AG Growth Income Fund
TSX : AFN.UN

AG Growth Income Fund

November 13, 2007 09:00 ET

Ag Growth Announces Results for Quarter Ended September 30, 2007

WINNIPEG, MANITOBA--(Marketwire - Nov. 13, 2007) - Ag Growth Income Fund (TSX:AFN.UN) today reported its financial results for the three and nine months ended September 30, 2007.

Results for the Three Months Ended September 30, 2007

For the three months ended September 30, 2007, the Fund reported sales of $40.8 million and EBITDA of $12.6 million. This compares to sales of $22.0 million and EBITDA of $7.1 million for the three months ended September 30, 2006.

Results for the Nine Months Ended September 30, 2007

For the nine months ended September 30, 2007, the Fund reported sales of $104.0 million and EBITDA of $28.5 million. This compares to sales of $64.3 million and EBITDA of $18.9 million for the nine months ended September 30, 2006.

Overview of Results

The significant increase in sales and EBITDA for the three and nine month periods ended September 30, 2007 was the result of a number of factors. The Fund's Hi Roller division, acquired on December 31, 2006, successfully leveraged its brand name and market share to take advantage of surplus demand created by the ethanol industry expansion. Sales and EBITDA were also positively impacted by exceptional growth in the sales of augers, belt conveyors, and aeration equipment in the Fund's core U.S. markets. Market conditions in the U.S. are favourable as a result of an increase in the number of corn acres planted, an increase in on-farm storage, positive market sentiment, and higher commodity prices. The significant increase in EBITDA at the operating divisions was achieved despite the recent appreciation of the Canadian dollar and was partially offset by an increase in expenses at the corporate level.

"We are very pleased with our third quarter results" said Rob Stenson, Chief Executive Officer of Ag Growth Income Fund. "Exceptional demand at all divisions, particularly in the U.S. market, combined with outstanding results at the newly acquired Hi Roller division has resulted in sales and EBITDA greatly in excess of prior years. As harvest nears completion it is becoming apparent that inventory levels throughout our distribution network are lower than historical norms. That bodes well for demand in the fourth quarter and into 2008 as our distribution network replenishes its inventories. We will continue in our efforts to focus on increasing capacity to efficiently meet what we foresee as a period of robust demand in the agricultural sector."

New Manufacturing Facility - Union City, Indiana

The Fund also announced today that it had exercised its USD $850,000 option to purchase a 160,000 square foot manufacturing facility in Union City, Indiana. The new facility provides the Fund with manufacturing capabilities in its core U.S. market, in a region with ready access to labour, and will help alleviate labour constraints in western Canada. Increasing production in the U.S. will also assist the Fund in reducing its foreign currency exposure in an environment of a strong Canadian dollar.

Company Profile

Ag Growth is a leading manufacturer of portable and stationary grain handling, storage and conditioning equipment, including augers, belt conveyors, grain storage bins, grain handling accessories and grain aeration equipment. Ag Growth's sales, marketing, and distribution system is comprised of approximately 1,400 dealers and distributors that distribute product in 48 states, nine provinces, and overseas.

Non-GAAP measures

References to "EBITDA" are to earnings before interest, income taxes, depreciation, and amortization. Management believes that, in addition to net income or loss calculated in accordance with Canadian generally accepted accounting principles ("GAAP"), EBITDA is a useful supplemental measure in evaluating the Fund's performance. EBITDA is not a financial measure recognized by GAAP and does not have a standardized meaning prescribed by GAAP. Management cautions investors that EBITDA should not replace net income or loss as an indicator of performance, or cash flows from operating, investing, and financing activities as a measure of the Fund's liquidity and cash flows. The Fund's method of calculating EBITDA may differ from the methods used by other issuers.

Forward-Looking Statements

This news release may contain forward-looking statements that reflect our expectations regarding the future growth, results of operations, performance and business prospects, and opportunities of the Fund. Forward-looking statements may contain such words as "anticipate", "believe", "continue", "could", "expects", "intend", "plans", "will" or similar expressions suggesting future conditions or events. Such forward-looking statements reflect our current beliefs and are based on information currently available to us. Forward-looking statements involve significant risks and uncertainties. A number of factors could cause actual results to differ materially from results discussed in the forward-looking statements, including changes in national and local business conditions, crop yields, crop conditions, seasonality, industry cyclicality, volatility of production costs, commodity prices, foreign exchange rates, and competition. These risks and uncertainties are described in our 2006 Annual Report and our Annual Information Form. Further information about these and other risks and uncertainties can be found in these and other disclosure documents filed by Ag Growth Income Fund with the securities regulatory authorities, available at www.sedar.com.

AG GROWTH INCOME FUND

MANAGEMENT'S DISCUSSION AND ANALYSIS

NOVEMBER 12, 2007

This Management's Discussion and Analysis should be read in conjunction with the audited consolidated financial statements and accompanying notes of Ag Growth Income Fund for the year ended December 31, 2006 and the unaudited interim consolidated financial statements of Ag Growth Income Fund for the three and nine month periods ended September 30, 2007. Results are reported in Canadian dollars unless otherwise stated and have been prepared in accordance with Canadian generally accepted accounting principles. Throughout this Management's Discussion and Analysis references are made to "EBITDA", "distributable cash", and "payout ratio". A description of these measures and their limitations are discussed below under "Non-GAAP Measures". See also "Risks and Uncertainties" and "Forward-Looking Statements" below.

FORWARD-LOOKING STATEMENTS

This Management's Discussion and Analysis contains forward-looking statements that reflect our expectations regarding the future growth, results of operations, performance, business prospects, and opportunities of the Fund. Forward-looking statements may contain such words as "anticipate", "believe", "continue", "could", "expects", "intend", "plans", "will" or similar expressions suggesting future conditions or events. Such forward-looking statements reflect our current beliefs and are based on information currently available to us. Forward-looking statements involve significant risks and uncertainties. A number of factors could cause actual results to differ materially from results discussed in the forward-looking statements, including changes in national and local business conditions, crop yields, crop conditions, seasonality, industry cyclicality, volatility of production costs, commodity prices, foreign exchange rates, and competition. These risks and uncertainties are described under "Risks and Uncertainties" in our 2006 Annual Report and our Annual Information Form. Although the forward-looking statements contained in this MD&A are based on what we believe to be reasonable assumptions, we cannot assure readers that actual results will be consistent with these forward-looking statements and we undertake no obligation to update such statements except as expressly required by law.

OVERVIEW OF THE FUND

Ag Growth Income Fund (the "Fund") is an unincorporated, open-ended, limited purpose trust established under the laws of the Province of Ontario by a Declaration of Trust made as at March 24, 2004. The Fund holds indirectly all of the securities of Ag Growth Industries Inc. ("Ag Growth"), which conducts business in the grain handling, storage, and conditioning market.

The previous owners of Ag Growth were issued Class B exchangeable limited partnership units ("Class B units") and Class C exchangeable subordinated limited partnership units ("Class C units") of AGX Holdings Limited Partnership ("AGHLP"), a wholly owned subsidiary of the Fund. The units of the Fund and the Class B and Class C units of AGHLP participate pro rata in distributions. All Class C units were converted to Class B units on a one-for-one basis upon the occurrence of the subordination end date in 2006. The Class B units are exchangeable for trust units of the Fund at the option of the holder on a one-for-one basis at any time.

On October 2, 2007, the Fund completed an equity financing whereby it issued 1,730,000 Trust units at a price of $26.00 per Trust unit for gross proceeds of $45.0 million. Subsequent to the equity financing, the Fund repaid $30.7 million and U.S. $12.0 million of its outstanding long-term debt. The remaining $2.3 million was applied against expenses of the offering, including underwriters' commission.

As at December 31, 2006, September 30, 2007 and November 12, 2007, the following units were issued and outstanding and participated pro rata in distributions:



----------------------------------------------------------------------------
Trust units Class B units (1) Total
----------------------------------------------------------------------------
December 31, 2006 and September
30, 2007 11,088,915 136,085 11,225,000
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October 2, 2007 equity financing 1,730,000 0 1,730,000
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November 12, 2007 12,818,915 136,085 12,955,000
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(1) The Fund has issued one Special Voting Unit for each Class B unit
outstanding. The Special Voting Units are not entitled to any interest
or share in the Fund, or in any distribution from the Fund, but are
entitled to vote on matters related to the Fund.


The Fund's trust units trade on the Toronto Stock Exchange under the symbol AFN.UN.

ENACTMENT OF LEGISLATION IMPOSING TAXATION ON INCOME TRUSTS

In June 2007, the Government of Canada enacted new legislation imposing additional income taxes upon publicly traded income trusts, including the Fund, effective January 1, 2011. Prior to June 2007, the Fund estimated the future income tax on certain temporary differences between amounts recorded on its balance sheet for book and tax purposes at a nil effective tax rate. Under the legislation, the Fund now estimates the effective tax rate on the post 2010 reversal of these temporary differences to be 31.5%. Temporary differences reversing before 2011 will still give rise to nil future income taxes. The amount and timing of reversals of temporary differences will depend on the Fund's future operating results, acquisitions and dispositions of assets and liabilities, and distribution policy. A significant change in any of the preceding assumptions could materially affect the Fund's estimate of the future tax liability.

Based on its assets and liabilities as at September 30, 2007, the Fund has estimated the amount of its temporary differences which were previously not subject to tax and has estimated the periods in which these differences will reverse. The fund estimates that approximately $35.3 million net taxable temporary differences will reverse after January 1, 2011, resulting in an additional $11.1 million future income tax liability. The taxable temporary differences related principally to the Fund's intangible assets. Until 2011, the new legislation does not directly affect the Fund's cash flow from operations. However, as enacted in its present form, the legislation will, all other things being equal, result in a reduction of cash available for distribution by the Fund commencing in 2011.



OPERATING RESULTS
Three Months Ended Nine Months Ended
September 30 September 30
2007 2006 2007 2006

Sales $40,798,315 $22,049,541 $104,037,173 $64,326,081
Cost of sales 23,492,282 12,275,594 61,743,476 35,893,181
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Gross margin 17,306,033 9,773,947 42,293,697 28,432,900
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General and
administration 4,815,905 2,870,697 13,626,447 9,300,969
Professional fees 157,789 95,260 463,543 252,366
Long term incentive
plan 157,152 213,500 471,456 640,500
Unit award incentive
plan 396,896 0 686,312 0
Research and
development 135,101 372,766 639,901 766,000
Capital taxes 62,500 72,420 187,500 224,769
Gain on foreign
exchange (1,117,489) (1,102,119) (2,253,941) (1,424,117)
Other expense (income) 126,204 198,545 (30,668) (212,632)
-----------------------------------------------------
4,734,058 2,721,069 13,790,550 9,547,855
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EBITDA(1) 12,571,975 7,052,878 28,503,147 18,885,045

Amortization 1,571,986 909,198 3,905,021 2,909,333
Interest expense 855,176 287,102 2,141,469 765,284
-----------------------------------------------------
Earnings before tax 10,144,813 5,856,578 22,456,657 15,210,428
Current income taxes 1,108,428 25,940 1,911,749 38,440
Future income taxes 60,000 59,500 11,353,400 128,200
Reversal of reserve 0 0 (500,000) 0
-----------------------------------------------------

Net earnings for period $ 8,976,385 $ 5,771,138 $ 9,691,508 $15,043,788
-----------------------------------------------------
-----------------------------------------------------

Net earnings per unit $ 0.80 $ 0.51 $ 0.86 $ 1.34
-----------------------------------------------------
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(1) See discussion of non-GAAP measures.


ASSETS AND LIABILITIES

September 30, 2007 December 31, 2006 September 30, 2006

Total assets $183,462,343 $170,232,551 $142,192,264
Total liabilities $74,734,450 $59,267,926 $30,513,192


Distributions Declared

The table below summarizes the distributions declared for Trust units of the Fund and for Class B units and Class C units of AGHLP. The Fund's distribution policy is described in the "Distributions" section of this document.



Three Months Ended Nine Months Ended
September 30 September 30
2007 2006 2007 2006

Trust units $4,657,344 $4,657,344 $13,972,033 $12,600,108
Class B units 57,156 57,156 171,467 195,192
Class C units (1) 0 0 0 1,348,200
-----------------------------------------------------
Total distributions $4,714,500 $4,714,500 $14,143,500 $14,143,500
-----------------------------------------------------
-----------------------------------------------------

(1) All Class C units were exchanged for Class B units upon the
subordination end date in June 2006. There were no Class C distributions
declared subsequent to their exchange.


Acquisitions

Effective December 31, 2006, the Fund acquired substantially all of the assets of Hansen Manufacturing Corp. ("Hansen" or "Hi Roller"), a manufacturer of enclosed belt conveyors. The inclusion of Hi Roller's assets as at September 30, 2007 and its operations for the three and nine months ended September 30, 2007 significantly impacts comparisons to 2006.

Effective May 31, 2007, the Fund acquired substantially all of the operating assets of Twister Pipe Ltd. ("Twister"), a manufacturer of grain storage bins, aeration equipment, and bin unload systems. The inclusion of Twister's assets as at September 30, 2007 and its operations for the three and four month periods ended September 30, 2007 significantly impacts comparisons to 2006.

Overall Performance

Sales for the three and nine month periods ended September 30, 2007 increased significantly compared to the same periods in 2006. Excluding the impact of acquisitions, sales increased $6.6 million and $12.5 million (30% and 19%) for the three and nine month periods respectively. The substantial increase in sales was largely due to robust demand in the U.S. market. Sales at the Edwards division compared especially well to prior periods as adverse weather conditions in western Canada negatively impacted its sales in the second half of 2006. Demand related to the expansion of the ethanol industry contributed to record sales at the Fund's Hi Roller division. Hi Roller, acquired by the Fund on December 31, 2006, reported sales of $9.5 million and $23.7 million for the three and nine month periods ended September 30, 2007.

Gross margin percentage for the three and nine month periods decreased compared to 2006. Implementation costs related to the Westfield capacity improvement initiative, the acquisition of Twister, and an increase in the proportion of bin unload sales all contributed to the decrease in gross margin percentage. The continued appreciation of the Canadian dollar in the third quarter of 2007 also negatively impacted gross margin compared to the prior year. Operating expenses increased over 2006 due to the inclusion of Hi Roller and Twister and an increase in certain sales and administrative expenses.

EBITDA for the three and nine months ended September 30, 2007 was $12.6 million and $28.5 million, compared to $7.1 million and $18.9 million for the same periods in 2006. The significant increase in EBITDA resulted from the inclusion of Hi Roller and Twister, increased EBITDA at the Fund's existing divisions, a higher gain on foreign exchange in the nine month period ended September 30, 2007, offset by increased expenses incurred at the corporate level.

Sales

Sales for the three months ended September 30, 2007 were $40.8 million, including $9.5 million recorded at Hi Roller and $2.6 million at Twister. Excluding the impact of acquisitions, third quarter sales in 2007 were $28.7 million, compared to $22.0 million in the same period in 2006. The increase is largely due to the following:

- Sales in the U.S. increased $5.9 million due to increased sales of portable augers, belt conveyors, bin-unload equipment, and aeration equipment. U.S. demand has been stimulated by positive market conditions including an increase in on-farm storage, higher commodity prices, and a record number of corn acres planted that is expected to result in the largest ever U.S. corn harvest. Sales per unit have benefited from price increases implemented on January 1, 2007 and June 1, 2007.

- U.S. sales were negatively impacted by the appreciation of the Canadian dollar. Had the average exchange rates experienced in 2006 been in effect in 2007, all other factors remaining constant, sales excluding acquisitions for the three month period ended September 30, 2007 would have increased $0.9 million.

- Sales in Canada increased $0.7 million. Sales at Edwards increased significantly compared to the same period in 2006, both due to strong demand in 2007 and a 2006 comparative that was negatively impacted by adverse weather conditions in western Canada. Wheatheart grain auger sales increased significantly as its distribution network more aggressively acquired inventory for the western Canadian market.

- International sales increased $0.1 million. A number of small differences accounted for the variance.

Sales for the nine months ended September 30, 2007 were $104.0 million, including $23.7 million recorded at Hi Roller and $3.6 million at Twister. Excluding acquisitions, sales were $76.7 million, compared to $64.3 million in 2006. The increase is largely due to the following:

- Sales in the U.S. increased $11.3 million due to increased sales of portable augers, belt conveyors, bin-unload equipment, and aeration equipment. U.S. demand has been stimulated by positive market conditions including an increase in on-farm storage, higher commodity prices, and a record number of corn acres planted that is likely to result in the largest ever U.S. corn harvest. Sales per unit have benefited from price increases implemented on January 1, 2007 and June 1, 2007.

- U.S. sales were negatively impacted by the appreciation of the Canadian dollar. Had the average exchange rates experienced in 2006 been in effect in 2007, all other factors remaining constant, sales excluding acquisitions for the nine month period ended September 30, 2007 would have increased $1.2 million.

- Sales in Canada increased $0.8 million. Sales of Wheatheart grain augers increased as its distribution network more aggressively acquired inventory in western Canada. A strong third quarter at Edwards, compared to a weak third quarter in 2006, resulted in a year to date increase in aeration sales compared to the prior year.

- International sales increased $0.3 million. The increase is largely the result of an increase in sales to Australia.

Foreign Exchange

Sales and expenses denominated in a foreign currency are recorded each month at the rate of exchange in effect on the closing business day of the previous month. For the three and nine months ended September 30, 2007, sales denominated in U.S. dollars accounted for 74% and 73% respectively of total sales (2006 - 69% and 64%). U.S. dollar denominated expenses equated to 25% and 28% of sales for the three and nine months ended September 30, 2007, compared to historical levels of 15% to 20%. The proportion of U.S. dollar sales and expenses increased largely due to the acquisition of U.S. based Hi Roller.

As sales denominated in U.S. dollars significantly exceed purchases denominated in that currency, the Fund is exposed to fluctuations in the rate of exchange between the Canadian and U.S. dollars. The average rate of exchange for the three and nine month periods ended September 30, 2007 was $1.06 and $1.11, compared to $1.12 and $1.13 for the same periods in 2006.

Ag Growth has entered into a series of hedging arrangements to partially mitigate the potential effect of fluctuating exchange rates. Realized gains or losses on foreign currency hedging instruments have been included, along with the gain or loss on the translation of U.S. dollar monetary items, in operating expenses as a gain or loss on foreign exchange.

Expenses

Gross margin as a percentage of sales for the three and nine months ended September 30, 2007 was 42.4% and 40.7% respectively, compared to 44.3% and 44.2% for the same periods in 2006. The decline in gross margin percentage was largely the result of a number of identifiable factors:

- Management extended the rollout of the capacity improvement initiative at the Westfield division to address increased demand. Westfield sales increased significantly, however the ancillary costs related to the capacity initiative negatively impacted the gross margin percentage. The project was substantially complete by the end of the third quarter.

- The further strengthening of the Canadian dollar negatively impacted gross margin. Had the average exchange rates experienced in 2006 been in effect in 2007, all other factors remaining constant, the impact excluding acquisitions would have increased gross margin to 43.2% and 41.2% for the three and nine month periods ended September 30, 2007.

- The inclusion of Twister resulted in a decrease in gross margin of 0.2% and 0.6% for the three and nine months ended September 30, 2007. Twister's product offering and the labour and operating inefficiencies currently experienced at its Calgary, AB location result in a lower gross margin than other Ag Growth divisions. Twister operations are scheduled to be moved to the Fund's Nobleford, AB facility in the fourth quarter of 2007.

- The Fund recorded a one-time warranty expense of $0.2 million in the second quarter related to a recently launched series of grain augers and establishing a warranty reserve for Twister.

- Sales of bin-unload equipment increased significantly in both the three and nine month periods ended September 30, 2007. This equipment is sold directly to a U.S. based storage bin manufacturer that incurs all further selling and distribution costs. Accordingly, the achievable gross margin percentage is necessarily lower to compensate the U.S. bin manufacturer for covering the costs of sales and distribution.

- Gross margin at the Hi Roller division increased in the third quarter of 2007 due to price increases and customer mix. As a result, the gross margin at Hi Roller increased the consolidated gross margin for the three month period and did not materially impact the consolidated nine month gross margin.

For the three months ended September 30, 2007, expenses were $5.7 million (2006 - $3.6 million). Excluding acquisitions, expenses in 2007 were $4.9 million, an increase of $1.3 million over the same period in the prior year. The Fund's gain on foreign exchange for the quarter was $1.1 million (2006 - $1.1 million) and other expense was $0.1 million (2006 - $0.2 million). The variances compared to 2006 are primarily due to the following:

- Salaries and wages increased $0.4 million largely due to a higher accrual for performance based bonuses, personnel additions at the corporate level, inflationary wage increases, and a number of smaller items.

- The adoption of a unit award incentive plan in 2007 resulted in an expense related to the plan of $0.4 million for the quarter ended September 30, 2007. The total cost of the plan is based on the Fund's unit price and is expensed over the plan's vesting period. See "Unit Award Incentive Plan" below.

- Direct expenses related to the integration of Twister, including travel and engineering salary, were approximately $0.2 million. Research and development expenses decreased in part due to the allocation of engineering resources to the Twister integration.

- Sales and marketing increased $0.2 million due to an increase in advertising expense, higher total salary that resulted from additional personnel, increased commissions, and inflationary wage increases, and a number of smaller items.

- A number of miscellaneous items accounted for the remaining change.

For the nine months ended September 30, 2007, expenses were $16.1 million (2006 - $11.2 million). Excluding acquisitions, expenses were $13.8 million, an increase of $2.6 million over the prior year. The Fund's gain on foreign exchange for the nine month period ended September 30, 2007 was $2.3 million (2006 - $1.4 million) and other income was less than $0.1 million (2006 - $0.2 million). The variances compared to 2006 are primarily due to the following:

- Salaries and wages increased $1.2 million, largely due to a higher accrual for performance based bonuses, $0.2 million in retention bonuses, personnel additions at the corporate level, salary increases, and a number of smaller items.

- The adoption of a unit award incentive plan in 2007 resulted in an expense related to the plan of $0.7 million for the period ended September 30, 2007. The total cost of the plan is based on the Fund's unit price and is expensed over the plan's vesting period.

- Sales and marketing expenses increased $0.5 million due to an increase in advertising expense, higher total salary that resulted from additional personnel, increased commissions, and inflationary wage increases, and a number of smaller items.

- Direct expenses related to the integration of Twister, including travel and engineering salary, were approximately $0.2 million. Research and development expenses decreased in part due to the allocation of engineering resources to the Twister integration.

- Professional fees increased $0.2 million due to a number of incidental legal fees and a higher accrual for audit fees.

- The Fund's gain on foreign exchange increased $0.8 million due to the impact of measuring U.S. dollar denominated debt to the September 30, 2007 foreign exchange rate, offset by smaller gains on foreign currency derivatives and a loss on measuring U.S. dollar denominated working capital.

- A number of miscellaneous items accounted for the remaining change.

EBITDA and Net Earnings (see discussion of non-GAAP measures)

EBITDA for the three and nine months ended September 30, 2007 was $12.6 million and $28.5 million respectively, compared to $7.1 million and $18.9 million for the same periods in 2006. The comparison to 2006 is significantly impacted by the acquisitions of Hi Roller and Twister.

The Fund's credit facility includes operating lines of CAD $10.0 million and USD $1.0 million, and provides for long-term debt of up to CAD $48.0 million and USD $18.5 million. As at September 30, 2007, no amounts were outstanding under the operating lines and the Fund's outstanding long-term debt totalled CAD $30.7 million and USD $18.5 million. Interest rates on both facilities are based on performance calculations. For the three and nine months ended September 30, 2007, the Fund's effective interest rate on its Canadian dollar term debt was 6.2% and 6.1% (2006 - 6.0% and 5.7%), and after consideration of the effect of the Fund's interest rate swap was 4.8% and 5.1% (2006 - 4.7% and 4.7%). For the three and nine months ended September 30, 2007, the Fund's effective interest rate on its U.S. dollar term debt was 8.7% and after consideration of the effect of the Fund's interest rate swaps was 6.3%. See "Financial Instruments". Subsequent to September 30, 2007 the Fund repaid a portion of its long-term debt from the proceeds of an equity offering (see "New Developments").

Amortization for the three months ended September 30, 2007 was $1.6 million (2006 - $0.9 million) and included the amortization of capital assets of $1.0 million and the amortization of intangible assets of $0.6 million. Amortization for the nine months ended September 30, 2007 was $3.9 million (2006 - $2.9 million) and included the amortization of capital assets of $2.2 million and the amortization of intangible assets of $1.7 million. Compared to 2006, amortization was most significantly impacted by the acquisitions of Hi Roller and Twister, and the amortization of the new paint line at the Westfield facility.

The Fund is a mutual fund trust for income tax purposes at this time, and therefore is not subject to tax on income distributed to unitholders. The manufacturing business operations of the Fund based in Canada are carried out within a limited partnership. Income from the limited partnership is not subject to tax but flows through to the holders of the partnership units, which includes the Fund. The Fund's distributions are taxable in the hands of the unitholders. As a result of the Fund's structure, a current tax provision is recorded only for the Fund's subsidiary corporations, including U.S. based Hi Roller, and for the three and nine months ended September 30, 2007 was $1.1 million and $1.9 million respectively. The reversal of reserve relates to a $0.5 million tax accrual that management has determined is no longer required.

The Fund recorded future tax expense of $0.1 million and $11.4 million for the three and nine months ended September 30, 2007. In addition to the expense derived primarily from the utilization of future tax assets, as described in the Fund's September 30, 2007 unaudited financial statements, future tax expense for the nine month period ended September 30, 2007 included an additional $11.1 million related to the enactment of taxation laws related to income trusts for taxation years commencing January 1, 2011 (see "New Developments").

For the three months ended September 30, 2007, the Fund recorded net earnings of $9.0 million (2006 - $5.8 million) and earnings per basic and diluted unit of $0.80 (2006 - $0.51). For the nine months ended September 30, 2007 the Fund recorded net earnings of $9.7 million (2006 - $15.0 million) and earnings per basic and diluted unit of $0.86 (2006 - $1.34). Net earnings were significantly impacted by an accrual in the second quarter of a non-cash future tax liability related to the enactment of taxation laws related to income trusts.



Quarterly Financial Information

----------------------------------------------------------------------------
2007
----------------------------------------------------------------------------
Gain (Loss) Net Earnings Net Earnings
Sales on FX (Loss) per Unit
----------------------------------------------------------------------------
Q1 $ 28,171,350 $ 58,895 $5,617,907 $0.50
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Q2 35,067,508 1,077,557 (4,902,784) ($0.44)
----------------------------------------------------------------------------
Q3 40,798,315 1,117,489 8,976,385 $0.80
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Nine Months $104,037,173 $2,253,941 $9,691,508 $0.86
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2006
----------------------------------------------------------------------------
Gain (Loss) Net Earnings
Sales on FX Net Earnings per Unit
----------------------------------------------------------------------------
Q1 $19,705,011 $ 201,001 $ 4,115,585 $0.37
----------------------------------------------------------------------------
Q2 22,571,529 120,997 5,157,065 0.46
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Q3 22,049,541 1,102,119 5,771,138 0.51
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Q4 17,199,356 2,549,326 4,000,053 0.36
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Fiscal 2006 $81,525,437 $3,973,443 $19,043,841 $1.70
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----------------------------------------------------------------------------
2005
----------------------------------------------------------------------------
Gain (Loss) Net Earnings
Sales on FX Net Earnings per Unit
----------------------------------------------------------------------------
Q1 $16,013,438 $ 220,020 $ 3,449,185 $0.36
----------------------------------------------------------------------------
Q2 24,363,985 115,822 6,255,028 0.56
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Q3 26,755,797 (274,763) 6,567,557 0.59
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Q4 16,900,725 1,294,912 3,380,300 0.31
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Fiscal 2005 $84,033,945 $1,355,991 $19,652,070 $1.82
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Interim period revenues and earnings historically reflect some seasonality. The third quarter is typically the strongest primarily due to high in-season demand at the farm level. Distributable cash generated per unit will also typically be highest in the third quarter. The following factors impact comparability between quarters in the table above:

- Sales, gain (loss) on foreign exchange, net earnings, and net earnings per unit are significantly impacted by the rate of exchange between the Canadian and U.S. dollars.

- The second quarter of 2007 includes a non-cash future tax accrual of $11.1 million related to the enactment of taxation laws related to income trusts for taxation years commencing January 1, 2011.

- Subsequent to May 31, 2007, results reflect the acquisition of Twister.

- Subsequent to December 31, 2006, results reflect the acquisition of Hi Roller.

- The third and fourth quarters of 2006 were adversely affected by hot and dry weather conditions in western Canada that negatively impacted sales of grain handling and aeration equipment.

- Subsequent to April 8, 2005, results reflect the acquisition of the Edwards Group.

- The first and second quarters of 2005 were exceptionally strong due to demand that resulted from the record 2004 U.S. harvest.

NON-GAAP MEASURES

References to "EBITDA" are to earnings before interest, income taxes, depreciation, and amortization. Management believes that, in addition to net income or loss, EBITDA is a useful supplemental measure in evaluating the Fund's performance. EBITDA is not a financial measure recognized by GAAP and does not have a standardized meaning prescribed by GAAP. Management cautions investors that EBITDA should not replace net income or loss as an indicator of performance, or cash flows from operating, investing, and financing activities as a measure of the Fund's liquidity and cash flows. The Fund's method of calculating EBITDA may differ from the methods used by other issuers.

Distributable cash is a non-GAAP measure generally used by Canadian income funds as an indicator of financial performance. The Fund defines distributable cash as cash flow from operating activities before the net change in non-cash working capital balances and before items not affecting cash other than items that impact amortization, interest expense, future taxes, or tax reserves, less maintenance capital expenditures (see "Capital Expenditures"). Distributable cash is not a financial measure recognized by GAAP and does not have a standardized meaning prescribed by GAAP. The method of calculating the Fund's distributable cash may differ from similar computations as reported by similar entities and, accordingly, may not be comparable to distributable cash as reported by such entities.

Payout ratio is a non-GAAP measure used by Canadian income funds as an indicator of the amount of generated distributable cash that is distributed to the unitholders. The Fund defines payout ratio as total distributions expressed as a percentage of distributable cash. Payout ratio is not a financial measure recognized by GAAP and does not have a standardized meaning prescribed by GAAP. The method of calculating the Fund's payout ratio may differ from similar computations as reported by similar entities and, accordingly, may not be comparable to payout ratio as reported by such entities.

CASH FLOW AND LIQUIDITY

The table below reconciles net earnings to cash provided by operations for the three and nine months ended September 30, 2007 and 2006.



Three Months Ended Nine Months Ended
September 30 September 30
2007 2006 2007 2006
Net earnings for the
period $ 8,976,385 $5,771,138 $ 9,691,508 $15,043,788
Add charges (deduct
credits) to operations
not requiring a current
cash payment:
Amortization 1,571,986 909,198 3,905,021 2,909,333
Future income taxes 60,000 59,500 11,353,400 128,200
Deferred foreign exchange
loss 0 183,545 0 (72,265)
Translation gain on
foreign exchange (1,787,966) 0 (3,693,222) 0
Non-cash component of
interest expense 55,191 0 112,134 0
Unit award incentive plan 396,896 0 686,312 0
Gain on sale of property,
plant & Equipment 0 (7,752) (39,803) (37,546)
-----------------------------------------------------
9,272,492 6,915,629 22,015,350 17,971,510
Net change in non-cash
working capital
balances related to
operations:

Accounts receivable 1,135,977 (224,645) (7,563,950) (7,796,887)
Inventory 2,335,683 702,965 706,902 (527,146)
Prepaid expenses and
other assets 64,607 (30,901) (243,143) 242,353
Accounts payable and
accrued liabilities 187,844 (742,745) 888,643 16,052
Long term incentive plan 157,152 213,500 (382,545) (292,501)
Customer deposits 280,077 149,486 (4,223,414) (2,061,487)
Income taxes payable 265,147 7,200 (182,333) (41,774)
-----------------------------------------------------
Cash provided by
operations $13,698,979 $6,990,509 $11,015,510 $ 7,510,120
-----------------------------------------------------
-----------------------------------------------------


For the three months ended September 30, 2007, cash provided by operations was $13.7 million, compared to $7.0 million for the same period in 2006. For the nine months ended September 30, 2007 cash provided by operations was $11.0 million, compared to $7.5 million in 2006. The variance from 2006 for the three and nine month periods is largely the result of increased net earnings after non-cash items and higher inventory turnover that resulted from increased demand. The variance for the nine month period was also impacted by the timing of preseason sales initiatives. In 2006, customer deposits related to preseason initiatives were largely received in the first quarter of 2006, and since the related shipments of product also occurred in the first quarter of 2006, there was only a limited impact on the statement of cash flows. In 2007, however, the shipments related to preseason initiatives were related to deposits received in the fourth quarter of 2006, and as a result there was a large impact on the reconciliation of net earnings to cash used by operations. A number of smaller changes account for the remaining variance.

Working Capital

Interim period working capital requirements typically reflect some seasonality. The Fund's collections of accounts receivable are weighted towards the third and fourth quarters. This collection pattern, combined with seasonally high sales in the third quarter, result in accounts receivable levels increasing throughout the year and peaking in the third quarter. In order to ensure the Fund has adequate supply throughout its distribution network in advance of in-season demand, inventory levels must be gradually increased throughout the year. Accordingly, inventory levels typically increase in the first and second quarters and then begin to decline in the third or fourth quarter as sales levels exceed production. As a result of these working capital movements, historically, Ag Growth begins to draw on its bank revolver in the first or second quarter. The revolver balance typically peaks in the second or third quarter and normally begins to decline later in the third quarter as collections of accounts receivable increase. Ag Growth has typically fully repaid its revolver balance by early in the fourth quarter. Operating results to date in 2007 have generally reflected these expectations. The inclusion of Hi Roller and Twister in 2007 is not expected to significantly impact the seasonality of working capital requirements.

Capital Expenditures

The Fund had maintenance capital expenditures of $0.2 million and $1.2 million for the three and nine months ended September 30, 2007 (2006 - $0.3 million and $0.9 million). Maintenance capital expenditures in 2007 relate primarily to purchases of a semi tractor unit and trailer and manufacturing equipment. The increase from 2006 is largely the result of the acquisition of Hi Roller. The Fund anticipates total maintenance capital expenditures in 2007 will approximate the amounts expended in 2006, plus approximately $0.3 million related to Hi Roller. All 2007 maintenance capital expenditures are expected to be funded through cash from operations.

The Fund defines maintenance capital expenditures as cash outlays required to maintain plant and equipment at current operating capacity and efficiency levels. Non-maintenance capital expenditures are defined as cash outlays required to increase operating capacity or improve operating efficiency. The Fund has invested in a capacity improvement initiative at its Westfield facility that has been categorized as a non-maintenance capital expenditure. In addition to anticipated capacity enhancements, the initiative is expected to improve the quality and finish of the Westfield product through the implementation of a new paint system. For the three and nine month periods ended September 30, 2007, non-maintenance capital expenditures related to the capacity enhancement project were $0.4 million and $1.7 million respectively. As at September 30, 2007 the investment in the capacity initiative totaled $3.5 million. The project is substantially complete.

Cash Balance

For the three month period ended September 30, 2007, the Fund's cash balance increased $3.3 million (2006 - $ nil) and for the nine month period then ended the Fund's cash balance decreased $5.4 million (2006 - $8.1 million). The movement in all periods was in line with management expectations.



CONTRACTUAL OBLIGATIONS

Total 2007 2008 2009 2010 2011 +
----------------------------------------------------------
Long-term debt 49,145,114 5,784 11,825 12,286,202 36,839,477 1,826
UAIP 686,312 0 0 0 298,604 387,708
Operating leases 2,186,696 290,665 723,179 598,741 313,123 260,988
----------------------------------------------------------
Total obligations 52,018,122 296,449 735,004 12,884,943 37,451,204 650,522
----------------------------------------------------------
----------------------------------------------------------


Long-term debt at September 30, 2007 includes non-amortizing term loans of $49.1 million, comprised of loans of CAD $30.675 million and USD $18.5 million, which for financial reporting purposes are shown net of the related deferred financing costs of $0.6 million. The remaining long-term debt relates to GMAC financed vehicle loans. The Unit Award Incentive Plan (UAIP) relates to 220,000 unit awards that have been granted to senior management and is described under "New Developments" below. The operating leases relate to vehicle, equipment, warehousing, and the Hi Roller manufacturing facility and were entered into in the normal course of business.

On October 2, 2007, the Fund completed an equity financing whereby it issued 1,730,000 Trust Units at a price of $26.00 per Trust Unit for gross proceeds of $45.0 million. Subsequent to September 30, 2007, the Fund repaid $30.675 million and U.S. $12.0 million of its outstanding long-term debt. The remaining $2.3 million was applied against expenses of the offering, including underwriters' commission (see "New Developments").

DISTRIBUTIONS

The Fund declared distributions to public unitholders of $4.7 million and $14.0 million for the three and nine month periods ended September 30, 2007 (2006 - $4.7 million and $12.6 million). Furthermore, consistent with the Fund's prospectus dated May 5, 2004, the Fund declared distributions to Ag Growth's previous owners of $0.1 million and $0.2 million for the same periods (2006 - $0.1 million and $1.5 million). The distributions declared to Ag Growth's previous owners have decreased as a number of exchangeable units were exchanged for publicly traded units of the Fund (see "Overview of the Fund"). Total distributions declared for the three and nine months ended September 30, 2007 are unchanged from the same periods in 2006.

The Fund's policy is to make monthly distributions to holders of both trust units of the Fund and Class B units of AGHLP. Furthermore, in accordance with the terms of the Fund's prospectus, holders of Class C units received distributions quarterly. The Fund's Declaration of Trust requires that it distribute all taxable income earned in its fiscal period ending December 31. It may be necessary for the Fund to estimate one or more special distributions to achieve this requirement.

The Fund's Board of Trustees reviews financial performance and other factors when assessing the Fund's distribution levels. An adjustment to distribution levels will be made at such time as the Board determines the adjustment is sustainable and in the long-term best interest of the Fund and its unitholders.


DISTRIBUTABLE CASH

Distributable cash, as defined under "non-GAAP measures", is the equivalent of EBITDA less maintenance capital expenditures, cash interest expense, and current cash tax expense. The objective of presenting these measures is to calculate the amount that is available for distribution to unitholders and exchangeable unitholders. The distributable cash definition excludes changes in working capital as they are necessary to drive organic growth and are expected to be financed by the Fund's operating facility (See "Capital Resources"). Distributable cash should not be construed as an alternative to cash flows from operating, investing, and financing activities as a measure of the Fund's liquidity and cash flows. Distributable cash can be reconciled to cash provided by operating activities as follows:



Three Months Ended Nine Months Ended
September 30 September 30
2007 2006 2007 2006

Cash provided by
operating activities $13,698,979 $6,990,509 $11,015,510 $7,510,120
Change in non-cash
working capital (4,426,487) (74,880) 10,999,840 10,461,390
Reversal of reserve (1) 0 0 (500,000) 0
Deferred foreign
exchange loss 0 (183,545) 0 72,265
Translation gain (loss)
on FX 1,787,966 0 3,693,222 0
Gain on sale of
equipment 0 7,752 39,803 37,546
Net maintenance capital
expenditures (209,298) (270,448) (1,158,134) (893,073)
----------------------------------------------------------
Distributable
cash (2)(3) $10,851,160 $6,469,388 $24,090,241 $17,188,248
----------------------------------------------------------
----------------------------------------------------------
Generated per unit $0.97 $0.58 $2.15 $1.53
Weighted average units
outstanding 11,225,000 11,225,000 11,225,000 11,225,000
Distributions declared
per unit $0.42 $0.42 $1.26 $1.26
Payout Ratio (2) 43.4% 72.9% 58.7% 82.3%

(1) See "EBITDA and net earnings".
(2) See discussion of non-GAAP measures.
(3) On July 19, 2007 the Fund entered into a new credit agreement that
included term debt to finance long term growth projects including the
acquisition of Twister, the Westfield capacity initiative, and costs
related to the acquisition of Hi Roller. These cash outlays had
previously been paid out of cash flow and accordingly were a deduction
in calculating cash available to unitholders. As these growth projects
have now been funded, they are no longer included in the calculation of
distributable cash. See "Capital Resources".


Historical distributable cash generated per unit and distributions
declared as a percentage of distributable cash generated is as
follows:

----------------------------------------------------------------------------
2007 (1)
----------------------------------------------------------------------------
Q3 Q2 Q1
----------------------------------------------------------------------------

----------------------------------------------------------------------------
Distributable cash generated $0.9667 $0.6350 $0.5367
----------------------------------------------------------------------------
Distributions declared $0.4200 $0.4200 $0.4200
----------------------------------------------------------------------------
Distribution percentage 43.4% 66.1% 78.3%
----------------------------------------------------------------------------
YTD distribution percentage 58.7% 71.7% 78.3%
----------------------------------------------------------------------------

----------------------------------------------------------------------------
2006 (1)
----------------------------------------------------------------------------
Special (2) Q4 Q3 Q2 Q1
----------------------------------------------------------------------------

----------------------------------------------------------------------------
Distributable cash generated N/A $0.4270 $0.5763 $0.5214 $0.4335
----------------------------------------------------------------------------
Distributions declared N/A $0.4200 $0.4200 $0.4200 $0.4200
----------------------------------------------------------------------------
Distribution percentage N/A 98.4% 72.9% 80.6% 96.9%
----------------------------------------------------------------------------
YTD distribution percentage N/A 85.8% 82.3% 88.0% 96.9%
----------------------------------------------------------------------------

2005
----------------------------------------------------------------------------
Special (2) Q4 Q3 Q2 Q1
----------------------------------------------------------------------------

----------------------------------------------------------------------------
Distributable cash generated N/A $0.3722 $0.6859 $0.6271 $0.3936
----------------------------------------------------------------------------
Distributions declared $0.3000 $0.3900 $0.3800 $0.3403 $0.3249
----------------------------------------------------------------------------
Distribution percentage N/A 104.8% 55.4% 54.3% 82.6%
----------------------------------------------------------------------------
YTD distribution percentage 83.6% 68.7% 60.6% 64.2% 82.6%
----------------------------------------------------------------------------

(1) As described above, in 2006 and 2007 certain adjustments were made to
calculate distributable cash available to unitholders.
(2) Special distributions declared in excess of the regular monthly
distributions.


Distributable Cash

Distributable Cash Distributions Payout
Generated Declared (1) Ratio

Period Ended December 31, 2004 $ 9,686,147 $ 9,109,017 94.0%
Year Ended December 31, 2005 22,628,723 18,917,872 83.6%
Year Ended December 31, 2006 21,978,594 18,858,000 85.8%
Nine Months Ended September 30,
2007 24,090,241 14,143,500 58.7%
------------------------------------------
Cumulative since inception $78,383,705 $61,028,389 77.9%
------------------------------------------
------------------------------------------

(1) Distributions declared include special distributions of $1,328,940 in
2004 and $3,367,500 in 2005.


Distributions declared for the three and nine months ended September 30, 2007 of $0.42 and $1.26 are consistent with distributions for the same periods in 2006, and represent a 29.2% increase over the per unit distribution disclosed in the Fund's 2004 prospectus. Distributions are funded entirely through cash from operations.

The Fund's Declaration of Trust requires that it distribute all taxable income earned in its fiscal periods ending December 31. Due to a number of tax deductions available to the Fund and its subsidiary entities and to the acquisitions of Hi Roller and Twister, since inception the Fund has retained $17.4 million for internal purposes. The amounts retained have been used primarily to strengthen the Fund's financial position and to allow for future strategic or expansionary capital expenditures.

CAPITAL RESOURCES

The Fund's credit facility includes operating lines of CAD $10.0 million and USD $1.0 million, and provides for long-term debt of up to CAD $48.0 million and USD $18.5 million. As at September 30, 2007, no amounts were outstanding under the operating lines and the Fund's outstanding long-term debt totalled CAD $30.7 million and USD $18.5 million. Interest rates on both facilities are based on performance calculations. For the three and nine months ended September 30, 2007, the Fund's effective interest rate on its Canadian dollar term debt was 6.2% and 6.1% (2006 - 6.0% and 5.7%), and after consideration of the effect of the Fund's interest rate swap was 4.8% and 5.1% (2006 - 4.7% and 4.7%). For the three and nine months ended September 30, 2007, the Fund's effective interest rate on its U.S. dollar term debt was 8.8% and after consideration of the effect of the Fund's interest rate swap was 6.3%. See "Financial Instruments". Under the terms of the credit facility agreement, the operating and term loan facilities will bear interest at prime plus 0.00%, 0.50%, or 1.00% per annum based on performance calculations. The loans mature August 31, 2008 and are extendible annually for an additional one-year term at the lender's option. Under the terms of the credit facility agreement, if the bank elects to not extend the operating and term loan facilities beyond the current August 31, 2008 maturity date, all amounts outstanding under the facilities become repayable in four equal quarterly instalments of principal, commencing November 30, 2009. Subsequent to September 30, 2007 the Fund repaid a portion of its long-term debt from the proceeds of an equity offering (see "New Developments").

CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the period. The Fund believes the accounting policies that are critical to its business relate to the use of estimates regarding the recoverability of accounts receivable and the valuation of inventory, intangibles, goodwill, and future income taxes. Due to the nature of Ag Growth's business and the credit terms it provides to its customers, estimates and judgments are inherent in the on-going assessment of the recoverability of accounts receivable. In addition, assessments and judgments are inherent in the determination of the net realizable value of inventories and the fair value of goodwill and intangible assets. Goodwill and indefinite life intangible assets are tested for impairment at least annually. Future income taxes are calculated based on assumptions related to the future interpretation of tax legislation, future income tax rates, and future operating results, acquisitions and dispositions of assets and liabilities, and distribution policy. In the normal course of its operations, the Fund may become involved in various legal actions. The Fund maintains, and regularly updates on a case-by-case basis, provisions when the expected loss is both likely and can be reasonably estimated. While management has applied judgment based on assumptions believed to be reasonable in the circumstances, actual results can vary from these assumptions. It is possible that materially different results would be reported using different assumptions.

FINANCIAL INSTRUMENTS

Risk from foreign exchange arises as a result of variations in exchange rates between the Canadian and the U.S. Dollar. The Fund has entered into foreign exchange contracts with a Canadian chartered bank to partially hedge its foreign currency exposure on anticipated U.S. dollar sales transactions and the collection of the related accounts receivable. At September 30, 2007, the Fund had outstanding the following foreign exchange and option contracts:



----------------------------------------------------------------------------
Forward Foreign Exchange Contracts
----------------------------------------------------------------------------
Settlement Dates Face Amount Average Rate Unrealized Gain
USD CDN (Loss) CDN

October - December 2007 $2,775,000 $ 1.2346 $662,475
---------------------------------------------------

----------------------------------------------------------------------------
Currency Options
----------------------------------------------------------------------------
Settlement Dates Face Amount Call Rate Put Rate Unrealized Gain
USD CND CDN (Loss) CDN

October - December 2007 $ 2,775,000 $1.1363 $1.2985 $ 392,846
October - December 2007 2,775,000 $1.1300 $1.1975 375,381
October - December 2007 5,550,000 $1.1363 $1.2410 785,691
January - December 2008 7,800,000 $1.0700 $1.2115 623,648
------------- ----------------
Total $18,900,000 $2,177,566
------------- ----------------
------------- ----------------


The Fund is subject to risks associated with fluctuating interest rates on its long-term debt. To manage this risk, as at September 30, 2007 the Fund had outstanding the following interest rate swap transactions with a Canadian chartered bank:

(i) Notional amount of CAD $30.675 million, expires August 31, 2008, effective interest rate of 4.38%, resulting in interest charges to the Fund of 4.38% plus a variable rate based on performance calculations.

(ii) Notional amount of USD $11.0 million, expires August 31, 2008, effective interest rate of 5.10%, resulting in interest charges to the Fund of 5.10% plus a variable rate based on performance calculations.

(iii) Notional amount of USD $7.5 million, expires August 31, 2008, effective interest rate of 5.10%, resulting in interest charges to the Fund of 5.10% plus a variable rate based on performance calculations.

At September 30, 2007, the fair value of the interest rate swap contracts was a loss of $21,146, and this amount has been recorded in prepaid expenses and other assets. Subsequent to September 30, the Fund raised net proceeds of $42.7 million via an equity offering and applied the proceeds against its long-term debt. (See "New Developments"). The Fund reduced its interest rate swaps by a like amount, realizing a net loss of $1,243.

NEW DEVELOPMENTS

Equity Offering and Repayment of Long-term Debt

On October 2, 2007, the Fund completed an equity financing whereby it issued 1,730,000 Trust Units at a price of $26.00 per Trust Unit for gross proceeds of $45.0 million. Subsequent to the closing of the equity offering, the Fund repaid $30.675 million and U.S. $12.0 million of its outstanding long-term debt. The remaining $2.3 million was applied against expenses of the offering, including underwriters' commission.

Enactment of Legislation Imposing Taxation on Income Trusts

As described in the Fund's financial statements for the three and six month periods ended June 30, 2007, in June 2007 the Government of Canada enacted legislation that will impose additional income taxes on publicly traded income trusts including the Fund for taxation years commencing January 1, 2011. The Fund continues to evaluate the new legislation and the Fund's organizational alternatives in light of the new legislation.

Future income tax liabilities for the period increased $11.1 million upon the June 2007 enactment of new tax legislation. Until June 2007 the Fund had been tax effecting the reversal of taxable temporary differences at a nil tax rate on the assumption that the Fund would make sufficient tax deductible cash distributions to unitholders such that the Fund's taxable income would be nil for the foreseeable future. The new legislation limits the tax deductibility of cash distributions such that income taxes may become payable in the future.

The Fund has estimated its future income taxes based on its best estimates of results of operations and tax pool claims and cash distributions in the future assuming no material change to the Fund's current organizational structure. As currently interpreted, Canadian GAAP does not permit the Fund's estimate of future income taxes to incorporate any assumptions related to a change in organizational structure until such structures are given legal effect.

The Fund's estimate of its future income taxes will vary as do the Fund's assumptions pertaining to the factors described above, and such variations may be material.

Until 2011, the new legislation does not directly affect the Fund's cash flow from operations, and accordingly, the Fund's financial condition.

Unit Award Incentive Plan

On May 10, 2007, the unitholders of Ag Growth approved the adoption by the Fund of a Unit Award Incentive Plan (the "UAIP") which authorizes the Trustees to grant awards ("Unit Awards") to persons, firms or corporations who are employees or officers of the Fund or any affiliates of the Fund or who are consultants or other service providers to the Fund and its affiliates ("Service Providers"). Unit Awards may not be granted to non-management Trustees.

Under the terms of the UAIP, any Service Provider may be granted Unit Awards. Each Unit Award will entitle the holder to be issued the number of trust units designated in the Unit Award, upon payment of an exercise price of $0.10 per Fund Unit and such Fund Units will vest and may be issued as to one third on each of January 1, 2010, January 1, 2011 and January 1, 2012 or such earlier or later dates as may be determined by the Trustees. In lieu of receiving trust units, the holder, with the consent of the Fund, may elect to be paid cash for market value of the units in excess of exercise price of the units. The UAIP provides for immediate vesting of the Unit Awards in the event of retirement, death, termination without cause, or in the event the Service Provider becomes disabled.

The UAIP provides that the maximum number of trust units reserved for issuance pursuant to Unit Awards shall not exceed the 220,000 trust units currently granted, subject to adjustment in lieu of distributions, if applicable.

The UAIP will be recognized as a direct award of units, resulting in an expense to be charged against income and a related liability recorded over the period of time to which the award vests. As at September 30, 2007, 220,000 Unit Awards have been granted and remain outstanding. For the three and nine month periods ended September 30, 2007, the Fund recorded an expense of $396,896 and $686,312 respectively for the Unit Awards.

Accounting Policy Changes

The Canadian Institute of Chartered Accountants has issued three new accounting standards; Hedges, Financial Instruments - Recognition and Measurement, and Comprehensive Income. These standards are effective for the Fund beginning in fiscal 2007.

The new standard for Hedges specifies the criteria under which hedge accounting can be applied and how hedge accounting can be executed for each of the permitted hedging strategies. For cash flow hedges where the Fund is hedging the variability in cash flows related to anticipated sales to customers in the United States and the collection of the related accounts receivable, the effective portion of the changes in the fair values of the derivative instruments are recorded through other comprehensive income until the hedged items are recognized in the Consolidated Statement of Operations.

The Financial Instruments - Recognition and Measurement standard requires financial assets to be classified as available for sale, held to maturity, trading or loans and receivables.

The Comprehensive Income standard requires a new component of unitholders' equity on the Consolidated Balance Sheet. The major component will be the changes in the fair value of the effective portion of cash flow hedging instruments.

The adoption of these Sections is done retroactively without restatement of the consolidated financial statements of prior periods. As at January 1, 2007, the impact on the consolidated balance sheet of measuring the long-term debt using the effective interest rate method was a decrease in deferred financing costs of $318,012 and a decrease in long-term debt of $318,012. The impact on the consolidated balance sheet of measuring derivatives at fair value as at January 1, 2007 was an increase in prepaid expenses and other assets by $276,679. Comprehensive income was increased by the same amount as a transition adjustment.

RISKS AND UNCERTAINTIES

The risks and uncertainties described below are not the only risks and uncertainties we face. We believe that the risks mentioned are the principal risks relating to our operations. The Fund's Annual Information Form contains a description of these and other risks that relate to the structure of the Fund. Additional risks and uncertainties not currently known to us or that we currently deem immaterial also may impair operations. If any of the following risks actually occur, our business, results of operations and financial condition, and the amount of cash available for distribution could suffer.

Industry Cyclicality

The performance of the agricultural industry is cyclical, and to the extent that the agricultural sector declines or experiences a downturn, this is likely to have a negative impact on the farm equipment and commercial grain handling industry, and the business of Ag Growth. The agricultural sector has recently been positively impacted by the expansion of the ethanol industry, and to the extent the ethanol industry declines or experiences a downturn, this is likely to have a negative impact on the farm equipment and commercial grain handling industry, and the business of Ag Growth.

Seasonality of Business

The seasonality of the demand for Ag Growth's products results in lower cash flow in the first three quarters of each calendar year and may impact the ability of the Fund to make cash distributions to Unitholders, or the quantum of such distributions, if any. No assurance can be given that the Fund's credit facility will be sufficient to offset the seasonal variations in Ag Growth's cash flow.

Risk of Decreased Crop Yields

Decreased crop yields due to poor weather conditions and other factors are a significant risk affecting Ag Growth. Both reduced crop volumes and the accompanying decline in farm incomes can negatively affect demand for grain handling equipment.

Potential Volatility of Production Costs

Various materials and components are purchased in connection with Ag Growth's manufacturing process, some or all of which may be subject to wide price variation. Consistent with past and current practices within the industry, Ag Growth manages its exposure to material and component price volatility by planning and negotiating significant purchases on an annual basis, and passing through to customers, most, if not all, of the price volatility. There can be no assurance that industry dynamics will allow Ag Growth to continue to reduce its exposure to volatility of production costs by passing through price increases to its customers.

Commodity Prices, International Trade and Political Uncertainty

Prices of commodities are influenced by a variety of unpredictable factors that are beyond the control of Ag Growth, including weather, government (Canadian, United States and other) farm programs and policies, and changes in global demand or other economic factors. The world grain market is subject to numerous risks and uncertainties, including risks and uncertainties related to international trade and global political conditions.

Competition

Ag Growth experiences competition in the markets in which it operates. Certain of Ag Growth's competitors may have greater financial and capital resources than Ag Growth. Ag Growth could face increased competition from newly formed or emerging entities, as well as from established entities that choose to focus (or increase their existing focus) on Ag Growth's primary markets. As the grain handling equipment sector is fragmented, there is also a risk that a larger, formidable competitor may be created through a combination of one or more smaller competitors. Ag Growth may also face potential competition from the emergence of new products or technology.

Business Interruption

The operation of the manufacturing facilities of Ag Growth are subject to a number of business interruption risks, including delays in obtaining production materials, plant shutdowns, labour disruptions and weather conditions/natural disasters. Ag Growth may suffer damages associated with such events that it cannot insure against or which it may elect not to insure against because of high premium costs or other reasons. For instance, Ag Growth's Rosenort facility is located in an area that was affected by widespread floods experienced in Manitoba in 1997, and insurance coverage for this type of business interruption is limited. Ag Growth is not able to predict the occurrence of business interruptions.

Litigation

In the ordinary course of its business, Ag Growth may be party to various legal actions, the outcome of which cannot be predicted with certainty. One category of potential legal actions is product liability claims. Farming is an inherently dangerous occupation. Grain handling equipment used on farms may result in product liability claims that require not only proper insuring of risk, but management of the legal process as well.

Dependence on Key Personnel

Ag Growth's future business, financial condition, and operating results depend on the continued contributions of certain of Ag Growth's executive officers and other key management and personnel, certain of whom would be difficult to replace.

Distribution, Sales Representative and Supply Contracts

Ag Growth typically does not enter into written agreements with its dealers, distributors or suppliers. As a result, such parties may, without notice or penalty, terminate their relationship with Ag Growth at any time. In addition, even if such parties should decide to continue their relationship with Ag Growth, there can be no guarantee that the consideration or other terms of such contracts will continue on the same basis.

Foreign Exchange Risk

Ag Growth generates a majority of its sales in US dollars, but a materially smaller proportion of its expenses are denominated in U.S. dollars. As a result, a significant strengthening of the Canadian dollar against the U.S. dollar will negatively impact the return from U.S. dollar sales revenue. To partially mitigate the effects of exchange rate fluctuation, management has implemented a foreign currency hedging strategy. Ag Growth has entered into a series of hedging arrangements to partially mitigate the potential effect of fluctuating exchange rates through December 2008. To the extent that Ag Growth does not adequately hedge its foreign exchange risk, changes in the exchange rate between the Canadian dollar and the U.S. dollar may have a material adverse effect on Ag Growth's results of operations, business, prospects and financial condition.

Interest Rates

The Fund's term and operating credit facilities bear interest at rates that are in part dependant on performance based financial ratios. The Fund's cost of borrowing may be impacted to the extent that the ratio calculation results in an increase in the performance based component of the interest rate. The Fund is party to a number of interest rate swap arrangements to mitigate the impact of fluctuating market interest rates. These swap arrangements mature on August 31, 2008. In the event the Fund enters new interest rate swap arrangements, the rate of the new contracts will be a function of prevailing market rates.

Uninsured and Underinsured Losses

Ag Growth will use its discretion in determining amounts, coverage limits and deductibility provisions of insurance, with a view to maintaining appropriate insurance coverage on its assets and operations at a commercially reasonable cost and on suitable terms. This may result in insurance coverage that, in the event of a substantial loss, would not be sufficient to pay the full current market value or current replacement cost of its assets or cover the cost of a particular claim.

Taxation of Income Trusts

There can be no assurance that Canadian federal income tax laws or the judicial interpretation thereof or the administrative and/or assessing practices of the Canada Revenue Agency and/or the treatment of mutual fund trusts will not be changed in a manner that adversely affects the holders of Trust Units.

As described in the Fund's financial statements for the three and nine month periods ended September 30, 2007, in June 2007 the Government of Canada enacted legislation imposing additional income taxes on the Fund for taxation years commencing January 1, 2011. Until June 2007 the Fund had been tax effecting the reversal of taxable temporary differences at a nil tax rate on the assumption that the Fund would make sufficient tax deductible cash distributions to unitholders such that the Fund's taxable income would be nil for the foreseeable future. The new legislation limits the tax deductibility of cash distributions such that income taxes may become payable in the future.

The Fund has estimated its future income taxes based on its best estimates of results of operations and tax pool claims and cash distributions in the future assuming no material change to the Fund's current organizational structure. As currently interpreted, Canadian GAAP does not permit the Fund's estimate of future income taxes to incorporate any assumptions related to a change in organizational structure until such structures are given legal effect.

The Fund's estimate of its future income taxes will vary as do the Fund's assumptions pertaining to the factors described above, and such variations may be material.

OUTLOOK

Demand for portable grain handling equipment in the fourth quarter of 2007 is expected to be strong due to positive market sentiment in the U.S., fuelled by high commodity prices and an increase in on-farm storage, what is expected to be a record corn harvest in the U.S., and depleted inventory levels throughout the Fund's distribution network. It is expected these conditions will also result in strong demand in the first half of 2008. Consistent with prior years, demand in 2008, particularly in the second half, will be influenced by crop conditions, weather patterns, and the timing of harvest.

Demand for stationary grain handling equipment, manufactured by the Fund's Hi Roller division, remains very strong with an order backlog that extends into 2008. Hi Roller continues to benefit from the robust U.S. agricultural sector and from an infrastructure build in the ethanol industry. Sales and earnings at Hi Roller in 2007 are expected to greatly exceed prior years. In part due to potential decreased activity in the ethanol sector, results in 2008 may not match the record results expected in 2007.

The value of the Canadian dollar relative to its U.S. counterpart will continue to impact the financial results of the Fund. Any appreciation of the Canadian dollar adversely impact sales and earnings compared to prior years. Also, as the Fund's foreign currency hedging instruments in place for fiscal 2008 total $7.8 million, compared to $27.1 million in 2007, the Fund expects to realize a smaller gain on foreign exchange in 2008.

DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is gathered and reported to senior management, including the Fund's Chief Executive Officer and Chief Financial Officer, on a timely basis so that appropriate decisions can be made regarding public disclosure.

As at December 31, 2006, management of the Fund, with the participation of the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the Fund's disclosure controls and procedures as required by Canadian securities laws. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that, as of December 31, 2006, the disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the Fund's annual filings and interim filings (as such terms are defined under Multilateral Instrument 52-109- Certification of Disclosure in Issuers' Annual and interim Filings) and other reports filed or submitted under Canadian securities laws is recorded, processed, summarized and reported within the time periods specified by those laws and that material information is accumulated and communicated to management of the Fund, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Internal Controls over Financial Reporting

Management of the Fund is responsible for designing internal controls over financial reporting for the Fund as defined under Multilateral Instrument 52-109 issued by the Canadian Securities Administrators. Management has designed such internal controls over financial reporting, or caused them to be designed under their supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with GAAP.

There have been no changes in the Fund's internal controls over financial reporting that occurred during the third quarter of 2007, the most recent interim period, that have materially affected, or are reasonably likely to materially affect, the Fund's internal controls over financial reporting, except for the following:

On December 31, 2006, the Fund acquired substantially all of the assets of Hi Roller, and on May 31, 2007 the Fund acquired substantially all of the operating assets of Twister. Management has not fully completed its review of internal controls over financial reporting for the newly acquired operations. Management expects to have finalized the design and implementation of internal controls prior to completion of the current fiscal year. For the period covered by this MD&A, management has undertaken specific procedures to satisfy itself with respect to the accuracy and completeness of the acquired operations financial information.

ADDITIONAL INFORMATION

Additional information relating to the Fund, including the Fund's most recent Annual Information Form, is available on SEDAR (www.sedar.com).



Unaudited Interim Consolidated Financial Statements

Ag Growth Income Fund
September 30, 2007



Ag Growth Income Fund

UNAUDITED INTERIM CONSOLIDATED
BALANCE SHEETS

As at As at
September 30, December 31,
2007 2006
$ $
----------------------------------------------------------------------------

ASSETS (note 13)
Current
Cash and cash equivalents 3,300,003 8,706,130
Cash held in trust (note 7) 500,000 582,638
Accounts receivable 20,419,113 10,882,840
Loan receivable (note 5) 846,855 -
Inventory 26,417,802 22,641,383
Prepaid expenses and other assets (note 3) 4,374,789 1,185,200
Future tax assets 3,800 182,200
----------------------------------------------------------------------------
Total current assets 55,862,362 44,180,391
Property, plant and equipment 15,869,005 14,226,481
Goodwill (note 7) 43,467,783 42,262,026
Intangible assets 68,263,193 69,245,641
Deferred financing costs (note 3) - 318,012
----------------------------------------------------------------------------
183,462,343 170,232,551
----------------------------------------------------------------------------
----------------------------------------------------------------------------

LIABILITIES AND UNITHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities 9,310,113 7,236,269
Customer deposits 1,725,875 5,661,420
Income taxes payable 341,522 523,855
Distributions payable 1,571,500 1,571,500
Long-term incentive plan payable 471,455 854,000
Deferred foreign exchange gain - 20,116
Acquisition, transaction and financing costs
payable (note 7) 872,568 1,825,121
Current portion of long-term debt 15,218 15,334
----------------------------------------------------------------------------
Total current liabilities 14,308,251 17,707,615
Unit Award Incentive Plan accrual (note 11) 686,312 -
Future income taxes (note 6) 11,175,000 -
Long-term debt (notes 3, 13 and 14) 48,564,887 41,560,311
----------------------------------------------------------------------------
Total liabilities 74,734,450 59,267,926

Unitholders' equity (note 14) 108,727,893 110,964,625
----------------------------------------------------------------------------
183,462,343 170,232,551
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes

On behalf of the Board of Trustees:
(signed) (signed)
Trustee Trustee

Ag Growth Income Fund



UNAUDITED INTERIM CONSOLIDATED
STATEMENTS OF EARNINGS

Three-month period ended Nine-month period ended
---------------------------------------------------
September September September September
30, 2007 30, 2006 30, 2007 30, 2006
$ $ $ $
----------------------------------------------------------------------------

Sales 40,798,315 22,049,541 104,037,173 64,326,081
Cost of goods sold 23,492,282 12,275,594 61,743,476 35,893,181
----------------------------------------------------------------------------
Gross margin 17,306,033 9,773,947 42,293,697 28,432,900
----------------------------------------------------------------------------
Expenses
Selling, general and
administration 4,815,905 2,870,697 13,626,447 9,300,969
Professional fees 157,789 95,260 463,543 252,366
Long-term incentive plan 157,152 213,500 471,456 640,500
Unit award incentive plan
(note 11) 396,896 - 686,312 -
Research and development 135,101 372,766 639,901 766,000
Capital taxes 62,500 72,420 187,500 224,769
Gain on foreign exchange (1,117,489) (1,102,119) (2,253,941) (1,424,117)
Other expense (income) 126,204 198,545 (30,668) (212,632)
----------------------------------------------------------------------------
4,734,058 2,721,069 13,790,550 9,547,855
----------------------------------------------------------------------------
Earnings before the
following 12,571,975 7,052,878 28,503,147 18,885,045
----------------------------------------------------------------------------
Interest expense
Short-term debt 100,410 52,178 186,957 75,396
Long-term debt 754,766 234,924 1,954,512 689,888
----------------------------------------------------------------------------
855,176 287,102 2,141,469 765,284
----------------------------------------------------------------------------
Earnings before amortization
and income taxes 11,716,799 6,765,776 26,361,678 18,119,761
----------------------------------------------------------------------------
Amortization of property,
plant and equipment 994,539 530,808 2,172,680 1,562,475
Amortization of deferred
financing costs - - - 149,188
Amortization of intangible
assets 577,447 378,390 1,732,341 1,197,670
----------------------------------------------------------------------------
1,571,986 909,198 3,905,021 2,909,333
----------------------------------------------------------------------------
Earnings before income
taxes 10,144,813 5,856,578 22,456,657 15,210,428
----------------------------------------------------------------------------
Provision for income taxes
(recovery) (note 6)
Current 1,108,428 25,940 1,911,749 38,440
Future 60,000 59,500 11,353,400 128,200
Reversal of reserve - - (500,000) -
----------------------------------------------------------------------------
1,168,428 85,440 12,765,149 166,640
----------------------------------------------------------------------------
Net earnings for the period 8,976,385 5,771,138 9,691,508 15,043,788
----------------------------------------------------------------------------

Basic and diluted net
earnings per unit $0.80 $0.51 $0.86 $1.34
----------------------------------------------------------------------------

Basic and diluted weighted
average number of units
outstanding 11,225,000 11,225,000 11,225,000 11,225,000
----------------------------------------------------------------------------

See accompanying notes



Ag Growth Income Fund

UNAUDITED INTERIM CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (note 3)

Three-month period ended Nine-month period ended
---------------------------------------------------
September September September September
30, 2007 30, 2006 30, 2007 30, 2006
$ $ $ $
----------------------------------------------------------------------------

Net earnings for the period 8,976,385 5,771,138 9,691,508 15,043,788
----------------------------------------------------------------------------
Transition adjustment
(note 3) - - (276,679) -
Change in fair value of
derivatives designated
as cash flow hedges 1,352,942 - 3,989,262 -
Unrealized gains on dual
purpose derivatives
designated as cash flow
hedges in prior periods
recognized in net earnings
in the current period (219,219) - (603,641) -
Realized gains on derivatives
designated as cash flow
hedges in prior periods
recognized in net earnings
in the current period (879,514) - (893,682) -
----------------------------------------------------------------------------
Other comprehensive income
for the period 254,209 - 2,215,260 -
----------------------------------------------------------------------------
Comprehensive income 9,230,594 5,771,138 11,906,768 15,043,788
----------------------------------------------------------------------------

See accompanying notes



Ag Growth Income Fund

UNAUDITED INTERIM CONSOLIDATED
STATEMENTS OF UNITHOLDERS' EQUITY

Nine-month period ended September 30, 2007

Accumulated
other
Unitholders' Accumulated Accumulated comprehensive
capital earnings distributions income Total
$ $ $ $ $
----------------------------------------------------------------------------
(note 3)

Balance,
December
31, 2006 110,430,194 47,419,320 (46,884,889) - 110,964,625
Net
earnings
for the
period - 9,691,508 - - 9,691,508

Distributions
declared
(note 12) - - (14,143,500) - (14,143,500)
Other
comprehensive
income for
the period - - - 2,215,260 2,215,260
----------------------------------------------------------------------------
Balance,
September
30, 2007 110,430,194 57,110,828 (61,028,389) 2,215,260 108,727,893
----------------------------------------------------------------------------
----------------------------------------------------------------------------

See accompanying notes



Ag Growth Income Fund

UNAUDITED INTERIM CONSOLIDATED
STATEMENTS OF UNITHOLDERS' EQUITY

Nine-month period ended September 30, 2006 and
year ended December 31, 2006

Accumulated
other
Unitholders' Accumulated Accumulated comprehensive
capital earnings distributions income Total
$ $ $ $ $
----------------------------------------------------------------------------
(note 3)

Balance,
December
31, 2005 110,430,194 28,375,479 (28,026,889) - 110,778,784
Net
earnings
for the
period - 15,043,788 - - 15,043,788
Distributions
declared - - (14,143,500) - (14,143,500)
----------------------------------------------------------------------------
Balance,
September
30, 2006 110,430,194 43,419,267 (42,170,389) - 111,679,072
Net
earnings
for the
three-month
period
ended
December
31, 2006 - 4,000,053 - - 4,000,053
Distributions
declared
for the
three-month
period
ended
December
31, 2006
(note 12) - - (4,714,500) - (4,714,500)
----------------------------------------------------------------------------
Balance,
December
31, 2006 110,430,194 47,419,320 (46,884,889) - 110,964,625
----------------------------------------------------------------------------
----------------------------------------------------------------------------

See accompanying notes



Ag Growth Income Fund

UNAUDITED INTERIM CONSOLIDATED
STATEMENTS OF CASH FLOWS

Three-month period ended Nine-month period ended
---------------------------------------------------
September September September September
30, 2007 30, 2006 30, 2007 30, 2006
$ $ $ $
----------------------------------------------------------------------------

OPERATING ACTIVITIES
Net earnings for the period 8,976,385 5,771,138 9,691,508 15,043,788
Add (deduct) items not
affecting cash
Amortization 1,571,986 909,198 3,905,021 2,909,333
Future income taxes 60,000 59,500 11,353,400 128,200
Deferred foreign
exchange loss - 183,545 - (72,265)
Translation gain on
foreign exchange (1,787,966) - (3,693,222) -
Non-cash component of
interest expense 55,191 - 112,134 -
Gain on sale of property,
plant and equipment - (7,752) (39,803) (37,546)
Unit award incentive plan 396,896 - 686,312 -
----------------------------------------------------------------------------
9,272,492 6,915,629 22,015,350 17,971,510
Net change in non-cash
working capital balances
related to operations
(note 10) 4,426,487 74,880 (10,999,840)(10,461,390)
----------------------------------------------------------------------------
Cash provided by operating
activities 13,698,979 6,990,509 11,015,510 7,510,120
----------------------------------------------------------------------------

INVESTING ACTIVITIES
Acquisition of property,
plant and equipment (595,123) (270,448) (2,819,757) (893,073)
Acquisition of assets of
Hansen Manufacturing Corp.
(note 7) - - (1,899,549) -
Acquisition of assets of
Twister Pipe Ltd. (note 7) (1,143,000) - (7,144,408) -
Increase in loan receivable
(note 5) - - (903,890) -
Proceeds from sale of
property, plant and equipment - 7,754 70,000 58,945
----------------------------------------------------------------------------
Cash used in investing
activities (1,738,123) (262,694) (12,697,604) (834,128)
----------------------------------------------------------------------------

FINANCING ACTIVITIES
Increase (decrease) in
bank indebtedness (14,261,351) (1,468,161) - 1,745,508
Increase (decrease) in
long-term debt, net of
repayments 10,669,216 (5,874) 10,695,968 (17,624)
Distributions paid (4,714,500) (5,253,780) (14,143,500)(16,552,510)
Increase in deferred
financing costs on
long-term debt (354,218) - (359,139) -
Transfer from cash held
in trust (note 7) - - 82,638 -
----------------------------------------------------------------------------
Cash used in financing
activities (8,660,853) (6,727,815) (3,724,033)(14,824,626)
----------------------------------------------------------------------------

Net increase (decrease) in
cash and cash equivalents
during the period 3,300,003 - (5,406,127) (8,148,634)
Cash and cash equivalents,
beginning of period - - 8,706,130 8,148,634
----------------------------------------------------------------------------
Cash and cash equivalents,
end of period 3,300,003 - 3,300,003 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Supplemental cash flow
information
Interest paid 855,176 287,667 2,080,289 777,751
Income taxes paid 845,120 26,990 1,579,560 21,004
----------------------------------------------------------------------------
----------------------------------------------------------------------------

See accompanying notes



Ag Growth Income Fund

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007


1. DESCRIPTION OF BUSINESS

Ag Growth Income Fund (the "Fund") is an unincorporated, open-ended, limited purpose trust established under the laws of the Province of Ontario by a Declaration of Trust made as at March 24, 2004. The Fund and its wholly-owned subsidiaries conduct business in the grain handling, storage, and conditioning market. Each unitholder participates pro rata in distributions of net earnings and, in the event of termination, participates pro rata in the net assets remaining after satisfaction of all liabilities. Income tax obligations related to the distribution of net earnings by the Fund are the obligations of the unitholders.

2. BASIS OF PRESENTATION

The unaudited interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP"). They have been prepared using the same accounting policies and methods of application as disclosed in the Fund's audited consolidated financial statements for the year ended December 31, 2006, except as described in note 3.

These unaudited interim consolidated financial statements do not include all of the information and notes to the financial statements required by GAAP for annual financial statements and therefore should be read in conjunction with the audited consolidated financial statements and notes included in the Fund's annual report for the year ended December 31, 2006.

Accounting measurements at interim dates inherently involve a greater reliance on estimates than at year end. In the opinion of management, the unaudited interim consolidated financial statements include all adjustments of a normal recurring nature to present fairly the consolidated financial position of the Fund as at September 30, 2007.

3. ACCOUNTING POLICIES

The following accounting policies do not include all of the accounting policies of the Fund required by GAAP for annual financial statements and should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2006. The following represent new accounting policies adopted by the Fund for significant transactions during the three-month and nine-month periods ended September 30, 2007.

Income Taxes

In June 2007, the Government of Canada enacted new legislation imposing additional income taxes upon publicly traded income trusts, including the Fund, effective January 1, 2011. Prior to June 2007, the Fund estimated the future income tax on certain temporary differences between amounts recorded on its balance sheet for book and tax purposes at a nil effective tax rate. Under the legislation, the Fund now estimates the effective tax rate on the post 2010 reversal of these temporary differences to be 31.5%. Temporary differences reversing before 2011 will still give rise to nil future income taxes.

While the Fund believes it will be subject to additional tax under the new legislation, the estimated effective tax rate on temporary difference reversals after 2011 may change in future periods. As the legislation is new, future technical interpretations of the legislation could occur and could materially affect management's estimate of the future income tax liability.

The amount and timing of reversals of temporary differences will also depend on the Fund's future operating results, acquisitions and dispositions of assets and liabilities, and distribution policy. A significant change in any of the preceding assumptions could materially affect the Fund's estimate of the future tax liability.

Unit Award Incentive Plan

The Fund has a Unit award incentive plan (the "UAIP") as described in note 11. The UAIP will be recognized as a direct award of units, resulting in an expense to be charged against earnings and related liability recorded over the period of time to which the award vests. The expense and related liability are based on the market price of the Fund's units at the end of the period and as such could increase or decrease from one period to the next in relation to the market price.

Financial Instruments, Hedges and Comprehensive Income

Effective January 1, 2007, the Fund adopted the Canadian Institute of Chartered Accountants ("CICA") Handbook Section 3855, financial instruments - recognition and measurement; Section 3865, hedges; and Section 1530, comprehensive income. The adoption of these new standards resulted in changes in the accounting policies for financial instruments and hedges.

The principal changes in accounting policies, financial statement reporting and disclosure recommendations for comprehensive income and its components and the presentation of equity are described below:

(a) Section 3855 financial instruments - recognition and measurement

This Section sets out the standards for the recognition and measurement of financial assets and financial liabilities. The standard prescribes when to recognize a financial instrument in the balance sheet and at what amount. Depending on their balance sheet classification, fair value or cost-based measures are used. This standard also prescribes the basis of presentation for gains and losses on financial instruments. Based on financial instrument classification, gains and losses on financial instruments are recognized in net earnings or other comprehensive income.

The Fund has made the following classifications:

- Cash and cash equivalents are classified as "assets held for trading" and are measured at fair value. Gains and losses resulting from the periodic revaluation are recorded in net earnings.

- Accounts receivable are classified as "loans and receivables" and are recorded at cost, which upon their initial measurement is equal to their fair value. Subsequent measurements are recorded at amortized cost using the effective interest rate method.

- Loan receivable is classified as "loans and receivables" and is recorded at cost, which upon its initial measurement is equal to its fair value. Subsequent measurements are recorded at amortized cost using the effective interest rate method.

- Bank indebtedness, accounts payable and accrued liabilities, distributions payable, long-term incentive plan and acquisition, transaction and financing costs payable are classified as "other financial liabilities" and are initially measured at their fair value. Subsequent measurements are recorded at amortized cost using the effective interest rate method.

- Long-term debt is classified as an "other financial liability" and is initially measured at fair value. Subsequent measurements are recorded at amortized cost using the effective interest rate method. The deferred financing costs, previously reported on a separate line item on the balance sheet, are now netted against the carrying value of the related debt and amortized into interest expense using the effective interest rate method. Prior to the adoption of the new standards, the amortization of deferred financing costs was reported as a separate line item in the consolidated statement of earnings.

- Derivative financial instruments are measured at fair value, even when they are part of a hedging relationship. All changes in fair value are recorded in earnings unless cash flow hedge accounting is used, in which case changes in fair value are recorded in other comprehensive income.

Fair value is based on quoted market prices when available. However, when financial instruments lack an available trading market, fair value is determined using management's estimates and is calculated using market factors with similar characteristics and risk profiles.

(b) Section 3865 hedges

This Section sets out the standards specifying when and how an entity can use hedge accounting. This standard offers entities the possibility of applying different reporting options than those set out in Section 3855 financial instruments - recognition and measurement, to qualifying transactions that they elect to designate as hedges for accounting purposes.

The Fund elected to apply hedge accounting for certain of its foreign exchange forward contracts and interest rate swaps. The foreign exchange contracts and swaps are designated as cash flow hedges. They are measured at fair value at the end of each period and the gain or loss resulting from remeasurement is recognized in other comprehensive income. Accumulated gains or losses in other comprehensive income related to the foreign exchange forwards and swaps are subsequently recognized in earnings when the hedged item affects earnings. In the event the hedged item is sold, extinguished or matures prior to the termination of the related derivative instrument, any accumulated realized or unrealized gain or loss on such derivative instrument in other comprehensive income is recognized in earnings.

(c) Section 1530 comprehensive income

This Section describes the reporting and disclosure standards with respect to comprehensive income and its components. Comprehensive income is comprised of net earnings and other comprehensive income or loss. Other comprehensive income or loss includes changes in the fair value of derivative instruments designated as cash flow hedges, and certain foreign exchange gains or losses on hedged accounts receivable, all net of applicable income taxes. The components of comprehensive income are disclosed in the consolidated statement of comprehensive income.

Impact of change on these statements

The adoption of these Sections is done retroactively without restatement of the consolidated financial statements of prior periods. As at January 1, 2007, the impact on the consolidated balance sheet of measuring the long-term debt using the effective interest rate method was a decrease in deferred financing costs of $318,012 and a decrease in long-term debt of $318,012. The impact on the consolidated balance sheet of measuring derivatives at fair value as at January 1, 2007 was an increase in prepaid expenses and other assets of $276,679. Comprehensive income was increased by the same amount as a transition adjustment.

4. SEASONALITY OF BUSINESS

Interim period revenues and earnings historically reflect some seasonality. The third quarter is typically the strongest primarily due to high in-season demand at the farm level. The Fund's collections of accounts receivable are weighted towards the third and fourth quarters. This collection pattern, combined with seasonally high sales in the third quarter, result in accounts receivable levels increasing throughout the year and normally peaking in the third quarter. As a result of these working capital movements, historically, the Fund's use of its bank revolver is typically highest in the first and second quarters. The revolver balance begins to decline in the third quarter as collections of accounts receivable increase. The Fund would expect to repay its revolver by the fourth quarter of each year.

5. LOAN RECEIVABLE

The Fund has entered into a term loan agreement with Randolph County Community and Economic Development Foundation ("Randolph County"). The Fund advanced U.S. $850,000 to assist Randolph County in financing the purchase of a manufacturing facility in Union City, Indiana. The Fund in turn has an option to acquire the property from Randolph County for U.S. $850,000 against which the funds advanced would be applied. Subsequent to September 30, 2007, the Fund exercised this option. The loan bears interest at a rate equal to the Fund's floating interest rate on its U.S. short-term borrowing plus 2.0%. The loan is collateralized by a mortgage on certain real estate property.

6. INCOME TAXES

Income tax obligations relating to distributions from the Fund are the obligations of the unitholders and accordingly, no provision for income taxes on the income of the Fund has been made. A provision for income taxes is recognized for the corporate subsidiaries of the Fund, which are subject to tax.

For the nine-month period ended September 30, 2007, the Fund has an income tax expense of $12,765,149. The expense is comprised of current and future income tax expense of $13,265,149 and a recovery of $500,000 related to the reversal of an accrual which management has determined is no longer required.

Based on its assets and liabilities as at September 30, 2007, the Fund has estimated the amount of its temporary differences which were previously not subject to tax and has estimated the periods in which these differences will reverse. The fund estimates that approximately $35,313,000 net taxable temporary differences will reverse after January 1, 2011, resulting in an additional $11,125,000 future income tax liability. The taxable temporary differences related principally to the Fund's intangible assets.

7. ACQUISITIONS

(a) Acquisition of Twister Pipe Ltd.

Effective May 31, 2007, the Fund acquired substantially all of the operating assets of Twister Pipe Ltd. ("Twister"), a manufacturer of grain bins, for cash consideration of $8,016,976. In conjunction with the acquisition, the Fund incurred transaction costs of $381,223.

The acquisition has been accounted for by the purchase method with the results of Twister's operations included in the Fund's earnings from the date of acquisition. The assets and liabilities of Twister were initially recorded in the consolidated financial statements at their estimated fair values as follows:



$
-----------
Net assets acquired
Accounts receivable 1,972,323
Inventory 4,483,321
Prepaid expenses and other assets 127,551
Property, plant and equipment 1,025,000
Intangible assets - brand name 800,000
Goodwill 1,081,223
Accounts payable and accrued liabilities (1,184,573)
Customer deposits (287,869)
-----------
8,016,976
-----------
-----------

$
-----------
Consideration
Cash 7,144,408
Acquisition and transaction costs payable 872,568
-----------
8,016,976
-----------
-----------



As at September 30, 2007, the Fund had cash held in trust in the amount of $500,000 to be released to the vendor prior to December 31, 2007, subject to the hold back provisions of the asset purchase agreement.

The asset purchase agreement provides for adjustments to the purchase price for working capital adjustments to be finalized between the vendor and the Fund, thus the purchase price allocation is subject to change.

(b) Acquisition of Hansen Manufacturing Corp.

As described in the December 31, 2006 audited financial statements, effective December 31, 2006 the Fund acquired substantially all of the assets of Hansen Manufacturing Corp. Subsequent to December 31, 2006, transaction costs were paid from cash and cash held in trust.

8. FINANCIAL INSTRUMENTS

The Fund has the following financial instruments: cash and cash equivalents, cash held in trust, accounts receivable, loan receivable, accounts payable and accrued liabilities, distributions payable, long-term incentive plan payable, acquisition, transaction and financing costs payable, long-term debt, interest rate and cash management swap arrangements, foreign exchange contracts and foreign currency swap agreements. It is management's opinion that the Fund is not exposed to significant credit risks arising from these financial instruments.

Risk management policies

The Fund manages risk and risk exposures through a combination of insurance, derivative financial instruments, a system of internal and disclosure controls and sound business practices. The Fund uses certain derivative financial instruments to manage risks of fluctuation in interest rates and foreign exchange rates. The Fund enters into interest rate swap agreements in order to limit exposure to increases in interest rates and fix interest rates on certain portions of long-term debt. The Fund enters into foreign currency forward and option contracts to limit exposure on certain anticipated future U.S. dollar sales and cash flows. The maximum length of time over which the Fund hedges its exposure to the variability in future cash flows related to anticipated future U.S. dollar sales is no more than two years.

Currency exposures

Risk from foreign exchange arises as a result of variations in exchange rates between the Canadian and the U.S. dollar. The Fund has entered into foreign exchange contracts to hedge its foreign currency exposure on anticipated U.S. dollar sales transactions and the collection of the related accounts receivable.



At September 30, 2007, the Fund had outstanding forward foreign exchange
contracts as follows:

Settlement dates Face value Average rate
U.S. $ Cdn. $
---------------------------

October 2007 to December 2007 2,775,000 1.2346
---------------------------
---------------------------

At September 30, 2007, the Fund had outstanding a series of foreign exchange
call and put options as follows:

Settlement dates Face value Call Put
U.S. $ Cdn. $ Cdn. $
--------------------------------

October 2007 to December 2007 2,775,000 1.1363 1.2985
October 2007 to December 2007 2,775,000 1.1300 1.1975
October 2007 to December 2007 5,550,000 1.1363 1.2410
January 2008 to December 2008 7,800,000 1.0700 1.2115


Interest rate exposures

The Fund is subject to risks associated with fluctuating interest rates on its long-term debt. To manage this risk, the Fund has entered into a number of interest rate swap transactions with a Canadian chartered bank:

(a) Notional amount of Cdn. $30.675 million, expires August 31, 2008, effective interest rate of 4.38%, resulting in interest charges to the Fund of 4.38% plus a variable rate based on performance calculations.

(b) Notional amount of U.S. $11.0 million, expires August 31, 2008, effective interest rate of 5.10%, resulting in interest charges to the Fund of 5.10% plus a variable rate based on performance calculations.

(c) Notional amount of U.S. $7.5 million, expires August 31, 2008, effective interest rate of 5.10%, resulting in interest charges to the Fund of 5.10% plus a variable rate based on performance calculations.

Fair value

At September 30, 2007, the carrying value of cash and cash equivalents, cash held in trust, accounts receivable, loan receivable, accounts payable and accrued liabilities, distributions payable, long-term incentive plan payable, acquisition, transaction and financing costs payable and long-term debt approximates their fair value. At September 30, 2007, the fair value and carrying value of the foreign exchange contracts was an unrealized gain (loss) of $2,840,040 (December 31, 2006 - ($276,679)), the fair value and carrying value of the interest rate swaps that are part of an effective hedging relationship was an unrealized loss of $21,146 (December 31, 2006 - $nil) and the fair value and carrying value of the interest rate swaps that are not part of an effective hedging relationship was an unrealized gain of $Nil (December 31, 2006 - $141,398).

Over the next twelve months, the Fund expects an estimated $2.6 million in net gains from items reported in other comprehensive income as at September 30, 2007.

The following summarizes the methods and assumptions used in estimating the fair value of the Fund's financial instruments:

(a) Short-term financial instruments approximate their carrying amount due to the relatively short period to maturity. These include cash and cash equivalents, cash held in trust, accounts receivable, loan receivable, accounts payable and accrued liabilities, income taxes payable, distributions payable, long-term incentive plan payable and acquisition, transaction and financing costs payable.

(b) Long-term debt with a variable interest rate is carried at amortized cost, which reflects fair value as the interest rate is the current market rate available to the Fund.

(c) Derivatives are valued based on market quotations.

9. SEGMENTED DISCLOSURE

The Fund operates in one business segment related to the manufacturing and distributing of grain handling, storage and conditioning equipment. Geographic information about the Fund's revenues is based on the product shipment destination. Assets are based on their physical location as at the period end:



Revenue
---------------------------------------------------
Three-month period ended Nine-month period ended
---------------------------------------------------
September September September September
30, 2007 30, 2006 30, 2007 30, 2006
$ $ $ $
---------------------------------------------------

Canada 8,485,870 6,123,190 23,914,626 20,292,406
United States 30,366,144 15,176,800 75,805,135 41,425,384
International 1,946,301 749,551 4,317,412 2,608,291
---------------------------------------------------
40,798,315 22,049,541 104,037,173 64,326,081
---------------------------------------------------
---------------------------------------------------

Property, plant and
equipment, goodwill and
intangible assets as at
-------------------------
September December
30, 2007 31, 2006
$ $
-------------------------

Canada 108,283,861 105,819,068
United States 19,316,120 19,915,080
International - -
-------------------------
127,599,981 125,734,148
-------------------------
-------------------------

10. NET CHANGE IN NON-CASH WORKING CAPITAL
BALANCES RELATED TO OPERATIONS

Three-month period ended Nine-month period ended
---------------------------------------------------
September September September September
30, 2007 30, 2006 30, 2007 30, 2006
$ $ $ $
---------------------------------------------------

Accounts receivable 1,135,977 (224,645) (7,563,950) (7,796,887)
Inventory 2,335,683 702,965 706,902 (527,146)
Prepaid expenses and other
assets 64,607 (30,901) (243,143) 242,353
Accounts payable and accrued
liabilities 187,844 (742,725) 888,643 16,052
Customer deposits 280,077 149,486 (4,223,414) (2,061,487)
Income taxes payable 265,147 7,200 (182,333) (41,774)
Long-term incentive plan 157,152 213,500 (382,545) (292,501)
payable
---------------------------------------------------
4,426,487 74,880 (10,999,840)(10,461,390)
---------------------------------------------------
---------------------------------------------------


11. UNIT AWARD INCENTIVE PLAN

On May 10, 2007, the unitholders of Ag Growth approved the adoption by the Fund of the UAIP which will authorize the Trustees to grant awards ("Unit Awards") to employees or officers of the Fund or any affiliates of the Fund or who are consultants or other service providers to the Fund and its affiliates ("Service Providers"). Unit Awards may not be granted to non-management Trustees.

Under the terms of the UAIP, any Service Provider may be granted Unit Awards. Each Unit Award will entitle the holder to be issued the number of Fund Units designated in the Unit Award, upon payment of an exercise price of $0.10 per Fund Unit and such Fund Units will vest and may be issued as to one third on each of January 1, 2010, January 1, 2011 and January 1, 2012 or such earlier or later dates as may be determined by the Trustees. In lieu of receiving units, the holder, with the consent of the Fund, may elect to be paid cash for market value of the units in excess of exercise price of the units. The UAIP provides for immediate vesting of the Unit Awards in the event of retirement, death, termination without cause, or in the event the Service Provider becomes disabled.

The unitholders reserved for issuance 220,000 Fund Units, subject to adjustment in lieu of distributions, if applicable. The aggregate number of Unit Awards granted to any single Service Provider shall not exceed 5% of the issued and outstanding Fund Units. In addition:

(a) The number of Fund Units issuable to insiders at any time, under all security based compensation arrangements of the Fund, shall not exceed 10% of the issued and outstanding Fund Units; and

(b) The number of Fund Units issued to insiders, within any one year period, under all security based compensation arrangements of the Fund, shall not exceed 10% of the issued and outstanding Fund Units.

As at September 30, 2007, 220,000 Unit Awards were granted and remain outstanding. For the three month and nine-month periods ended September 30, 2007, the Fund recorded an expense of $396,896 and $686,312 respectively for the Unit Awards.

For the three-month and nine-month periods ended September 30, 2007, the 220,000 Unit Awards granted were excluded from the calculation of diluted net earnings per unit because their effect is anti-dilutive.

12. DISTRIBUTIONS TO UNITHOLDERS

The Declaration of Trust provides that the Fund will, subject to applicable law, distribute to Trust Unitholders by way of monthly distributions all of its distributable cash, being all cash received from its indirect ownership in Ag Growth Industries Limited Partnership ("AGLP"), which will carry on the business of Ag Growth, less amounts set aside for:

(a) administrative expenses and other obligations of the Fund;

(b) amounts that may be paid by the Fund in connection with any cash redemptions or repurchases of Trust Units;

(c) satisfaction of its debt service obligations (principal and interest) on indebtedness, if any; and

(d) any amount that the Trustees may reasonably consider to be necessary to provide for the payment of any costs or expenses and for reasonable reserves.

The Fund's distribution policy is to pay cash distributions on or about the 30th of each month to unitholders of record on the last business day of the preceding month.

The Fund may make additional distributions in excess of monthly distributions. The distribution in respect of the month ended December 31 of each year will include such amounts as are necessary to ensure that the Fund will not be liable for income taxes under Part I of the Tax Act. Any income of the Fund that is unavailable for cash distribution will, to the extent necessary to ensure that the Fund does not have any such income tax liability, be distributed to Trust Unitholders in the form of additional Trust Units, subject to applicable securities laws. The distribution policy may be amended only with the approval of a majority of the votes cast at a meeting of Unitholders.

For the three-month and nine-month periods ended September 30, 2007, the Fund made distributions of $4,714,500 and $14,143,500 which equated to $0.42 and $1.26 per unit, respectively. For the three-month and nine-month periods ended September 30, 2006, the Fund made consistent distributions as noted for the respective September 30, 2007 periods.

13. LONG-TERM DEBT

In July 2007, the Fund entered into a new credit facility arrangement with two financial lenders. Under the terms of the facility arrangement, the Fund has term loan availability of $48,000,000 and U.S. $18,500,000. In addition, the facility arrangement provides for operating facilities of $10,000,000 and U.S. $1,000,000. Deferred financing costs in the amount of $565,010 have been netted against the carrying value of the debt, as described in note 3. As at September 30, 2007, the Fund has drawn $49,145,115 on this facility.

The facility bears interest at a rate of prime to prime plus 1.0% per annum based on performance calculations. Collateral for the operating and term loan facilities includes a general security agreement over all assets, first position collateral mortgages on land and buildings, and assignments of rents and leases and security agreements for patents and trademarks. The new credit facility matures on August 31, 2008. Under the terms of the credit facility agreement, if the lenders elect to not extend the operating loan and term loan facilities beyond the August 31, 2008 maturity date, all amounts outstanding under the facilities become repayable in four equal quarterly instalments of principal, commencing November 30, 2009.

Principal repayments due within the next four fiscal years, if the term loans are not further renewed and are repayable commencing November 30, 2009, are as follows:



$
------------
2007 (October 1 - December 31) 5,784
2008 11,825
2009 12,286,202
2010 36,841,304
------------
49,145,115
------------
------------


14. SUBSEQUENT EVENT

On October 2, 2007, the Fund completed an equity financing whereby it issued 1,730,000 Trust Units at a price of $26.00 per Trust Unit for gross proceeds of $45,000,000. Expenses incurred in connection with the offering, including commissions payable to the underwriters, are estimated at $2,300,000. Subsequent to September 30, 2007, the Fund repaid $30,675,000 and U.S. $12,000,000 of its outstanding long-term debt.

Contact Information

  • Ag Growth Income Fund
    Steve Sommerfeld
    Investor Relations
    (204) 489-1855
    Email: steve@aggrowth.com