications as well as Sun Media’s distribution business,Messageries Dynamiques. In addition, the Urban Daily Group operates seven free daily publications,24 Hoursin Toronto, Ottawa, Calgary, Edmonton and Vancouver and24 Heuresin Montreal and Ottawa. The Community Newspaper Group includes the majority of Sun Media’s other publications, including nine paid daily community newspapers, 183 weekly newspapers, weekly shopping guides and agricultural and other specialty publications. The Community Newspaper Group has its own distribution sales operation,NetMedia.Sun Media also owns a 25% interest in SUN TV Company (“SUN TV”), a general interest television station in Toronto, Ontario.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations covers the main activities of the second quarter of 2007 and the major changes from the last financial year. It should be read in conjunction with the information in the Annual Report (Form 20-F/A) for the year ended December 31, 2006. References to Canadian dollars, Cdn$ and $ are to the currency of Canada, and references to U.S. dollars and US$ are to the currency of the United States.

RECENT DEVELOPMENTS

Acquisition of Additional Shares of Le Courrier du Sud Inc.

On July 3, 2007, the Company exercised its option to acquire an additional 2,500 shares or 25.0% of Le Courrier du Sud Inc., a community newspaper publisher in Quebec, for a purchase price of $7.9 million, plus acquisition costs. The acquisition was completed on August 7, 2007 and increased the Company’s total ownership of Le Courrier du Sud Inc. to 75.01%. Following the acquisition of additional shares, the Company will continue to consolidate Le Courrier du Sud Inc. within the financial statements of Sun Media.

NEW ACCOUNTING STANDARDS

The accounting policies described in the Company’s latest audited annual consolidated financial statements have been consistently applied except for the new accounting standards described below and Notes 2 and 5 in the unaudited interim consolidated financial statements for the six months ended June 30, 2007.

Effective January 1, 2007, the Company adopted the Canadian Institute of Chartered Accountants (“CICA”) Handbook Section 1530,Comprehensive Income (“CICA 1530”), Handbook Section 3855,Financial Instruments — Recognition and Measurement (“CICA 3855”)and Handbook Section 3865,Hedges (“CICA 3865”). The significant changes related to these new accounting standards are as follows:

Comprehensive income

CICA 1530 introduces the concept of comprehensive income, which is calculated by including other comprehensive income with net income. Other comprehensive income represents changes in shareholders’ equity arising from transactions and other events with non-owner sources, such as unrealized gains and losses on financial assets classified as available-for-sale and changes in the fair value of the effective portion of cash flow hedging instruments. With the adoption of this section, the unaudited interim consolidated financial statements now include consolidated statements of comprehensive income.

SUN MEDIA CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SECOND QUARTER 2007

Financial assets and financial liabilities

CICA 3855 establishes standards for recognizing and measuring financial assets, financial liabilities and derivatives. Under this standard, financial instruments are now classified as held-for-trading, available-for-sale, held-to-maturity, loans and receivables, or other financial liabilities and measurement in subsequent periods depends on their classification. Transaction costs are expensed as incurred for financial instruments classified as held-for-trading. For other financial instruments, transaction costs are capitalized on initial recognition and presented as a reduction of the underlying financial instruments.

Financial assets and financial liabilities held-for-trading are measured at fair value with changes recognized in financial expenses. Available-for-sale financial assets are measured at fair value or at cost, in the case of financial assets that do not have a quoted market price in an active market, and changes in fair value are recorded in comprehensive income. Financial assets classified as held-to-maturity, loans and receivables, and other financial liabilities are measured at amortized cost using the effective interest method of amortization. The Company has classified its cash and cash equivalents and temporary investments as held-for-trading. Trade receivables, receivables from related parties, loans and other long-term receivables were classified as loans and receivables. Investments in preferred shares of related companies were classified as available-for-sale. All of the Company’s financial liabilities, including convertible obligations to related companies, were classified as other liabilities.

Derivative instruments are recorded as financial assets or liabilities at fair value, including those derivatives that are embedded in financial or non-financial contracts that are not closely related to the host contracts. Changes in fair values of the derivatives are recognized in financial expenses, with the exception of derivatives designated as a cash flow hedge for which hedge accounting is used. In accordance with the new standards, the Company selected January 1, 2003 as its transition date for adopting this standard related to embedded derivatives. Derivative instruments are recorded in other liabilities in the consolidated balance sheets.

Hedges

CICA 3865 specifies the criteria that must be satisfied in order for hedge accounting to be applied and the accounting for each of the permitted hedging strategies.

Accordingly, for derivatives designated as fair value hedges, such as certain cross currency interest rate swaps used by the Company, changes in the fair value of the hedging derivative recorded in financial expenses are substantially offset by changes in the fair value of the hedged item to the extent that the hedging relationship is effective. When a fair value hedge is discontinued, the carrying value of the hedged item is no longer adjusted and the cumulative fair value adjustments to the carrying value of the hedged item are amortized to financial expenses over the remaining term of the original hedging relationship.

For derivative instruments designated as cash flow hedges, such as certain cross currency interest rate swaps and forward exchange contracts used by the Company, the effective portion of a hedge is reported in other comprehensive income until it is recognized in income during the same period in which the hedged item affects income, while the ineffective portion is immediately recognized in the consolidated statements of income. When a cash flow hedge is discontinued, the amounts previously recognized in accumulated other comprehensive income are reclassified to income when the variability in the cash flows of the hedged item affects income.

Upon adoption of these new standards, the transition rules require that the Company adjust either the opening retained earnings or accumulated other comprehensive income as if the new standards had always been applied in the past, without restating comparative figures of prior years. Accordingly, the following adjustments were recorded in the consolidated financial statements as at January 1, 2007:

—   Decrease in other assets of $17.0 million
—   Increase in other liabilities of $14.9 million
—   Decrease in long-term debt of $23.1 million
—   Decrease in future income tax liabilities of $11.5 million
—   Increase in retained earnings of $2.8 million
—   Increase in accumulated other comprehensive loss of $0.1 million

SUN MEDIA CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SECOND QUARTER 2007

In addition, the adoption of these new standards decreased net income by $3.1 million for the three months ended June 30, 2007 and increased net income by $0.1 million for the six months ended June 30, 2007.

OPERATING RESULTS

The comments and analysis in this report are based on Sun Media’s primary consolidated financial statements, which are prepared in accordance with Canadian GAAP (elements of the reconciliation to U.S. GAAP are presented in Note 14 of the attached unaudited interim consolidated financial statements).

Management uses the supplemental financial measure “operating income” to assess its operating results and financial performance. Operating income, as defined by the Company, and ratios using this measure, are not required by or recognized under Canadian GAAP. Operating income, as reconciled to net income under Canadian GAAP, is defined by the Company as net income before amortization, restructuring charges, financial expenses, equity losses, income taxes and non-controlling interest. Operating income and ratios using this measure are not intended to represent funds available for debt service, dividends, reinvestment or other discretionary uses, and this non-GAAP measure is not intended or designed to replace other financial operating performance measures or the statement of cash flows as a measure of liquidity. Operating income should not be considered in isolation from, or as a substitute for analysis of, the Company’s financial information reported under Canadian GAAP. Operating income is used by Sun Media because management believes it is a meaningful measure of performance commonly used in the publishing industry and by financial analysts and other users of the Company’s financial information to analyze and compare companies in our industry. Operating income, as defined by the Company, has limitations as an analytical tool, including:


	—	it does not reflect interest expense or the cash necessary to make interest payments;
	—	it does not reflect income tax expense or the cash necessary to pay income taxes;
	—	although amortization is a non-cash charge, the assets being amortized will often have to be replaced in the future, and operating income does not reflect cash requirements for such capital expenditures;
	—	it does not reflect financial expenses or the cash necessary to pay financial expenses;
	—	it does not reflect the cash necessary to pay expenses relating to the Company’s restructuring initiatives;
	—	it does not reflect cash outlays for future contractual commitments;
	—	it does not reflect equity losses, including equity losses in SUN TV; and
	—	it does not reflect potential cash requirements to maintain the Company’s interest in SUN TV.

Sun Media’s definition of operating income is not identical to similarly titled measures reported by other companies, limiting the usefulness of operating income as a comparative measure.

SUN MEDIA CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SECOND QUARTER 2007

The following table provides the reconciliation of net income and the reconciliation of operating income to cash flows provided by operations under Canadian GAAP, for the three and six months ended June 30, 2007 and 2006.


	Three Months Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
	2007			2006			2007			2006

	(In thousands of Canadian dollars)
Net income	$	23,380		$	31,735		$	40,812		$	53,252
Amortization		8,630			9,387			16,538			17,917
Restructuring charges		4,783			7,765			10,707			7,765
Financial expenses		22,190			15,046			27,349			28,468
Equity loss on investment in SUN TV		678			859			1,215			1,838
Income tax recovery		(4,235	)		(4,537	)		(5,349	)		(12,200	)
Non-controlling interest		434			449			741			803

Operating income, as defined	$	55,860		$	60,704		$	92,013		$	97,843
Restructuring charges		(4,783	)		(7,765	)		(10,707	)		(7,765	)
Financial expenses		(22,190	)		(15,046	)		(27,349	)		(28,468	)
Current income taxes		(394	)		(639	)		(670	)		(1,158	)
Other items not involving cash		11,416			4,467			5,845			7,999
Changes in non-cash operating working capital		7,228			(50	)		13,986			(11,535	)

Cash flows provided by operations	$	47,137		$	41,671		$	73,118		$	56,916

SUN MEDIA CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SECOND QUARTER 2007

Three Months Ended June 30, 2007 compared to the Three Months Ended June 30, 2006

Revenues


	Three months ended June 30,
	2007		2006
	(In thousands of Canadian dollars)
Advertising revenues	$	177,741	$	174,501
Circulation revenues		38,161		39,635
Distribution, commercial printing and other revenues		24,643		26,800

Total revenues	$	240,545	$	240,936

Consolidated revenues for the three months ended June 30, 2007 were $240.5 million compared to $240.9 million for the three months ended June 30, 2006.

Advertising revenues were $177.7 million for the three months ended June 30, 2007, an increase of $3.2 million or 1.9%, from $174.5 million for the three months ended June 30, 2006. The Company’s recently launched free daily publications in Ottawa, Edmonton and Calgary accounted for $1.1 million of the increase in advertising revenues. In addition, the Company continued to generate growth in its free daily publications in Toronto, Montreal and Vancouver, as well as in its community publications. These increases in advertising revenue were offset partly by declines in the Company’s paid urban daily newspapers, which experienced softness in the retail advertising category.

Circulation revenues were $38.2 million for the three months ended June 30, 2007, a decrease of $1.5 million or 3.7%, from $39.6 million for the three months ended June 30, 2006. A significant portion of the decline relates to the Toronto Sun and Le Journal de Montréal which continued their investments in circulation during the quarter by increasing promotional activities within their respective markets and providing additional discounts to increase circulation and readership levels.

Distribution, commercial printing and other revenues of $24.6 million for the three months ended June 30, 2007, were $2.2 million or 8.0% less than the same period in the prior year. Distribution revenues decreased mainly due to the closure of an unprofitable distribution facility in Calgary, in the first quarter of 2007. Commercial printing revenues decreased mainly due to lower third party printing in the quarter.

Cost of Sales, Selling and Administrative Expenses

Cost of sales, selling and administrative expenses were $184.7 million for the three months ended June 30, 2007, an increase of $4.5 million or 2.5% from $180.2 million for the three months ended June 30, 2006.

Payroll expenses were $89.4 million for the three months ended June 30, 2007, a decrease of $1.0 million or 1.1% from $90.4 million for the three months ended June 30, 2006. Payroll expenses decreased primarily due to staff reductions resulting from the Company’s restructuring initiatives, which began in mid-2006, and savings recorded by Le Journal de Québec relating to the current labour disruption with its unionized pressroom, newsroom and office employees since April 22, 2007. These savings were partly offset by higher stock compensation expense of $2.3 million, compared to last year, and normal wage increases. In addition, payroll expenses in the second quarter of 2006 included favourable pay equity settlements, and labour savings as a result of a strike at Le Journal de Montréal beginning in June 2006.

Other expenses, including newsprint, production, sales and administration costs, were $95.3 million for the three months ended June 30, 2007, an increase of $5.5 million or 6.1% from $89.8 million for the three months ended June 30, 2006. The increase in other expenses was due to the additional costs relating to the newly launched free daily publications in Ottawa, Edmonton and Calgary, and incremental expenses, such as security costs, relating to the current labour disruption at Le Journal de Québec. In addition, other expenses in the second quarter of 2006 included favourable tax recoveries, offset in part by incremental costs as a result of the strike at Le Journal de Montréal

SUN MEDIA CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SECOND QUARTER 2007

beginning in June 2006. The increases in other expenses were offset partly by lower newsprint prices and management fees paid to Quebecor Media compared to the prior year.

Operating Income

Operating income, as defined by the Company, was $55.9 million for the three months ended June 30, 2007, a decrease of $4.8 million or 8.0%, from $60.7 million for the three months ended June 30, 2006. Excluding the losses relating to the newly launched free daily publications, as well as the one-time favourable pay equity settlements and tax recoveries in 2006, operating income increased by $0.5 million compared to the prior year.

The Company’s operating income margin for the three months ended June 30, 2007 was 23.2% compared to 25.2% for the three months ended June 30, 2006.

Amortization

Amortization was $8.6 million for the three months ended June 30, 2007 compared to $9.4 million for the three months ended June 30, 2006. Amortization for the three months ended June 30, 2007 includes an additional amortization of $2.0 million (2006 — $2.7 million) relating to the shortened estimated useful life of production equipment associated with the consolidation and relocation of the Company’s printing plants, as further described in Note 4(a) of the Company’s unaudited interim consolidated financial statements.

Restructuring Charges

Restructuring charges for the three months ended June 30, 2007 were $4.8 million, compared to $7.8 million during the same period in 2006.

In August 2005, Quebecor Media announced a plan to invest in a new printing facility located in Toronto, Ontario and transfer the printing of certain of its publications in Ontario to the new facility. In addition, in August 2005, Quebecor Media announced a plan to relocate the printing of certain Sun Media publications to a new printing facility owned by Quebecor Media to be located in Saint-Janvier-de-Mirabel, Québec. As of August 2007, the Company has completely transferred the printing of 24 Hours (Toronto) to the Ontario printing facility and has transferred the printing of 24 heures (Montreal), the Ottawa Sun and several Quebec community publications to the Quebec printing facility. The Company plans to transfer the printing of additional publications to these printing facilities during the remainder of 2007.

During the second quarter of 2007, the Company recorded special termination benefits of $3.2 million in connection with the restructuring of printing facilities at the Toronto Sun and $0.1 million in connection with the Ottawa Sun.

In addition, during the second quarter of 2007, the Company recorded severance costs of $0.5 million relating to the restructuring of the Company’s news production operations and another $1.0 million relating to general workforce reduction initiatives.

Sun Media expects that during the remainder of 2007, it will record additional restructuring charges relating to special termination benefits for the Toronto Sun printing facilities. Sun Media also anticipates that it will record additional restructuring charges relating to other potential workforce reduction initiatives.

Financial Expenses

Financial expenses for the three months ended June 30, 2007 were 22.2 million, an increase of $7.2 million from $15.0 million for the three months ended June 30, 2006. For the three months ended June 30, 2007, the Company recorded a net unrealized loss on derivative instruments and on foreign currency translation of financial instruments of $10.9 million, compared to a net unrealized loss of $4.0 million in the comparable period last year.

SUN MEDIA CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SECOND QUARTER 2007

Sun Media also earned dividend income of $16.9 million during the three months ended June 30, 2007 (2006 — $37.7 million) comprised of dividend income on its investments in Quebecor Media preferred shares of $16.0 million (2006 — $36.7 million) and dividend income on its investment in SUN TV preferred shares of $0.9 million (2006 — $1.0 million). Concurrently, Sun Media incurred interest expense of $16.4 million during the three months ended June 30, 2007 (2006 — $36.6 million) comprised of interest expense on its convertible obligation to Quebecor Media of $15.5 million (2006 — $35.6 million) and interest expense on its convertible obligation to SUN TV of $0.9 million (2006 — $1.0 million).

Excluding the net unrealized losses on derivative instruments and on foreign currency translation of financial instruments, dividend income and interest on convertible obligations, interest expense decreased $0.4 million compared to the prior year due to a lower average debt balance.

Income Taxes

Sun Media’s income tax recovery was $4.2 million for the three months ended June 30, 2007 compared to $4.5 million for the three months ended June 30, 2006. The following table summarizes the main components which resulted in the Company’s income tax recovery for the three months ended June 30, 2007 and 2006:


	Three months ended June 30,
	2007			2006
	(In thousands of Canadian dollars)

Income before income taxes and non-controlling interest	$	19,579		$	27,647
Add: Net loss on derivative instruments and on foreign currency translation of financial instruments		10,917			3,976
Less: Non-taxable dividend income		(16,910	)		(37,726	)

	$	13,586		$	(6,103	)
Statutory tax rate		33.8	%		33.8	%

		4,592			(2,062	)
Tax effect on net loss on derivative instruments and on foreign currency translation of financial instruments		(4,333	)		(1,932	)
Reversal of future income tax liability⁽¹⁾		(2,000	)		—
Recognition of deferred credit relating to acquisition of non-capital losses⁽²⁾		(2,190	)		—
Other		(304	)		(543	)

Income tax recovery	$	(4,235	)	$	(4,537	)

⁽¹⁾

During the quarter, the Company determined that a future income tax liability initially recorded on the disposition of certain publications was no longer required. Accordingly, the reversal of this liability was recorded in the consolidated statements of income.

⁽²⁾

On September 30, 2006, Sun Media’s ultimate parent company, Quebecor Inc., transferred to the Company $74.2 million of non-capital tax losses in exchange for net cash consideration of $16.1 million. This transaction was recorded at the exchange amount. As a result, the Company recorded an income tax asset of $24.5 million and the difference of $8.4 million between the net cash consideration and the income tax asset was recorded as a deferred credit. During the second quarter of 2007, the Company recognized $2.2 million of this deferred credit and increased its future income tax recovery by the same amount.

SUN MEDIA CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SECOND QUARTER 2007

Six Months Ended June 30, 2007 compared to the Six Months Ended June 30, 2006

Revenues


	Six months ended June 30,
	2007		2006
	(In thousands of Canadian dollars)

Advertising revenues	$	335,852	$	330,426
Circulation revenues		76,829		79,768
Distribution, commercial printing and other revenues		48,136		50,457

Total revenues	$	460,817	$	460,651

Consolidated revenues for the six months ended June 30, 2007 were $460.8 million compared to $460.7 million for the six months ended June 30, 2006.

Advertising revenues were $335.9 million for the six months ended June 30, 2007, an increase of $5.4 million or 1.6%, from $330.4 million for the six months ended June 30, 2006. The Company’s free daily publications in Ottawa, Edmonton and Calgary, launched in late 2006 and early 2007, accounted for $1.7 million of the increase in advertising revenues. In addition, the Company continued to generate growth in its free daily newspapers in Toronto, Montreal and Vancouver, as well as in its community publications. These increases in advertising revenue were offset partly by declines in the Company’s paid urban daily newspapers, of which the largest declines were in the Toronto Sun and Le Journal de Montreal.

Circulation revenues were $76.8 million for the six months ended June 30, 2007, a decrease of $2.9 million or 3.7%, from $79.8 million for the six months ended June 30, 2006. A significant portion of the decline relates to the Toronto Sun and Le Journal de Montréal which continued their investments in circulation during 2007 by increasing promotional activities within their respective markets and providing additional discounts to increase circulation and readership levels.

Distribution, commercial printing and other revenues of $48.1 million for the six months ended June 30, 2007, were $2.3 million or 4.6% less than the same period in the prior year. Distribution revenues decreased mainly due to the closure of an unprofitable distribution facility in Calgary, in the first quarter of 2007. Commercial printing revenues decreased mainly due to lower third party printing, compared to the prior year.

Cost of Sales, Selling and Administrative Expenses

Cost of sales, selling and administrative expenses were $368.8 million for the six months ended June 30, 2007, an increase of $6.0 million or 1.7% from $362.8 million for the six months ended June 30, 2006.

Payroll expenses were $180.9 million for the six months ended June 30, 2007, a decrease of $2.4 million or 1.3% from $183.3 million for the six months ended June 30, 2006. Payroll expenses decreased primarily due to staff reductions resulting from the Company’s restructuring initiatives, which began in mid 2006, savings recorded by Le Journal de Québec relating to the current labour disruption with its unionized pressroom, newsroom and office employees since April 22, 2007, and a favourable pension adjustment of $0.9 million recorded in the first quarter of 2007. These savings were partly offset by normal wage increases, higher stock compensation expense of $2.4 million and additional charges recorded by Le Journal de Montréal relating to an unfavourable arbitrator ruling on the lockout of its press employees, which ended on February 21, 2007. In addition, payroll expenses in the second quarter of 2006 included favourable pay equity settlements, and labour savings as a result of a strike at Le Journal de Montréal beginning in June 2006.

SUN MEDIA CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SECOND QUARTER 2007

Other expenses, including newsprint, production, sales and administrative costs, were $187.9 million for the six months ended June 30, 2007, an increase of $8.4 million or 4.7% from $179.5 million for the six months ended June 30, 2006. The increase in other expenses was due to the additional costs relating to the newly launched free daily publications in Ottawa, Edmonton and Calgary, the timing of marketing expenses in some urban daily publications and incremental expenses, such as security costs, relating to the current labour disruption at Le Journal de Québec and lockout of Le Journal de Montréal’s press employees, which ended earlier in 2007. In addition, other expenses in the second quarter of 2006 included favourable tax recoveries. The increases in other expenses were offset partly by lower newsprint prices and management fees compared to the prior year.

Operating Income

Operating income, as defined by the Company, was $92.0 million for the six months ended June 30, 2007, a decrease of $5.8 million or 6.0%, from $97.8 million for the six months ended June 30, 2006. Excluding the losses relating to the newly launched free daily publications, as well as the one-time favourable pay equity settlements and tax recoveries in 2006, operating income increased by $1.3 million compared to the prior year.

The Company’s operating income margin for the six months ended June 30, 2007 was 20.0% compared to 21.2% for the six months ended June 30, 2006.

Amortization

Amortization was $16.5 million for the six months ended June 30, 2007 compared to $17.9 million for the six months ended June 30, 2006. Amortization for the six months ended June 30, 2007 includes additional amortization of $3.9 million (2006 — $5.0 million) relating to the shortened estimated useful life of production equipment associated with the consolidation and relocation of the Company’s printing plants.

Restructuring Charges

Restructuring charges for the six months ended June 30, 2007 were $10.7 million, compared to $7.8 million during the same period in 2006.

During the six months ended June 30, 2007, the Company recorded special termination benefits of $4.0 million in connection with the restructuring of printing facilities at the Toronto Sun and $0.1 million in connection with the Ottawa Sun. The Company also recorded additional severance costs of $2.3 million relating to the elimination of an equivalent of 39 full-time editorial positions in operations across the organization. Finally, the Company recorded additional severance costs of $4.3 million for the elimination of an equivalent of 107 full-time positions relating to general workforce reduction initiatives.

Financial Expenses

Financial expenses for the six months ended June 30, 2007 were $27.3 million, a decrease of $1.1 million from $28.5 million for the six months ended June 30, 2006. For the six months ended June 30, 2007, the Company recorded a net unrealized loss on derivative instruments and on foreign currency translation of financial instruments of $4.9 million, compared to a net unrealized loss of $7.0 million in the comparable period last year.

Sun Media also earned dividend income of $33.8 million during the six months ended June 30, 2007 (2006 — $76.5 million) comprised of dividend income on its investments in Quebecor Media preferred shares of $32.0 million (2006 — $74.5 million) and dividend income on its investment in SUN TV preferred shares of $1.8 million (2006 — $2.0 million). Concurrently, Sun Media incurred interest expense of $32.8 million during the six months ended June 30, 2007 (2006 — $74.3 million) comprised of interest expense on its convertible obligation to Quebecor Media of $31.0 million (2006 — $72.3 million) and interest expense on its convertible obligation to SUN TV of $1.8 million (2006 — $2.0 million).

SUN MEDIA CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SECOND QUARTER 2007

Excluding the net unrealized losses on derivative instruments and on the foreign currency translation of financial instruments, dividend income and interest on convertible obligations, interest expense decreased $0.1 million compared to the prior year.

Income Taxes

Sun Media’s income tax recovery was $5.3 million for the six months ended June 30, 2007 compared to $12.2 million for the six months ended June 30, 2006. The following table summarizes the main components which resulted in the Company’s income tax recovery for the six months ended June 30, 2007 and 2006:


	Six months ended June 30,
	2007			2006
	(In thousands of Canadian dollars)

Income before income taxes and non-controlling interest	$	36,204		$	41,855
Add: Net loss on derivative instruments and on foreign currency translation of financial instruments		4,862			7,042
Less: Non-taxable dividend income		(33,820	)		(76,486	)

	$	7,246		$	(27,589	)
Statutory tax rate		33.8	%		33.8	%

		2,449			(9,325	)
Tax effect on net loss on derivative instruments and on foreign currency translation of financial instruments		(3,291	)		(3,044	)
Reversal of future income tax liability⁽¹⁾		(2,000	)		—
Recognition of deferred credit relating to acquisition of non-capital losses⁽²⁾		(2,740	)		—
Other		233			169

Income tax recovery	$	(5,349	)	$	(12,200	)

⁽¹⁾

During the second quarter of 2007, the Company determined that a future income tax liability initially recorded on the disposition of certain publications was no longer required. Accordingly, the reversal of this liability was recorded in the consolidated statements of income.

⁽²⁾

On September 30, 2006, Sun Media’s ultimate parent company, Quebecor Inc., transferred to the Company $74.2 million of non-capital tax losses in exchange for net cash consideration of $16.1 million. This transaction was recorded at the exchange amount. As a result, the Company recorded an income tax asset of $24.5 million and the difference of $8.4 million between the net cash consideration and the income tax asset was recorded as a deferred credit. During the six months end June 30, 2007, the Company recognized $2.7 million of this deferred credit and increased its future income tax recovery by the same amount.

LIQUIDITY AND CAPITAL RESOURCES

Operating Activities

For the three months ended June 30, 2007, cash flows provided by operations increased $5.5 million to $47.1 million from $41.7 million in the same period in 2006. The positive variance was primarily due to improved collections of accounts receivable at certain publications, as well as the timing of newsprint rebates, which were received during the second quarter of 2007. In addition, the timing of other operating expense payments contributed to the positive variance in cash flows provided by operations. These positive variances were offset partly by a decrease in operating income, as defined by the Company, of $4.8 million during the quarter, compared to the prior year.

SUN MEDIA CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SECOND QUARTER 2007

For the six months ended June 30, 2007, cash flows provided by operations increased $16.2 million to $73.1 million from $56.9 million in the same period in 2006. The positive variance was primarily due the timing of newsprint and other operating expense payments, as well as improved collections of accounts receivable at certain divisions. These positive variances were offset partly by a decrease in operating income, as defined by the Company, of $5.8 million during the six months ended June 30, 2007, compared to the prior year.

Investing Activities

Capital expenditures in the three months ended June 30, 2007 were $6.7 million, compared to $2.4 million in the three months ended June 30, 2006. Capital expenditures in the six months ended June 30, 2007 were $12.8 million, compared to $5.2 million in the six months ended June 30, 2006. In 2007, the Company has made significant investments in its call centre operations, advertising and circulation systems and editorial content management systems, with the objective of standardizing, improving and streamlining Sun Media’s business processes.

On July 13, 2007, subsequent to the end of the second quarter, the Company sold $235,000 of its investment in the Series A Cumulative First Preferred Shares of Quebecor Media and used the proceeds to redeem $235,000 of its November 2008 convertible obligation issue.

On July 27, 2007, subsequent to the end of the second quarter, the Company issued a new convertible obligation to Quebecor Media in the amount of $240,000. This new convertible obligation matures on December 20, 2022, bears interest at 10.5% payable semi-annually and otherwise has terms and conditions substantially similar to existing convertible obligations. The Company used the proceeds from the issuance of this new convertible obligation issue to invest in $240,000 of Quebecor Media Series G Cumulative First Preferred Shares carrying a 10.85% annual fixed cumulative preferential dividend payable semi-annually and otherwise having terms and conditions substantially similar to its Preferred Shares of Quebecor Media.

Financing Activities

During the first and second quarter of 2007, Sun Media made scheduled debt repayments of US$0.6 million (Cdn$0.9 million) on its Term Loan B Credit Facility and Cdn$0.1 million on its Term Loan C Credit Facility.

In the three months ended June 30, 2007, Sun Media paid dividends of $42.0 million (2006 — $55.0 million) to Quebecor Media in connection with its ownership of Sun Media’s 1,261,001 common shares. In the six months ended June 30, 2007, Sun Media paid dividends of $47.0 million (2006 — $70.0 million) to Quebecor Media in connection with its ownership of Sun Media’s 1,261,001 common shares.

Financial Position

As at June 30, 2007, Sun Media had cash and cash equivalents of $12.6 million compared to cash and cash equivalents of $3.9 million at December 31, 2006 and had $75.0 million available from its revolving credit facility.

As at June 30, 2007, the carrying value of Sun Media’s debt, including the current portion, was $426.1 million. This represents a decrease in debt of $60.6 million from the December 31, 2006 balance of $486.7 million. The decrease was primarily due to changes in the period-end exchange rates used to translate the Company’s foreign-denominated debt as well as the adoption of new accounting standards described in Note 2 and detailed further in Note 9 of the Company’s unaudited interim consolidated interim financial statements.

As at June 30, 2007, the aggregate amount outstanding under the Term Loan B Credit Facility was US$180.2 million, the aggregate amount outstanding under the Term Loan C Credit Facility was Cdn$38.9 million and the aggregate amount outstanding under the Senior Notes was US$205.0 million.

Sun Media believes that cash flow from operations and available sources of financing will be sufficient to cover cash requirements for working capital, restructuring activities, capital expenditures, interest payments and scheduled debt repayments.

SUN MEDIA CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SECOND QUARTER 2007

Pursuant to its financing agreements, Sun Media is required to maintain certain financial ratios. The key indicators listed in these agreements include debt service coverage ratios and a leverage ratio (long-term debt over operating income, as defined by its financing agreements). As at June 30, 2007, the Company was in compliance with all required financial ratios.

Contractual Obligations

As of June 30, 2007, material contractual obligations included principal and interest repayments on long-term debt, principal and interest repayments on convertible obligations, operating lease arrangements and other commitments and obligations related to derivative financial instruments. Except for the changes in convertible obligations issued to Quebecor Media as described in Note 13(b) of the unaudited consolidated interim financial statements, there was no material change during the first six months of 2007 compared to the disclosures in the Annual Report for the financial year ended December 31, 2006 (Form 20-F/A).

Financial Instruments

In the normal course of business, Sun Media is exposed to fluctuations in interest rates and exchange rates.

As at June 30, 2007, Sun Media used derivative financial instruments to manage its exchange rate and interest rate exposures. The Company has entered into foreign exchange forward contracts and cross-currency swap arrangements to hedge the foreign currency risk exposure on the entirety of its U.S. dollar-denominated long-term debt. Sun Media also uses interest rate swaps in order to manage the impact of interest rate fluctuations on its long-term debt.

The Company does not hold or use any derivative instruments for trading purposes.

The fair value of derivative financial instruments is estimated using period-end market rates and reflects the amount the Company would receive or pay if the instruments were terminated at those dates, as follows:

June 30, 2007

Notional

Carrying Amount

Fair Value

Value

Asset (Liability)

(In thousands of dollars)

Cross-currency interest rate swaps and forward contracts

US$

385,200

$ (215,341

)

$ (216,598

)

During the three and six-month periods ended June 30, 2007, Sun Media recorded a loss of $6.0 million and $4.0 million, respectively, on derivative financial instruments for which hedge accounting is not applied ($4.0 million and $7.0 million in 2006). Also, during the three and six-month periods ended June 30, 2007, Sun Media recorded a loss of $3.4 million and a gain of $0.1 million, respectively, for the ineffective portion of fair value hedges. Finally, a total loss of $0.4 million and gain of $0.3 million was recorded under other comprehensive income in the three and six-month periods ended June 30, 2007, respectively, in connection with the Company’s cash flow hedge.

Principal Repayments

As of June 30, 2007, the aggregate amount of minimum principal payments required in each of the next five years and thereafter, based on borrowing levels as at that date, were as follows (in thousands of Canadian dollars):


2008	$	2,850
2009	$	2,850
2010	$	222,435
2011	$	—
2012	$	—
2013 and thereafter	$	203,589

SUN MEDIA CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SECOND QUARTER 2007

Forward-Looking Statements

This quarterly report contains forward-looking statements with respect to our financial condition, results of operations, business strategies and certain plans and objectives. These forward-looking statements are made pursuant to the “Safe Harbor” provisions of theUnited States Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry in which we operate as well as beliefs and assumptions made by our management. Such statements include, in particular, statements about our plans, prospects, financial position and business strategies. Words such as “may,” “will,” “expect,” “continue,” “intend,” “estimate,” “anticipate,” “plan,” “foresee,” “believe” or “seek” or the negatives of these terms or variations of them or similar terminology are intended to identify such forward-looking statements. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these statements, by their nature, involve risks and uncertainties and are not guarantees of future performance. Such statements are also subject to assumptions concerning, among other things: our anticipated business strategies; anticipated trends in our business; and our ability to continue to control costs. We can give no assurance that these estimates and expectations will prove to have been correct. Actual outcomes and results may, and often do, differ from what is expressed, implied or projected in such forward-looking statements, and such differences may be material. Some important factors that could cause actual results to differ materially from those expressed in these forward-looking statements include, but are not limited to:


	—	general economic, financial or market conditions;
	—	the intensity of competition within the newspaper industry and from other communications and advertising media and platforms;
	—	cyclical and seasonal variations in the businesses of our local, regional or national advertisers and in our advertising revenue;
	—	labour disputes or strikes;
	—	changes in our ability to obtain raw materials critical to our operations, such as newsprint, in sufficient quantities and at reasonable prices;
	—	exchange rate fluctuations that affect our ability to repay our U.S. dollar-denominated debt; and
	—	interest rate fluctuations that affect our ability to repay our U.S. dollar-denominated debt, or that could impact our accounting estimates.

We caution you that the above list of cautionary statements is not exhaustive. These and other factors are discussed in further detail elsewhere in the Quarterly Report, and in Sun Media’s Annual Report on Form 20-F/A, for the fiscal year ended December 31, 2006, including under the sections “Risk Factors”. Each of these forward-looking statements speaks only as of the date of this report. Sun Media will not update these statements unless securities laws require us to do so. We advise you to consult any documents we may file or furnish with the U.S. Securities and Exchange Commission.

SUN MEDIA CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands of Canadian dollars)
(Unaudited)


	Three months ended						Six months ended
	June 30,			June 30,			June 30,			June 30,
	2007			2006			2007			2006

REVENUES	$	240,545		$	240,936		$	460,817		$	460,651

Cost of sales, selling and administrative expenses (note 6)		184,685			180,232			368,804			362,808
Amortization (note 4(a)(i))		8,630			9,387			16,538			17,917
Restructuring charges (note 4)		4,783			7,765			10,707			7,765
Financial expenses (note 3)		22,190			15,046			27,349			28,468
Equity loss on investment in SUN TV Company		678			859			1,215			1,838


INCOME BEFORE INCOME TAXES AND NON-CONTROLLING INTEREST		19,579			27,647			36,204			41,855
Income Taxes
Current		394			639			670			1,158
Future		(4,629	)		(5,176	)		(6,019	)		(13,358	)

		(4,235	)		(4,537	)		(5,349	)		(12,200	)

		23,814			32,184			41,553			54,055
Non-controlling interest		434			449			741			803

NET INCOME	$	23,380		$	31,735		$	40,812		$	53,252

See accompanying notes to consolidated financial statements.

SUN MEDIA CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands of Canadian dollars)
(Unaudited)


	Three months ended					Six months ended
	June 30,			June 30,		June 30,		June 30,
	2007			2006		2007		2006
NET INCOME	$	23,380		$	31,735	$	40,812	$	53,252
Other comprehensive loss, net of income taxes (note 11):
Unrealized gain (loss) on derivative financial instruments, net of income tax recovery of $231 for the three months ended June 30, 2007 and income tax expense of $239 for the six months ended June 30, 2007.		(154	)		—		68		—

COMPREHENSIVE INCOME	$	23,226		$	31,735	$	40,880	$	53,252

See accompanying notes to consolidated financial statements.

SUN MEDIA CORPORATION
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(In thousands of Canadian dollars)
(Unaudited)


	Three months ended						Six months ended
	June 30,			June 30,			June 30,			June 30,
	2007			2006			2007			2006

RETAINED EARNINGS AT BEGINNING OF PERIOD, AS PREVIOUSLY REPORTED	$	54,109		$	34,139		$	38,894		$	27,622
Cumulative effect of change in accounting policies (note 2)		—			—			2,783			—

RETAINED EARNINGS AT BEGINNING OF PERIOD, AS RESTATED		54,109			34,139			41,677			27,622
Net income		23,380			31,735			40,812			53,252
Dividends		(42,000	)		(55,000	)		(47,000	)		(70,000	)

RETAINED EARNINGS AT END OF PERIOD	$	35,489		$	10,874		$	35,489		$	10,874

See accompanying notes to consolidated financial statements.

SUN MEDIA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of Canadian dollars)
(Unaudited)


	Three months ended						Six months ended
	June 30,			June 30,			June 30,			June 30,
	2007			2006			2007			2006
CASH FLOWS RELATED TO OPERATIONS
Net income	$	23,380		$	31,735		$	40,812		$	53,252
Adjustments for:
Amortization of property, plant and equipment		8,328			8,685			15,937			16,523
Amortization of intangible assets		302			702			601			1,394
Net unrealized loss on derivative instruments and on foreign currency translation of financial instruments		10,917			3,976			4,862			7,042
Future income taxes		(4,629	)		(5,176	)		(6,019	)		(13,358	)
Non-controlling interest		434			449			741			803
Equity loss on investment in SUN TV Company		678			859			1,215			1,838
Other		499			491			983			957

		39,909			41,721			59,132			68,451
Changes in non-cash balances related to operations		7,228			(50	)		13,986			(11,535	)

Cash flows provided by operations		47,137			41,671			73,118			56,916

CASH FLOWS RELATED TO INVESTING ACTIVITIES
Business acquisitions, net of cash acquired		—			(1,125	)		—			(1,125	)
Additions to property, plant and equipment		(6,678	)		(2,404	)		(12,774	)		(5,168	)
Disposal of preferred shares of Quebecor Media Inc.		—			255,000			—			255,000
Investment in preferred shares of Quebecor Media Inc.		—			(120,000	)		—			(120,000	)
Equity investment in SUN TV Company		(1,300	)		(4,618	)		(1,300	)		(4,618	)
Advances to affiliated companies		(870	)		—			(870	)		—
Other		108			1			114			3

Cash flows provided by (used in) investing activities		(8,740	)		126,854			(14,830	)		124,092

CASH FLOWS RELATED TO FINANCING ACTIVITIES
Issuance of long-term debt, net of financing fees		—			—			—			40,000
Repayment of long-term debt		(973	)		(1,155	)		(1,945	)		(2,430	)
Increase in bank indebtedness		—			4,452			—			4,452
Redemption of convertible obligations to Quebecor Media Inc.		—			(255,000	)		—			(255,000	)
Issuance of convertible obligations to Quebecor Media Inc.		—			120,000			—			120,000
Dividends		(42,000	)		(55,000	)		(47,000	)		(70,000	)
Reduction in paid-up capital		—			—			—			(40,000	)
Other		(168	)		(651	)		(589	)		(850	)

Cash flows used in financing activities		(43,141	)		(187,354	)		(49,534	)		(203,828	)

INCREASE (DECREASE)IN CASH AND CASH EQUIVALENTS		(4,744	)		(18,829	)		8,754			(22,820	)
CASH AND CASH EQUIVALENTS — BEGINNING OF PERIOD		17,363			18,829			3,865			22,820

CASH AND CASH EQUIVALENTS — END OF PERIOD	$	12,619		$	—		$	12,619		$	—


CHANGES IN NON-CASH BALANCES RELATED TO OPERATIONS
Accounts receivable		318			(8,064	)		12,034			6,833
Inventories		(310	)		63			377			688
Accounts payable and accrued liabilities		8,108			6,549			5,298			(17,590	)
Dividend income receivable from related companies		(15,050	)		(22,696	)		351			14,875
Interest payable to related companies		14,596			22,033			(341	)		(14,461	)
Other		(434	)		2,065			(3,733	)		(1,880	)

	$	7,228		$	(50	)	$	13,986		$	(11,535	)

Cash interest payments (including interest paid on convertible obligations)	$	6,954		$	19,599		$	56,378		$	110,731
Cash income tax payments	$	337		$	832		$	691		$	1,805

See accompanying notes to consolidated financial statements.

SUN MEDIA CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands of Canadian dollars except for share information)
(Unaudited)


	June 30,			December 31,
	2007			2006
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	12,619		$	3,865
Accounts receivable		128,075			140,109
Dividend income receivable from related companies (note 6)		29,613			29,964
Inventories		8,215			8,592
Prepaid expenses		7,046			4,881
Future income taxes		26,990			26,869

		212,558			214,280
INVESTMENT IN PREFERRED SHARES OF RELATED COMPANIES (note 6)		589,375			589,375
EQUITY INVESTMENT IN SUN TV COMPANY		3,830			3,745
PROPERTY, PLANT AND EQUIPMENT		152,400			155,680
FUTURE INCOME TAXES		36,159			34,047
OTHER ASSETS		16,236			32,303
GOODWILL (note 5)		756,115			756,115

	$	1,766,673		$	1,785,545

LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities	$	154,220		$	148,922
Income and other taxes payable		1,697			3,763
Interest payable to related companies (note 6)		28,716			29,057
Deferred revenue		18,842			19,340
Current portion of long-term debt (note 9)		2,850			3,080

		206,325			204,162
LONG-TERM DEBT (note 9)		423,218			483,637
FUTURE INCOME TAXES		10,637			22,981
OTHER LIABILITIES		237,815			182,975
NON-CONTROLLING INTEREST		2,061			1,720
CONVERTIBLE OBLIGATIONS TO RELATED COMPANIES (note 6)		589,375			589,375

		1,469,431			1,484,850
SHAREHOLDER’S EQUITY
Capital stock (note 10)		261,801			261,801
Retained earnings		35,489			38,894
Accumulated other comprehensive loss (note 11)		(48	)		—

		297,242			300,695

	$	1,766,673		$	1,785,545

See accompanying notes to consolidated financial statements.

SUN MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three and six-month period ended June 30, 2007
(In thousands of Canadian dollars except for share information)
(Unaudited)

NATURE OF BUSINESS

The primary operation of Sun Media Corporation (“Sun Media” or “the Company”) is newspaper publishing. The Company publishes urban daily newspapers, community newspapers, as well as other specialty publications in communities across Canada. Sun Media is also active in the newspaper and magazine and flyer distribution business. In addition, Sun Media provides a wide range of commercial printing and other related services to third parties through its national network of production and printing facilities. Sun Media also owns a 25% interest in SUN TV Company (“SUN TV”), a general interest television station in Toronto, Ontario.

1. BASIS OF PRESENTATION

These unaudited interim consolidated financial statements have been prepared in conformity with generally accepted accounting principles in Canada. Sun Media has consistently applied the same accounting policies described in the Company’s latest audited annual consolidated financial statements, except as described in Notes 2 and 5 below. However, these unaudited interim consolidated financial statements do not include all the disclosures required under generally accepted accounting principles in Canada and accordingly should be read in conjunction with Sun Media’s latest audited annual consolidated financial statements and notes thereto. The results of operations for the interim periods should not be considered indicative of the results to be expected for the full year due to the seasonality of Sun Media’s business. References to Canadian dollars, Cdn$ and $ are to the currency of Canada, and references to U.S. dollar and US$ are to the currency of the United States.

Certain comparative figures for the previous period have been reclassified to conform to the presentation adopted for the three and six-month period ended June 30, 2007.

2. NEW ACCOUNTING STANDARDS

(a) Comprehensive income

CICA 1530 introduces the concept of comprehensive income, which is calculated by including other comprehensive income with net income. Other comprehensive income represents changes in shareholder’s equity during a period arising from transactions and other events with non-owner sources, such as unrealized gains and losses on financial assets classified as available-for sale and changes in the fair value of the effective portion of cash flow hedging instruments. With the adoption of this section, the unaudited interim consolidated financial statements now include consolidated statements of comprehensive income.

(b) Financial assets and financial liabilities

SUN MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three and six-month period ended June 30, 2007
(In thousands of Canadian dollars except for share information)
(Unaudited)

		Financial assets and financial liabilities held-for-trading are measured at fair value with changes recognized in financial expenses. Available-for-sale financial assets are measured at fair value or at cost, in the case of financial assets that do not have a quoted market price in an active market, and changes in fair value are recorded in comprehensive income. Financial assets classified as held-to-maturity, loans and receivables, and other financial liabilities are measured at amortized cost using the effective interest method of amortization. The Company has classified its cash and cash equivalents and temporary investments as held-for-trading. Trade receivables, receivables from related parties, loans and other long-term receivables were classified as loans and receivables. Investments in preferred shares of related companies were classified as available-for-sale. All of the Company’s financial liabilities, including convertible obligations to related companies, were classified as other liabilities.

		Derivative instruments are recorded as financial assets or liabilities at fair value, including those derivatives that are embedded in financial or non-financial contracts that are not closely related to the host contracts. Changes in fair values of the derivatives are recognized in financial expenses, with the exception of derivatives designated as a cash flow hedge for which hedge accounting is used. In accordance with the new standards, the Company selected January 1, 2003 as its transition date for adopting this standard related to embedded derivatives. Derivative instruments are recorded in other liabilities in the consolidated balance sheets.

(c) Hedges

		CICA 3865 specifies the criteria that must be satisfied in order for hedge accounting to be applied and the accounting for each of the permitted hedging strategies.

		Accordingly, for derivatives designated as fair value hedges, such as certain cross currency interest rate swaps used by the Company, changes in the fair value of the hedging derivative recorded in financial expenses are substantially offset by changes in the fair value of the hedged item to the extent that the hedging relationship is effective. When a fair value hedge is discontinued, the carrying value of the hedged item is no longer adjusted and the cumulative fair value adjustments to the carrying value of the hedged item are amortized to financial expenses over the remaining term of the original hedging relationship.

		For derivative instruments designated as cash flow hedges, such as certain cross currency interest rate swaps and forward exchange contracts used by the Company, the effective portion of a hedge is reported in other comprehensive income until it is recognized in income during the same period in which the hedged item affects income, while the ineffective portion is immediately recognized in the consolidated statements of income. When a cash flow hedge is discontinued, the amounts previously recognized in accumulated other comprehensive income are reclassified to income when the variability in the cash flows of the hedged item affects income.

—   Decrease in other assets of $17,031
—   Increase in other liabilities of $14,933
—   Decrease in long-term debt of $23,094
—   Decrease in future income tax liabilities of $11,537
—   Increase in retained earnings of $2,783
—   Increase in accumulated other comprehensive loss of $116

In addition, the adoption of these new standards decreased net income by $3,083 for the three months ended June 30, 2007 and increased net income by $128 for the six months ended June 30, 2007.

SUN MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three and six-month period ended June 30, 2007
(In thousands of Canadian dollars except for share information)
(Unaudited)

3. FINANCIAL EXPENSES


	Three months ended						Six months ended
	June 30, 2007			June 30, 2006			June 30, 2007			June 30, 2006

Interest on long-term debt	$	11,661		$	11,835		$	23,241		$	23,024
Net loss on derivative instruments and on foreign currency translation of financial instruments^{(a) (b)}		10,917			3,976			4,862			7,042
Amortization of deferred financing costs		364			371			728			723
Dividend income on preferred shares of related companies (note 6)		(16,910	)		(37,726	)		(33,820	)		(76,486	)
Interest on convertible obligations to related companies (note 6)		16,395			36,633			32,791			74,274
Other		(237	)		(43	)		(453	)		(109	)

Total financial expenses	$	22,190		$	15,046		$	27,349		$	28,468

(a)		During the three-month and six-month periods ended June 30, 2007, the Company recorded a loss of $6,006 and $3,958, respectively, on derivative instruments for which hedge accounting is not applied ($3,976 and $7,042 in 2006).

(b)		During the three-month and six-month periods ended June 30, 2007, the Company recorded a loss of $3,412 and a gain of $49 for the ineffective portion of fair value hedges.

4. RESTRUCTURING OF OPERATIONS

During the first six months of 2007, the Company recorded charges for the restructuring of its operations, consisting substantially of employee termination benefits, summarized as follows:


	Total
	Estimated
	Number of
	Full-time		Restructuring							Restructuring
	Equivalent		Accrual at		Restructuring					Accrual at
	Positions		December 31,		Charges		Payments in			June 30,
	Affected		2006		2007		2007			2007

(a) Restructuring of printing facilities
— London Free Press		113	$	4,435	$	—	$	—		$	4,435
— Toronto Sun		194		4,371		4,013		(467	)		7,917
— Ottawa Sun		40		1,130		123		(675	)		578
— Le Journal de Montréal		146		910		—		—			910
(b) Restructuring of news production operations		124		327		2,288		(2,320	)		295
(c) General workforce reduction		205		1,605		4,283		(4,130	)		1,758

		822	$	12,778	$	10,707	$	(7,592	)	$	15,893

SUN MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three and six-month period ended June 30, 2007
(In thousands of Canadian dollars except for share information)
(Unaudited)

(a) Restructuring of Printing Facilities

In August 2005, Quebecor Media announced a plan to invest in a new printing facility to be located in Toronto, Ontario and transfer the printing of certain of its publications in Ontario to the new facility. In addition, in August 2005, Quebecor Media announced a plan to relocate the printing of certain Sun Media publications to a new printing facility owned by Quebecor Media to be located in Saint-Janvier-de-Mirabel, Québec. During 2006, the Company recorded severance costs of $10,976 and made payments of $130 in connection with this initiative. During the first six months of 2007, the Company recorded the following additional charges:

		(i) Property, Plant and Equipment

		As a result of these new investments, the Company accelerated the amortization of certain presses and related equipment to reflect the shortened useful life of such equipment beginning in the fourth quarter of 2005. For the three months ended June 30, 2007, the Company recorded additional amortization of $1,989 (2006 — $2,685). For the six months ended June 30, 2007, the Company recorded additional amortization of $3,944 (2006 — $4,979).

		(ii) Severance and Termination Benefits

		During the first six months of 2007, the Company recorded special termination benefits of $4,013 relating to employees of the Toronto Sun and severances of $123 relating to employees of the Ottawa Sun. During the period, payments of $467 and $675 have been made to employees of the Toronto Sun and Ottawa Sun, respectively.

The Company expects to draw down a substantial amount of its restructuring accrual over the remainder of 2007,as the printing of additional publications are transferred to the new press facilities.

(b) Restructuring of News Production Operations

In June 2006, Sun Media announced a plan to restructure its news production operations by introducing new content management technologies and streamlining the news gathering process. During 2006, the Company recorded severance costs of $2,881 relating to the elimination of an equivalent of 85 full-time editorial positions and made payments of $2,554 in connection with this initiative. During the first six months of 2007, the Company recorded additional severance costs of $2,288 relating to the elimination of an equivalent of 39 full-time editorial positions in operations across the organization. During the period, payments of $2,320 have been made.

(c) General Workforce Reductions

In 2006, Sun Media implemented a number of voluntary and involuntary workforce reduction programs. During 2006, the Company recorded severance costs of $3,176 relating to the elimination of an equivalent of 98 full-time positions and made payments of $1,571 in connection with these initiatives. During the first six months of 2007, the Company continued its workforce reduction programs and recorded additional severance costs of $4,283 for the elimination of an equivalent of 107 full-time positions relating to these workforce reduction initiatives. During the period, payments of $4,130 have been made.

5. GOODWILL

During the second quarter 2007, the Company changed its annual date for the impairment test for goodwill from October 1 to April 1. Accordingly, the Company performed its impairment test for goodwill on April 1, 2007 and concluded that goodwill was not impaired.

SUN MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three and six-month period ended June 30, 2007
(In thousands of Canadian dollars except for share information)
(Unaudited)

6. TRANSACTIONS WITH RELATED COMPANIES

(a) Investment in and Convertible Obligations Issued to Quebecor Media Inc. (“Quebecor Media”)

The following tables summarize the Company’s issuance of convertible obligations, and investments in Quebecor Media Preferred Shares:


	Convertible Obligation Issue
Issue or Redemption Date	2007			2008			2020			2021		Total

Balance — January 1, 2006	$	640,000		$	350,000		$	255,000		$	—	$	1,245,000
June 12, 2006		(255,000	)		—			—			120,000		(135,000	)
December 28, 2006		(385,000	)		(115,000	)		(55,000	)		—		(555,000	)

Balance — December 31, 2006 and June 30, 2007	$	—		$	235,000		$	200,000		$	120,000	$	555,000


	Quebecor Media Preferred Shares
	12.5%			10.85%
Issue or Redemption Date	Series A			Series F			Total

Balance — January 1, 2006	$	990,000		$	255,000		$	1,245,000
June 12, 2006		(255,000	)		120,000			(135,000	)
December 28, 2006		(500,000	)		(55,000	)		(555,000	)

Balance — December 31, 2006 and June 30, 2007	$	235,000		$	320,000		$	555,000

During the three months ended June 30, 2007, dividends of $15,980 (2006 — $36,717) were declared on the Cumulative First Preferred Shares of Quebecor Media. During the six months ended June 30, 2007, dividends of $31,960 (2006 — $74,468) were declared on the Company’s Cumulative First Preferred Shares of Quebecor Media. Sun Media received payments of dividend income of $32,311 (2006 — $89,343) from Quebecor Media during the six months ended June 30, 2007. As at June 30, 2007, the unpaid dividend receivable from Quebecor Media was $29,501 (December 31, 2006 — $29,852).

During the three months ended June 30, 2007, the interest expense on the Company’s convertible obligations amounted to $15,496 (2006 — $35,656). During the six months ended June 30, 2007, the interest expense on the Company’s convertible obligations amounted to $30,991 (2006 — $72,321). For the six months ended June 30, 2007, the total interest paid on the convertible obligations was $31,332 (2006 — $86,782). As at June 30, 2007, the unpaid interest on the convertible obligations was $28,607 (December 31, 2006 — $28,948).

(b) Investment In and Convertible Obligation Issued to SUN TV

During the three months ended June 30, 2007, dividends of $930 (2006 — $1,009) were declared on the SUN TV Preferred Shares. During the six months ended June 30, 2007, dividends of $1,860 (2006 — $2,018) were declared on the SUN TV Preferred Shares. Sun Media received payments of dividend income of $1,860 (2006 — $2,018) from SUN TV during the six months ended June 30, 2007. As at June 30, 2007, the unpaid dividend receivable from SUN TV was $112 (December 31, 2006 — $112).

SUN MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three and six-month period ended June 30, 2007
(In thousands of Canadian dollars except for share information)
(Unaudited)

During the three months ended June 30, 2007, interest expense on the convertible obligations amounted to $900 (2006 — $977). During the six months ended June 30, 2007, interest expense on the convertible obligations amounted to $1,800 (2006 — $1,953). For the six months ended June 30, 2007, the total interest paid on the convertible obligations was $1,800 (2006 — $1,953). As at June 30, 2007, the unpaid interest on the convertible obligations was $109 (December 31, 2006 — $109).

As at June 30, 2007, the Company’s investment in SUN TV preferred shares and convertible obligations was $34,375 (December 31, 2006 — $34,375).

(c) Management Fees to Quebecor Media

During the three months ended June 30, 2007, the Company recorded Quebecor Media management fees of $1,800 (2006 — $2,422). During the six months ended June 30, 2007, the Company recorded Quebecor Media management fees of $3,600 (2006 — $4,343). These management fees are included in cost of sales, selling and administrative expenses in the consolidated statements of income. As at June 30, 2007, there was no outstanding balance relating to the management fees (2006 — $nil).

(d) Additional Equity Investment in Sun TV

During the three months ended June 30, 2007, the Company made $1,300 (2006 — $4,618) in additional cash contributions to Sun TV to maintain its 25% equity interest in Sun TV.

(e) Other Transactions

The Company has earned revenue for advertising and other services, and incurred expenses for purchases and services, at prices and conditions prevailing on the open market, with related parties under common control in the normal course of operations. These transactions were concluded and accounted for at their exchange values.

7. PENSION PLANS

The Company maintains defined contribution and benefit pension plans for its employees. The total benefit cost of these employee future benefit plans is as follows:


	Three months ended				Six months ended
	June 30,		June 30,		June 30,		June 30,
	2007		2006		2007		2006

Defined contribution plans	$	887	$	816	$	1,591	$	1,633
Defined benefit plans		2,113		2,884		5,670		6,034

Total benefit cost	$	3,000	$	3,700	$	7,261	$	7,667

SUN MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three and six-month period ended June 30, 2007
(In thousands of Canadian dollars except for share information)
(Unaudited)

8. STOCK OPTION PLANS

The following table provides details of changes to outstanding options of Sun Media employees in the stock-based compensation plan of Quebecor Media for the six-month period ended June 30, 2007:


				Weighted-average
	Number			exercise price

Outstanding options, as at December 31, 2006		777,620		$	18.57
Cancelled		(41,846	)	$	17.86

Outstanding options, as at June 30, 2007		735,774		$	19.08

Vested options, as at June 30, 2007		574,890		$	17.07

During the three months ended June 30, 2007, the Company recognized a stock compensation expense of $2,444 (2006 — $154) related to the Quebecor Media stock-based compensation plan. During the six months ended June 30, 2007, the Company recognized stock compensation expense of $3,856 (2006 — $1,467) related to the Quebecor Media stock-based compensation plan.

9. LONG-TERM DEBT


	June 30,			December 31,
	2007			2006

Long-term debt^(a)	$	446,882		$	486,717
Change in fair value of debt for hedged interest rate risks		(14,031	)		—
Adjustment related to embedded derivatives		(1,127	)		—
Financing fees, net of amortization		(5,656	)		—

	$	426,068		$	486,717
Less: Current portion		(2,850	)		(3,080	)

	$	423,218		$	483,637

(a) Period-end exchange rates were used to translate foreign-denominated debt.

10. CAPITAL STOCK

(a) Authorized capital stock:

10,000,000,000 Voting Class A Common Shares, without par value;
10,000,000,000 Non-voting redeemable Class B Preferred Shares, without par value;
10,000,000,000 Non-voting Class C Preferred Shares, without par value;

(b) Issued and outstanding capital stock:


	Common Shares
	Number		Amount

Balance as at December 31, 2006 and June 30, 2007		1,261,001	$	261,801

SUN MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three and six-month period ended June 30, 2007
(In thousands of Canadian dollars except for share information)
(Unaudited)

11. ACCUMULATED OTHER COMPREHENSIVE LOSS


Balance — December 31, 2006	$	—
Cumulative effect of change in accounting policies (note 2)		(116	)
Other comprehensive income, net of income tax expense of $239		68

Balance — June 30, 2007	$	(48	)

No significant amount is expected to be reclassified in income over the next 12 months, in connection with derivatives designated as cash flow hedges.

12. SEGMENTED INFORMATION

Management has reviewed the requirements of CICA Handbook 1701,Segment Disclosures, and determined that there are no reportable segments requiring disclosure. This conclusion was reached on the basis that Sun Media’s newspaper divisions exhibit similar economic characteristics, with similar products, production processes, and classes of customers.

13. SUBSEQUENT EVENTS

(a) Acquisition of Additional Shares of Le Courrier du Sud Inc.

On July 3, 2007, the Company exercised its option to acquire an additional 2,500 shares or 25.0% of Le Courrier du Sud Inc., a community newspaper publisher in Quebec, for a purchase price of $7,867, plus acquisition costs. The acquisition was completed on August 7, 2007 and increased the Company’s total ownership of Le Courrier du Sud Inc. to 75.01%. Following the acquisition of additional shares, the Company will continue to consolidate Le Courrier du Sud Inc. within the financial statements of Sun Media.

(b) Changes in Investments in and Convertible Obligations Issued to Quebecor Media

On July 13, 2007, the Company sold $235,000 of its investment in the Series A Cumulative First Preferred Shares of Quebecor Media and used the proceeds to redeem $235,000 of its November 2008 convertible obligation issue.

On July 27, 2007, the Company issued a new convertible obligation to Quebecor Media in the amount of $240,000. This new convertible obligation matures on December 20, 2022, bears interest at 10.5% payable semi-annually and otherwise has terms and conditions substantially similar to existing convertible obligations. The Company used the proceeds from the issuance of this new convertible obligation issue to invest in $240,000 of Quebecor Media Series G Cumulative First Preferred Shares carrying a 10.85% annual fixed cumulative preferential dividend payable semi-annually and otherwise having terms and conditions substantially similar to its Preferred Shares of Quebecor Media.

14. MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN
CANADA AND THE UNITED STATES

The unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles as applied in Canada which are different in some respects from those applicable in the United States, as described below. The following tables set forth the impact of material differences between GAAP in Canada and GAAP in the United States on Sun Media’s unaudited interim consolidated financial statements, including disclosures that are required under GAAP in the United States.

SUN MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three and six-month period ended June 30, 2007
(In thousands of Canadian dollars except for share information)
(Unaudited)

Restatement of U.S. GAAP Reconciliation Note to Financial Statements Relating to Accounting for Fair Value Hedge Relationships

The following U.S. GAAP financial information from the consolidated statements of income and comprehensive income for the three and six-month periods ended June 30, 2006 has been restated and the consolidated balance sheet as at December 31, 2006 was previously restated, to reflect certain adjustments to previously reported financial information for the correction of an error related to the accounting for certain fair value hedge relationships. The Company has entered into fair value hedges of its debt with derivative instruments. The accounting of a fair value hedge in accordance with U.S. GAAP requires that the change in fair value of the hedging instrument and the change in fair value of the hedged item attributable to the hedged risk, be recognized currently in earnings. The Company has determined that the adjustment to the carrying value of the debt (hedged item) attributable to the hedged risks was calculated and recorded incorrectly in previously presented financial information calculated in accordance with GAAP in the United States due to a misinterpretation of the applicable U.S. GAAP.

The following tables summarize the effects of the adjustments on previously reported U.S. GAAP information.


	Three months			Six months
	ended			ended
*Consolidated Statements of Income and Comprehensive Income*	June 30, 2006			June 30, 2006

Decrease in change in fair value and ineffective portion of derivative instruments	$	(2,568	)	$	(5,136	)
Decrease in income tax expense		66			516

Net decrease in net income and comprehensive income	$	(2,502	)	$	(4,620	)


	Three months ended						Six months ended
*Consolidated Statements of Income*	June 30,			June 30,			June 30,			June 30,
	2007			2006			2007			2006
				(restated)						(restated)

Net income per Canadian GAAP	$	23,380		$	31,735		$	40,812		$	53,252
Adjustments:
Pension and post-retirement benefits (a)		150			41			299			81
Derivative financial instruments (c)		1,500			(1,146	)		955			(792	)
Non-monetary transactions (d)		(15	)		(16	)		(31	)		(31	)
Related party transactions (f)		(2,190	)		—			(2,740	)		—
Income taxes on U.S. adjustments		(547	)		(768	)		(396	)		(946	)

Net income per U.S. GAAP	$	22,278		$	29,846		$	38,899		$	51,564

SUN MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three and six-month period ended June 30, 2007
(In thousands of Canadian dollars except for share information)
(Unaudited)


	Three months ended						Six months ended
	June 30,			June 30,			June 30,			June 30,
*Consolidated Statements of Comprehensive Income*	2007			2006			2007			2006
				(restated )						(restated )

Net income per Canadian GAAP	$	23,380		$	31,735		$	40,812		$	53,252
Other comprehensive loss per Canadian GAAP		(154	)		—			68			—

		23,226			31,735			40,880			53,252
U.S. GAAP adjustments to net income, per above		(1,102	)		(1,889	)		(1,913	)		(1,688	)
Adjustments:
Pension and post-retirement benefits (a)		1,093			1,385			2,187			2,770
Derivative financial instruments (c)		—			(394	)		—			524
Income taxes on comprehensive income		(373	)		(771	)		(746	)		(1,833	)

Comprehensive income per U.S. GAAP	$	22,844		$	30,066		$	40,408		$	53,025


	June 30,			December 31,
*Accumulated other comprehensive loss*	2007			2006

Accumulated other comprehensive loss per Canadian GAAP	$	(48	)	$	—
Adjustments:
Pension and post-retirement benefits (a)		(23,253	)		(25,440	)
Derivative financial instruments (c)		—			(1,441	)
Income taxes on comprehensive income		7,587			9,658

Accumulated other comprehensive loss per U.S. GAAP	$	(15,714	)	$	(17,223	)


	June 30,			December 31,
*Consolidated Shareholder’s Equity*	2007			2006

Shareholder’s Equity per Canadian GAAP	$	297,242		$	300,695
Cumulative Adjustments:
Pension and post-retirement benefits (a)		(19,829	)		(22,315	)
Restructuring charges (b)		(6,981	)		(6,981	)
Derivative financial instruments (c)		(1,126	)		(10,952	)
Non-monetary transactions (d)		1,734			1,765
Share-based payments (e)		(900	)		(900	)
Related party transactions (f)		5,660			8,400
Income taxes on U.S. adjustments (g)		9,388			22,067

Shareholder’s Equity per U.S. GAAP	$	285,188		$	291,779

SUN MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three and six-month period ended June 30, 2007
(In thousands of Canadian dollars except for share information)
(Unaudited)


*Consolidated Balance Sheet Data*	June 30, 2007				December 31, 2006
	CDN GAAP		U.S. GAAP		CDN GAAP		U.S. GAAP

Current assets	$	212,558	$	212,558	$	214,280	$	214,280
Goodwill		756,115		752,692		756,115		752,692
Future income tax asset		36,159		38,859		34,047		34,047
Other assets		16,236		11,273		32,303		17,427

Current liabilities		206,325		201,565		204,162		196,662
Future income tax liability		10,637		3,564		22,981		3,230
Long-term debt		423,218		424,344		483,637		469,008
Convertible obligations		589,375		589,375		589,375		589,375
Other liabilities		237,815		254,890		182,975		215,472
Total shareholder’s equity		297,242		285,188		300,695		291,779

Consolidated Statements of Cash Flows

The disclosure of a subtotal of the amount of cash provided by operations before changes in non-cash operating working capital items in the consolidated statements of cash flows is allowed under Canadian GAAP while it is not allowed under U.S. GAAP.

(a) Pension and Post-Retirement Benefits

Under U.S. GAAP, Statement of Financial Accounting Standards No. 158,Employers’ Accounting for Defined Benefit Pension and Other Post-retirement Plans(“SFAS158”), was issued in 2006 and requires the recognition in the consolidated balance sheet of the over or under funded positions of defined benefit pension and other post-retirement plans, along with a corresponding non-cash adjustment, which is recorded in the accumulated other comprehensive loss. The recognition and disclosure provisions of SFAS158 are effective prospectively for fiscal years ended after December 15, 2006 and did not have an impact on the Company’s consolidated statements of income.

Under U.S. GAAP, prior to 2007, if the accumulated benefit obligation exceeds the fair value of a pension plan’s assets, the Company is required to recognize a minimum accrued liability equal to the unfunded accumulated benefit obligation, which was recorded in accumulated other comprehensive loss. The additional minimum liability concept has been eliminated with the adoption of SFAS158.

Under Canadian GAAP, when a defined benefit plan gives rise to an accrued benefit asset, a company must recognize a valuation allowance for the excess, if any, of the adjusted benefit asset over the expected future benefit to be realized from the plan asset. U.S. GAAP does not provide for a valuation allowance against pension assets.

(b) Restructuring Charges

In respect of the 1999 acquisition of Sun Media, certain of the restructuring charges related to the acquired newspapers are recorded in the purchase equation as goodwill under Canadian GAAP, but are excluded from the purchase equation and expensed under U.S. GAAP.

(c) Derivative Financial Instruments

Prior to 2007, under Canadian GAAP, derivative financial instruments were accounted for on an accrual basis. Realized and unrealized gains and losses were deferred and recognized in income in the same period and in the same financial statement category as the income or expense arising from the corresponding hedged positions. Since January 1, 2007, standards for hedge accounting under Canadian GAAP are now similar to those under U.S. GAAP, as established by Statement of Financial Accounting Standards No.133,Accounting for Derivative Instruments and Hedging Activities.

SUN MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three and six-month period ended June 30, 2007
(In thousands of Canadian dollars except for share information)
(Unaudited)

However, under Canadian GAAP, certain embedded derivatives, such as early settlement options included in some of the Company’s borrowing agreements, do not meet the criteria to be considered closely related to their host contracts and therefore must be recorded at their fair value with changes in earnings. Under U.S. GAAP, these embedded derivatives are considered closely related to their host contract and do not have to be recorded at their fair value. Accordingly, measurement of hedging relationships ineffectiveness recorded in earnings under U.S. GAAP could differ from the measurement under Canadian GAAP.

Further differences result from the different transition rules and timing of the adoption of the current standards in Canada and in the United States for derivative financial instruments and hedge accounting.

(d) Non-Monetary Transactions

In April 2005, the Company exchanged a community publication for another community publication. Under U.S. GAAP, this exchange of businesses is recorded in accordance with FASB Statement No. 141,Business Combinationsand the cost of the purchase should be determined as the fair value of the consideration given or the fair value the net assets or equity interest received, whichever is more reliably measurable. Under Canadian GAAP, since this exchange of businesses was a non-monetary transaction, it was accounted for in accordance with CICA Handbook 3830,Non-monetary Transactions, and recorded at the carrying value of the asset or service given up in the exchange adjusted by any monetary consideration received or given.

Accordingly, under U.S. GAAP, this transaction resulted in a gain on disposal of the Company’s publication in 2005 and also resulted in an increase of the purchase price of the publication acquired. A portion of the increase in purchase price was allocated to amortizable intangible assets for U.S. GAAP purposes, and it is being amortized over 10 years.

(e) Share-Based Payments

Under U.S. GAAP, the Company adopted Financial Accounting Standards No. 123R,Share-Based Payments (“SFAS123R”). In accordance with SFAS123R, the liability related to stock-based awards that call for settlement in cash or other assets must be measured at its fair value based on the fair value of stock option awards, and shall be remeasured at the end of each reporting period until settled. Under Canadian GAAP, the liability is measured and remeasured based on the intrinsic value of the stock option awards instead of the fair value.

(f) Related Party Transactions

In the third quarter of 2006, the Company entered into a tax consolidation transaction by which Quebecor Inc., the ultimate parent company, transferred to the Company non-capital tax losses for net cash consideration of $16,142. Under GAAP in Canada, the transaction was recorded in accordance with CICA Handbook 3840,Related Party Transactions, and resulted in the recognition of a deferred credit of $8,400, which reduces future income tax expense as these tax deductions are used. Under GAAP in the United States, since this transaction related to an asset transfer from Quebecor Inc. to the Company, the difference between the carrying value of the tax deductions transferred and the cash consideration paid has been recognized in contributed surplus.

SUN MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three and six-month period ended June 30, 2007
(In thousands of Canadian dollars except for share information)
(Unaudited)

(g) Income Taxes

Under U.S. GAAP, on January 1, 2007, the FASB issued interpretation No. 48,Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109 (“FIN48”). FIN48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance as to derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The adoption of FIN48 did not have an impact on Sun Media’s consolidated statements of income.

Under Canadian GAAP, there is no such interpretation and therefore, the reserve related to income taxes contingencies is not based on the same level of likelihood as the one used under the new rules of FIN48.

Further adjustments represent the tax impact of U.S. GAAP adjustments.

Sun Media Inactive 6-KCurrent report (foreign)

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents