Fonds de revenu Morneau Sobeco
TSX : MSI.UN

Fonds de revenu Morneau Sobeco

14 août 2007 15h40 HE

Morneau Sobeco dévoile ses résultats du deuxième trimestre de 2007

Points saillants : - Augmentation des revenus du trimestre de 13 % par rapport à la même période en 2006 - Marge du BAIIA de 22,7 % pour le trimestre - Constatation d'un impôt à payer résultant de l'adoption des nouvelles mesures fiscales du gouvernement fédéral touchant les fiducies de revenu - Etats financiers à retraiter pour corriger une erreur dans la constatation d'impôts futurs - Effet favorable du retraitement des états financiers sur le bénéfice net; aucune incidence sur le rendement d'exploitation ni sur les perspectives d'avenir - Revenus et bénéfices conformes aux attentes - Transition relative à la seconde acquisition conforme aux objectifs

TORONTO, ONTARIO--(Marketwire - 14 août 2007) - NE PAS ACHEMINER AUX FILS DE PRESSE AMERICAINS NI DISTRIBUER AUX ETATS-UNIS

Le Fonds de revenu Morneau Sobeco (le "Fonds") (TSX:MSI.UN) a dévoilé aujourd'hui des résultats d'exploitation favorables, soit une augmentation des revenus de 13 %, pour le deuxième trimestre de 2007. Le Fonds a aussi annoncé le retraitement de ses états financiers pour toutes les périodes, afin de corriger une erreur résultant d'une mauvaise application de lignes directrices techniques de comptabilité.

Retraitement des états financiers

Lors de l'évaluation des effets des récentes modifications adoptées par le gouvernement fédéral relativement à l'imposition des fiducies de revenu, Morneau Sobeco a découvert qu'une erreur dans ses états financiers antérieurs avait entraîné une sous-évaluation du bénéfice net. Cette erreur réside dans la constatation des impôts futurs à recevoir et à payer pour une filiale imposable du Fonds à l'égard des différences dans la valeur aux fins comptables et fiscales des coûts d'émission initiaux des parts du Fonds, des actifs incorporels et des immobilisations.

La correction de cette erreur dans les états financiers passés se répercutera favorablement sur le bénéfice net du Fonds, et n'aura aucun effet sur les mesures financières non définies par les PCGR du Fonds, comme cela est exposé en détail dans notre rapport de gestion. Le bénéfice imposable du Fonds demeure lui aussi inchangé. La correction n'aura pas non plus de conséquences sur le rendement d'exploitation de Morneau Sobeco, ni sur ses perspectives d'avenir.

Morneau Sobeco rendra publics le plus rapidement possible ses états financiers retraités pour toutes les périodes depuis le 30 septembre 2005.

Voici un résumé des postes des états financiers qui sont touchés par cette correction.



Information financière consolidée
(en milliers de dollars, sauf pour
les montants relatifs aux unités)
Période de trois mois terminée 31 mars 31 décembre 30 septembre
2007 2006 2006
Retraité Retraité Retraité
Bénéfice et autres éléments du
résultat étendu
Recouvrement d'impôts
(charges) - futurs
Antérieurement (123)$ (134) $ 80 $
Retraité 855 $ 574 $ 941 $

Bénéfice net
Antérieurement 2 268 $ 2 449 $ 1 798 $
Retraité 3 045 $ 3 010 $ 2 482 $

Bénéfice net par unité
Antérieurement 0,10279 $ 0,11100 $ 0,08148 $
Retraité 0,13799 $ 0,13644 $ 0,11249 $

Bilan
Total de l'actif
Antérieurement 293 330 $ 300 546 $ 299 723 $
Retraité 338 530 $ 345 872 $ 345 398 $

Impôts à recevoir (à payer) -- nets
Antérieurement 618 $ 742 $ 875 $
Retraité (29 808)$ (30 664)$ (31 236)$

Avoir des détenteurs de parts
Antérieurement 192 010 $ 194 399 $ 196 754 $
Retraité 202 007 $ 203 619 $ 205 413 $


Information financière consolidée
(en milliers de dollars, sauf pour
les montants relatifs aux unités)
Période de trois mois terminée 30 juin 31 mars 31 décembre
2006 2006 2005
Retraité Retraité Retraité
Bénéfice et autres éléments du
résultat étendu
Recouvrement d'impôts
(charges) - futurs
Antérieurement 163 $ 32 $ 64 $
Retraité 3 033 $ 878 $ - $

Bénéfice net
Antérieurement 3 355 $ 2 158 $ 2 099 $
Retraité 5 646 $ 2 835 $ 2 048 $

Bénéfice net par unité
Antérieurement 0,15245 $ 0,09821 $ 0,09553 $
Retraité 0,25650 $ 0,12900 $ 0,09318 $

Bilan
Total de l'actif
Antérieurement 307 188 $ 297 753 $ 303 718 $
Retraité 353 149 $ 342 322 $ 348 551 $

Impôts à recevoir (à payer) -- nets
Antérieurement 795 $ 632 $ 600 $
Retraité (32 177)$ (33 289)$ (34 167)$

Avoir des détenteurs de parts
Antérieurement 199 506 $ 199 618 $ 201 992 $
Retraité 207 481 $ 205 301 $ 206 999 $


Résultats du deuxième trimestre de 2007

Les résultats financiers du Fonds pour le deuxième trimestre de 2007 révèlent une croissance des revenus de 4,3 millions de dollars, soit 13,0 %, passant à 37,1 millions de dollars comparativement à 32,8 millions de dollars pour la même période en 2006. Cette augmentation des revenus est attribuable à de nouveaux mandats pour divers clients dans les secteurs des services-conseils et des services d'impartition. Une partie de cette augmentation, 1,6 million de dollars, provient de l'acquisition de Heath experts conseils en avantages sociaux ("Heath") en juin 2006 et une autre, 0,3 million de dollars, de l'acquisition des services administratifs et des services-conseils actuariels en régimes de retraite à prestations déterminées ("activités PD de Cowan") de Cowan Benefits Consulting Limited en juin 2007. Cette dernière acquisition est décrite en détail plus loin.

Le bénéfice avant intérêts, impôts et amortissement (BAIIA) a augmenté de 9,6 % durant la période de trois mois terminée le 30 juin 2007, tandis que la marge du BAIIA est demeurée solide à 22,7 % après rajustement pour l'acquisition de Heath.

"Au deuxième trimestre, nous avons atteint les objectifs que nous nous étions fixés, aussi bien sur le plan des revenus que sur celui des bénéfices", déclare Bill Morneau, président et chef de la direction. "Ce trimestre a été marqué par la réalisation de notre deuxième acquisition. Tout semble indiquer que 2007 sera une autre bonne année pour Morneau Sobeco."

Comme nous l'avons déjà annoncé au cours du trimestre, une filiale du fonds s'est portée acquéreur de certains éléments d'actif et de passif ainsi que de contrats qui ont trait aux activités PD de Cowan. Cette transaction a été conclue le 1(er) juin 2007. Selon les modalités de l'entente, le prix d'achat est lié aux revenus de clôture des services administratifs et des services-conseils actuariels en régimes de retraite ainsi qu'à d'autres conditions d'intégration. Nous nous attendons à ce que le montant de la transaction soit d'environ 6 millions de dollars.

"L'intégration des activités PD de Cowan se déroule comme prévu", affirme Fred Vettese, vice-président exécutif et actuaire en chef. "Nous sommes satisfaits des efforts de l'équipe de transition."

Cette transaction confirme la volonté de Morneau Sobeco de prendre de l'expansion en Ontario et, plus particulièrement, dans la région de Waterloo. L'acquisition des activités PD de Cowan a été financée par consolidation de dette et sera favorable pour les détenteurs de parts du Fonds de revenu Morneau Sobeco au troisième trimestre.

En raison de l'adoption, par le gouvernement fédéral, de changements au mode d'imposition des fiducies de revenu, le Fonds a constaté un impôt futur à payer de 2,7 millions de dollars au 30 juin 2007, qui représente des différences temporaires existant entre les bases de calcul comptables et fiscales des actifs incorporels. Ce changement dans les charges fiscales, combiné au changement de taux d'imposition pour 2006, s'est traduit par une diminution du bénéfice net du Fonds portant celui-ci à 1,7 million de dollars pour le trimestre terminé le 30 juin 2007, par rapport à un bénéfice net de 5,6 millions pour la période correspondante en 2006.

Les résultats du deuxième trimestre de 2007 du Fonds de revenu Morneau Sobeco feront l'objet d'une discussion, lors d'une conférence téléphonique avec Bill Morneau, président et chef de la direction, et Nancy Lala (anciennement Reid), chef des finances, cet après-midi, le mardi 14 août 2007, à 16 h (HAE). La conférence téléphonique est ouverte à toutes les personnes qui souhaitent y prendre part, et une période de questions est prévue à la fin de la présentation. Pour participer à la conférence en direct, veuillez appeler au 416 641-6110, à partir de la région de Toronto, ou au 1 866 542-4237 d'ailleurs au Canada. La conférence sera rediffusée sur le site Web de Morneau Sobeco, à www.morneausobeco.com.

A propos de Morneau Sobeco

Morneau Sobeco est le plus important cabinet de services-conseils et d'impartition en régimes de retraite et d'assurance collective détenu par des intérêts canadiens, offrant ses services à des entreprises de partout au Canada et aux Etats-Unis. Comptant plus de 1 100 employés répartis dans 13 villes nord-américaines, Morneau Sobeco met l'accent sur l'intégration de la conception et de l'administration de régimes de retraite et d'assurance collective depuis plus de 40 ans. Les parts du Fonds de revenu Morneau Sobeco sont négociées à la Bourse de Toronto sous le symbole MSI.UN. De plus amples renseignements sur Morneau Sobeco sont disponibles sur le site Web du cabinet, à www.morneausobeco.com.

Mesures financières non définies par les PCGR

Le BAIIA ne constitue pas une mesure reconnue du bénéfice selon les principes comptables généralement reconnus (PCGR) et n'a aucune signification normalisée reposant sur ceux-ci. Par conséquent, cette donnée ne peut être comparée à des mesures semblables proposées par d'autres entités. Les investisseurs doivent se tenir avertis de ne pas considérer les mesures financières non définies par les PCGR comme un équivalent des bénéfices nets ou des pertes nettes déterminés selon les PCGR à titre d'indicateurs de rendement du Fonds ou des flux de trésorerie provenant des activités d'exploitation, d'investissement et de financement comme mesure des liquidités et des flux de trésorerie.

Enoncés prospectifs

Certaines déclarations contenues dans le présent communiqué ont un caractère prospectif au sens des lois sur les valeurs mobilières applicables, comme les énoncés au sujet d'événements, de résultats, de circonstances, de rendements ou de prévisions futurs anticipés qui ne sont pas des faits historiques. Les énoncés contenant des verbes tels que "pouvoir", "s'attendre" et "croire" ou d'autres termes susceptibles de créer un effet semblable peuvent constituer des énoncés prospectifs. Ces énoncés ne sauraient garantir tout rendement futur et sont assujettis à de nombreux risques et à de nombreuses incertitudes, dont ceux décrits dans nos documents déposés auprès du public (qui sont disponibles en anglais sur le site Web SEDAR, à www.sedar.com). Ces risques et incertitudes comprennent les questions d'ordre fiscal, la capacité de maintenir la rentabilité et de gérer l'expansion, la dépendance à l'égard des systèmes d'information et de la technologie, la réputation, la dépendance à l'égard de clients et de spécialistes clés et les conditions économiques générales. Un grand nombre de ces risques et incertitudes peuvent influencer nos résultats réels et faire en sorte que ceux-ci diffèrent considérablement de ceux exprimés explicitement ou implicitement dans tout énoncé prospectif émis par nous ou en notre nom. En raison de ces risques et incertitudes, il est recommandé aux investisseurs de ne pas indûment considérer ces énoncés prospectifs comme des prédictions de résultats futurs. Tous les énoncés prospectifs du présent communiqué de presse sont faits sous réserve de la présente mise en garde. Ces énoncés sont faits en date du présent communiqué de presse et, sauf pour nous conformer aux lois applicables, nous n'assumons aucune obligation de mettre à jour ou de réviser publiquement tout énoncé prospectif en raison de nouveaux renseignements, d'événements futurs ou pour toute autre raison. De plus, nous n'assumons aucune obligation de commenter toute analyse, prévision ou tout énoncé émis par une tierce partie à l'égard du Fonds, de ses résultats financiers ou d'exploitation ou encore de son titre.

(Nota : Les états financiers et le rapport de gestion du Fonds de revenu Morneau Sobeco pour le deuxième trimestre de 2007 ne sont présentement disponibles qu'en anglais. Certains documents financiers seront disponibles sous peu en français sur le site Web de Morneau Sobeco, à www.morneausobeco.com.)


Unaudited Consolidated Financial Statements of

MORNEAU SOBECO INCOME FUND

For the three and six months ended June 30, 2007



MORNEAU SOBECO INCOME FUND
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands of dollars)
--------------------------------------------------------------------------
As at As at
June 30, December 31,
2007 2006

--------------------------------------------------------------------------
(Restated -
Note 19)
Assets
Current assets:
Cash $- $5,257
Accounts receivable 29,387 23,315
Unbilled fees 3,345 4,117
Income taxes recoverable - 774
Prepaid expenses and other 1,766 1,875
----------------------
34,498 35,338

Future income taxes (note 11) 3,971 4,383
Interest-rate swap (note 6) 908 840
Capital assets (note 4) 10,475 10,833
Intangible assets (note 5) 123,266 125,027
Goodwill 169,451 169,451
----------------------
$342,569 $345,872
----------------------
----------------------
Liabilities and Unitholders' Equity
Current liabilities:
Bank indebtedness (note 6) $434 $-
Accounts payable and accrued liabilities 5,848 5,868
Accrued compensation and related benefits 3,302 7,025
Unitholder distributions payable (including
non-controlling) 2,646 2,793
Income taxes payable 66 -
Operating line of credit (note 6) 3,800 -
----------------------
16,096 15,686
Insurance premium liabilities:
Payable to insurance companies 8,807 9,108
Less related cash and investments held (8,807) (9,108)
----------------------
- -

Long-term debt (note 6) 34,888 35,000
Future considerations related to acquisition
(note 3) 2,044 -
Future income taxes (note 11) 34,929 35,047
----------------------
87,957 85,733
----------------------
Non-controlling interest (note 8) 55,794 56,520

Unitholders' equity:
Fund units (note 7) 210,607 210,607
Deficit (11,789) (6,988)
----------------------
198,818 203,619
----------------------
$342,569 $345,872
----------------------
----------------------

Commitments and Contingencies (notes 3, 14 and 15)
See accompanying notes to consolidated financial statements



"Robert Chisholm" "William Morneau"

Robert Chisholm William Morneau
Trustee, Audit Committee Chair Trustee, President and CEO



MORNEAU SOBECO INCOME FUND
CONSOLIDATED STATEMENTS OF INCOME,
OTHER COMPREHENSIVE INCOME AND DEFICIT
For the three and six months ended
(Unaudited)
(In thousands of dollars, except per unit amounts)
--------------------------------------------------------------------------
Three months ended Six months ended
----------------------------------------
June 30, June 30, June 30, June 30,
2007 2006 2007 2006
----------------------------------------
(Restated (Restated
-Note 19) -Note 19)
----------------------------------------
Revenue
Fees $32,289 $29,625 $63,467 $58,921
Commissions 4,626 3,105 9,402 5,866
Other 142 63 279 184
----------------------------------------
37,057 32,793 73,148 64,971
Expenses
Salaries and benefits 21,574 18,737 43,247 37,636
Other operating 7,377 6,384 13,930 12,436
Amortization of capital assets
(note 4) 547 523 1,070 1,021
Amortization of intangible
assets (note 5) 3,807 3,627 7,582 7,168
Interest expenses (income)
(note 6) 315 (692) 768 (231)
----------------------------------------
33,620 28,579 66,597 58,030
Income before income taxes and
non-controlling interest 3,437 4,214 6,551 6,941

Income taxes (recovery)(note 11)
Current 173 172 307 234
Future 1,149 (3,033) 294 (3,912)
----------------------------------------
1,322 (2,861) 601 (3,678)
----------------------------------------
Income before non-controlling
interest 2,115 7,075 5,950 10,619

Non-controlling interest (note 8) (435) (1,429) (1,225) (2,138)
----------------------------------------
Net income 1,680 5,646 4,725 8,481
Other comprehensive income
(note 2(l)) - - - -
Comprehensive income 1,680 5,646 4,725 8,481
----------------------------------------

Deficit, beginning of period -
as previously reported (13,539) (4,859) (11,150) (2,484)
Adjustment for future income
taxes accounting error (note 19) 4,939 626 4,162 (51)
----------------------------------------
Deficit, beginning of
period-as restated (8,600) (4,233) (6,988) (2,535)
Distributions declared (note 9) (4,869) (4,539) (9,526) (9,072)
----------------------------------------
Deficit, end of period - as
restated $(11,789) $(3,126) $(11,789) $(3,126)
----------------------------------------
----------------------------------------
Net income per Unit (basic and
diluted) (note 13) $0.07614 $0.25650 $0.21413 $0.38576
----------------------------------------
----------------------------------------



MORNEAU SOBECO INCOME FUND
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three and six months ended
(Unaudited)
(In thousands of dollars)
-------------------------------------------------------------------------
Three months ended Six months ended
----------------------------------------
June 30, June 30, June 30, June 30,
2007 2006 2007 2006
(Restated (Restated
Cash provided by (used in): -Note 19) -Note 19)
Operating activities

Net income $ 1,680 $ 5,646 $ 4,725 $ 8,481
Items not involving cash:
Amortization of capital assets
(note 4) 547 523 1,070 1,021
Amortization of intangible
assets (note 5) 3,807 3,627 7,582 7,168
Amortization of debt issue
costs (note 6) 13 - 26 -
Non-controlling interest of
Class B LP Units 435 1,429 1,225 2,138
Future income taxes 1,149 (3,033) 294 (3,912)
Salary component of Heath
acquisition (note 3) 300 - 520 -
Fair value of interest-rate
swap agreements (note 6) (132) (1,113) (68) (1,113)
----------------------------------------
7,799 7,079 15,374 13,783
Change in non-cash operating
working capital:
Accounts receivable (3,755) 588 (6,072) (2,661)
Unbilled fees 1,870 (307) 772 493
Income taxes
recoverable/payable 166 864 840 1,005
Prepaid expenses and other (236) (232) (22) (172)
Accrued compensation and
related benefits 1,397 1,370 (3,858) (2,000)
Accounts payable and accrued
liabilities 682 (112) (143) (449)
----------------------------------------
7,923 9,250 6,891 9,999
Financing activities
Operating line of credit (note
6) 3,800 5,100 3,800 5,100
Distributions paid (6,092) (5,644) (12,143) (11,320)
----------------------------------------
(2,292) (544) (8,343) (6,220)
Investing activities
Business acquisition (note 3) (3,783) (5,098) (3,783) (5,098)
Cash and bank indebtedness
assumed (note 3) 256 (907) 256 (907)
Purchase of capital assets (576) (230) (712) (370)
----------------------------------------
(4,103) (6,235) (4,239) (6,375)
Net increase (decrease) in
cash for the period 1,528 2,471 (5,691) (2,596)
----------------------------------------
Cash, (bank indebtedness)
beginning of period (1,962) (719) 5,257 4,348
----------------------------------------
Cash (bank indebtedness), end
of period $(434) $1,752 $(434) $1,752
----------------------------------------
----------------------------------------
Supplemental disclosures:
Interest paid $468 $590 $845 $1,045
Income taxes paid (refunded) $(9) $(486) $(486) $(447)

-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.



MORNEAU SOBECO INCOME FUND
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three and six months ended June 30, 2007
(Unaudited)
(In thousands of dollars, except per unit amounts)


1. ORGANIZATION AND NATURE OF THE BUSINESS

Morneau Sobeco Income Fund (the "Fund") is an unincorporated, open-ended, limited purpose trust established under the laws of the Province of Ontario on August 22, 2005.

The Fund is the largest Canadian-owned pension and benefits consulting and outsourcing firm, providing services to organizations across Canada and in the United States. The Fund focuses on the integrated design and delivery of retirement, employee compensation and benefit programs.

2. SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements of the Fund have been prepared by management in accordance with Canadian generally accepted accounting principles and the significant accounting policies are summarized below:

(a) Basis of presentation

These consolidated financial statements include the assets, liabilities, revenue and expenses of the following entities:



% Ownership
-----------
Morneau Sobeco Limited Partnership ("MSLP") 79.4
Morneau Sobeco Group Limited Partnership ("MS Group LP") 79.4
Morneau Sobeco, Ltd. ("MSUS") 79.4
Morneau Sobeco Corporation ("MS Corp") 79.4
Morneau Sobeco Trust ("Trust") 100
Morneau Sobeco GP Inc. ("MS GP") 100


All material intercompany transactions have been eliminated upon consolidation.

(b) Measurement uncertainties

The preparation of financial statements 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 consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

(C) Revenue recognition and unbilled fees

Fees for administrative, actuarial and consulting services are recognized when the services are rendered.

Unbilled fees are recorded at the lower of unbilled hours worked at normal billing rates and the amount which is estimated to be recoverable upon invoicing.

Commissions are recognized when earned which is at the later of the billing or effective date of the policy, net of a provision for return commissions due to policy cancellation.

Investment income is recorded on the accrual basis.

(d) Foreign currency translation

Monetary assets and liabilities denominated in foreign currencies have been translated into Canadian dollars at the exchange rate prevailing at the consolidated balance sheet dates. Non-monetary items have been translated into Canadian dollars at the exchange rate prevailing when the assets were acquired or obligations incurred. Revenue and expenses have been translated at rates in effect on the transaction dates. Exchange gains or losses are reflected in income for the period.

(e) Capital assets

Capital assets are stated at their initial capital cost less accumulated amortization. Amortization is recognized over the assets' estimated useful lives as follows:



Asset Basis Rate
----- ----- ----
Computer equipment Declining balance 30%
Furniture and equipment Declining balance 20%
Leasehold improvements Straight-line Over term of the lease


(f) Intangible assets and goodwill

Intangible assets consist principally of customer relationships, proprietary software and customer contracts, based on management's best estimate of the relative fair values. These intangible assets are being amortized on a straight-line basis over their estimated useful lives of 15 to 20, 5 and 3 years, respectively.

Goodwill is not amortized and is subject to an annual impairment test. Goodwill impairment is assessed based on a comparison of the estimated fair value of the Fund and the carrying value of its net assets including goodwill. An impairment loss will be recognized if the carrying amount of the Fund's net assets exceeds its estimated fair value.

(g) Impairment of long-lived assets

The Fund periodically reviews the useful lives and the carrying values of its long-lived assets for continued appropriateness. The Fund reviews long-lived assets for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. An impairment loss is measured at the amount by which the carrying amount of the long-lived asset exceeds its fair value.

(h) Insurance premium liabilities and related cash and investments

In its capacity as consultants, the Fund collects premiums from insureds and remits premiums, net of agreed deductions, such as taxes, administrative fees and commissions, to insurance underwriters. These are considered flow-through items for the Fund and, as such, the cash and investment balances relating to these liabilities are deducted from the related liability in the consolidated balance sheet.

(i) Long-term incentive plan

The Fund has a long-term incentive plan under which participants are eligible to receive Units. The amount awarded under this plan is recorded as salaries and benefits expense on a straight- line basis over the three-year vesting period.

(j) Employee future benefits

The Fund offers a pension benefit plan for its employees, which includes a defined benefit option and a defined contribution option.

The defined benefit option was closed effective January 1, 1998 and included 8 employees, 5 retirees and 54 deferred vested members as at June 30, 2007. All other employees are covered by the defined contribution option of the plan.

The Fund accrues its obligations under the defined benefit option of the plan as the employees render the services necessary to earn the pension. For the defined contribution option, the Fund matches member contributions and may be required to make additional contributions at the option of the member, up to the limits defined in the plan text.

(k) Income taxes

The Fund uses the asset and liability method of accounting for income taxes. Future income taxes are recognized for the temporary differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Future income tax assets and liabilities are measured using enacted or substantively enacted tax rates and laws that are expected to apply to taxable income in the years in which those temporary differences are expected to be reversed or settled. The effect on future income tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the date of enactment or substantive enactment (note 11).

(l) Financial instruments

Effective January 1, 2007, the Fund adopted the new recommendations of the Canadian Institute of Chartered Accountants (CICA) Handbook Section 1530, Comprehensive Income; Section 3855, Financial Instruments - Recognition and Measurement; and, Section 3865, Hedges, retroactively without restatement. These new Handbook Sections provide requirements for the recognition and measurement of financial instruments and the use of hedge accounting. Section 1530 establishes standards for reporting and presenting comprehensive income, which is defined as the change in equity from transactions and other events from non-owner sources. Other comprehensive income refers to items recognized in comprehensive income that are excluded from net income calculated in accordance with generally accepted accounting principles.

Under Section 3855, financial instruments must be classified into one of these five categories: held-for-trading, held-to-maturity, loans and receivables, available-for-sale financial assets or other financial liabilities. All financial instruments, including derivatives, are measured in the balance sheet at fair value except for loans and receivables, held-to-maturity investments and other financial liabilities which are measured at amortized cost. Subsequent measurement and changes in fair value will depend on their initial classification, as follows: held-for-trading financial assets are measured at fair value and changes in fair value are recognized in net income; available-for-sale financial instruments are measured at fair value with changes in fair value recorded in other comprehensive income until the investment is derecognized or impaired at which time the amounts would be recorded in net income; and financial assets held-to-maturity, loan and receivables and other financial liabilities are measured at amortized cost using the effective interest method of amortization. Transaction costs are expensed as incurred for financial instruments classified or designated as held-for-trading. For other financial instruments, transaction costs are capitalized on initial recognition.

Upon adoption of these new standards, the Fund designated its cash and short-term investments as held-for-trading, which are measured at fair value. Accounts receivable is classified as loans and receivables, which are measured at amortized cost. Bank indebtedness, accounts payable and accrued liabilities, accrued compensation and related benefits, unitholder distributions payable and long-term debt, are classified as other financial liabilities. The Fund had neither available for sale, nor held-to-maturity instruments as at June 30, 2007.

Interest-rate swap agreements are used as part of the Fund's program to manage the fixed and floating interest rate mix of the Fund's total debt outstanding and related overall cost of borrowing. The interest-rate swap agreements involve the periodic exchange of payments without the exchange of the notional principal amount upon which the payments are based. The interest-rate swap agreements are classified as held-for-trading and are recorded at their fair value with a corresponding adjustment to interest expense.

The adoption of these Handbook Sections had no impact on opening deficit. The Fund had no "other comprehensive income or loss" transactions during the three and six months ended June 30, 2007 and no opening or closing balances for accumulated other comprehensive income or loss.

3. BUSINESS ACQUISITION

(a) Cowan Benefits Consulting Limited

On June 1, 2007, a subsidiary of the Fund directly acquired certain assets, liabilities and contracts of the defined benefit pension administration and actuarial consulting practices ("Cowan DB business") of Cowan, a benefits consulting firm based in the Waterloo region, in Ontario. The purchase price is based on the final pension administration and actuarial consulting services revenue and certain other integration conditions and is expected to be approximately $6 million. The acquisition will be paid in three instalments.

The first instalment was made on the closing date of June 1, 2007 and was funded by $3,800 of the operating line of credit. In addition, the Fund issued a standby letter of credit in the amount of $400 which will be paid on or before December 31, 2008 to the extent the vendor has performed all of its transition services obligations. The second and third instalments are subject to the purchase price adjustment and will be payable on August 1, 2008 and August 1, 2009, respectively.

The contingent consideration has been recognized to the extent the acquired assets net of liabilities assumed exceed the first instalment of the purchase price. The acquisition has been accounted for by the purchase method based on management's best estimate of the relative fair value of the identifiable assets and liabilities acquired.



Assets, Liabilities and Contacts acquired:

Assets and liabilities acquired:
Cash $256
Prepaid expenses and other 6
Intangible assets 5,821
Accrued compensation and related benefits (135)
Accounts payable and accrued liabilities (121)
-------
$5,827
-------

Consideration:
Cash (financed via operating line of credit) $3,783
Future considerations 2,044
-------
$5,827
-------


These consolidated financial statements include the results of the Cowan DB business from the date of acquisition.

(b) Heath Benefits Consulting Inc. ("Heath")

On June 1, 2006, the Fund indirectly acquired all of the issued and outstanding shares of Heath, a Vancouver-based benefits consulting firm with over 90 employees across Canada.

The consideration is based on future revenue from the Heath business with a minimum purchase price of $9,014. The consideration, which is currently estimated to be approximately $15 million, is being paid in three instalments and is satisfied primarily through the assumption and repayment of the Heath debt of $4,648 on closing and the issuance of Class B LP Units of MS Group LP.

The first instalment of the purchase price was made on closing. The purchase price is conditional upon the success in retaining and growing revenue from specified Heath clients, as well as achieving targeted cost efficiencies. The second and third instalments, which represent contingent consideration, will be settled on June 30 and December 1 of 2008 and are currently estimated to be approximately $6 million. These instalments will be settled by issuing a number of Class B LP Units of MS Group LP based on a pre-determined value of $12.52 per unit. In addition to the estimate of $15 million, contingent consideration will include amounts to compensate for foregone distributions payable on its second and third instalments during the period June 1, 2006 to December 1, 2008, which amounted to approximately $434 to the end of June 30, 2007.

These contingent consideration elements will be recorded when the final purchase price has been established except for a portion of the third instalment which is conditional on the continuing employment of certain selling shareholders and is being recorded as salary expense over the required employment period to December, 2008. The estimated payable amount as at June 30, 2007 is $1,033 and the expense for the three and six months ended June 30, 2007 was $300 and $520, respectively.

The acquisition has been accounted for by the purchase method based on management's best estimate of the relative fair value of the identifiable assets and liabilities assumed. The first instalment of the purchase price has been accounted for as follows:



Assets and liabilities acquired:
Cash $827
Accounts receivable 1,530
Income taxes recoverable 106
Prepaid expenses and other 101
Capital assets 365
Intangible assets 8,090
Goodwill (Restated - Note 19) 3,179
Bank indebtedness (1,734)
Accounts payable and accrued liabilities (1,527)
Future income tax liability (Restated - Note 19) (1,923)
Payable to insurance companies (3,156)
Related cash balances held 3,156
--------
$9,014
--------
Consideration:
Cash $449
Debt assumed and repaid 4,648
Exchangeable Units (first instalment paid on June 20, 2006) 3,917
--------
$9,014
--------

These consolidated financial statements include the results of Heath from
the date of acquisition.

4. CAPITAL ASSETS
The Fund's capital assets are comprised of:

-------------------------------------------------
Accumulated Net Book Net Book
Cost Amortization Value Value
June 30, June 30, December
2007 2007 31, 2006
-------------------------------------------------
Computer equipment $2,085 $(797) $1,288 $1,401
Furniture and equipment 3,542 (967) 2,575 2,675
Leasehold improvements 8,532 (1,920) 6,612 6,757
-------------------------------------------------
$14,159 $(3,684) $10,475 $10,833
-------------------------------------------------
-------------------------------------------------

Amortization for the three months ended June 30, 2007 and June 30, 2006
were $547 and $523 and for the six months ended June 30, 2007 and
June 30, 2006 were $1,070 and $1,021, respectively.

5. INTANGIBLE ASSETS

The Fund's intangible assets are comprised of:

-------------------------------------------------
Accumulated Net Book Net Book
Cost Amortization Value Value
June 30, June 30, December
2007 2007 31, 2006
-------------------------------------------------
Customer relationships $103,911 $(8,532) $95,379 $92,110
Customer contracts 5,000 (3,113) 1,887 2,917
Proprietary software 40,000 (14,000) 26,000 30,000
-------------------------------------------------
$148,911 $(25,645) $123,266 $125,027
-------------------------------------------------
-------------------------------------------------


Amortization for the three months ended June 30, 2007 and June 30, 2006
were $3,807 and $3,627 and for the six months ended June 30, 2007
and June 30, 2006 were $7,582 and $7,168 respectively.

6. BANK INDEBTEDNESS AND LONG-TERM DEBT

June 30, 2007 December 31, 2006
---------------------------------
Secured term loan $35,000 $35,000
Debt issue costs, net of accumulated
amortization (112) -
---------------------------------
---------------------------------
$34,888 $35,000
---------------------------------
---------------------------------


The secured term loan of $35,000 is with two Canadian chartered banks repayable in full on September 30, 2009. The term loan bears interest at the bankers' acceptance rate plus 1%.

The Fund entered into interest-rate swap agreements on September 30, 2005 in order to fix the interest rate at 4.4% for the duration of the loan. These interest-rate swap agreements have been recorded at their fair value with the corresponding adjustment to interest expense. As at June 30, 2007 the fair value of the swap was $908 (December 31, 2006 - $840) and the adjustment to interest expense for the three and six months ended June 30, 2007 was $(132) and $(68), respectively (for the three and six months ended June 30, 2006 - $(1,113)).

As a result of adopting the new financial instruments standard in 2007, debt issue costs incurred on the secured term loan have been reclassified from prepaid expenses and other, to long-term debt. The corresponding amortization of $13 and $26 for the three and six months ended June 30, 2007 respectively have been removed from other operating expenses and is now reflected as interest expenses. The debt issue costs, net of accumulated amortization as at December 31, 2006 were $137 and have not been restated.

The Fund also has available a secured operating line of credit for $15,000 with $4,234 drawn at June 30, 2007 of which $3,800 is related to the Cowan DB business acquisition and is repayable on August 31, 2007. The line of credit bears interest at the bankers' acceptance rate plus 1% and the undrawn portion incurs a standby fee of 0.2% . The bank indebtedness and term loan are secured by a general assignment of the assets of the Fund.

The Fund as part of the Cowan DB business acquisition issued a standby letter of credit of $400 to the vendor.

7. FUND UNITS

The Fund is authorized to issue an unlimited number of Units and an unlimited number of special voting units ("Special Voting Units"). Special Voting Units are not entitled to any beneficial interest in any distribution from the Fund.

Units are redeemable at any time on demand by the Unitholders up to an aggregate maximum monthly amount of $50. Trustees may, in their sole discretion, waive this limitation. The redemption price is calculated based on the lesser of:

(i) 90% of the "market price", as defined in the prospectus, as of the date on which the Units were surrendered for redemption; and

(ii) 100% of the "closing market price", as defined in the prospectus, on the redemption date.

The following details the issued and outstanding Units and Special Voting Units:



-----------------------------------------------------------------------
June 30, 2007 December 31, 2006
Units Issued Amount Units Issued Amount
-----------------------------------------------------------------------
(Restated
Note 19)
-----------------------------------------------------------------------
Units 22,062,916 $210,607 22,062,916 $210,607
Special Voting Units 5,721,444 - 5,721,444 -
-----------------------------------------------------------------------
27,784,360 $210,607 27,784,360 $210,607
-----------------------------------------------------------------------
-----------------------------------------------------------------------


8. NON-CONTROLLING INTEREST

The former shareholders of Morneau Sobeco and Heath own 5,721,444
Class B LP Units of MS Group LP. The Class B LP Units are fully
exchangeable for equal Units in the Fund, subject to certain
restrictions, and provide the former shareholders of Morneau Sobeco
and Heath with a non-controlling interest of 20.6% in the Fund.
Some of the Class B LP Units are subordinated in their rights to receive
distributions.

June 30, 2007 December 31, 2006
--------------------------------------
Units Amount Units Amount
Issued Issued
--------------------------------------
Subordinated Class B LP Units 4,095,060 $40,951 4,095,060 $40,951
Non-subordinated Class B LP Units 1,626,384 16,836 1,626,384 16,836
--------------------------------------
5,721,444 $57,787 5,721,444 $57,787
--------------------------------------


Three Months ended
-------------------
June 30, 2007 June 30, 2006
------------- -------------
(Restated
- Note 19)
Units Units
------ ------
Issued Amount Issued Amount
------ ------ ------ ------
Balance, beginning
of period - restated note 19 5,721,444 $56,322 5,494,303 $53,885
June 1, 2006 units issued - - 312,845 3,917
(Heath acquisition)

Exchange units - - (85,704) (1,073)
Salary component Of Heath - 300 - -
acquisition (note 3)
Share of net income for the
period - restated note 19 - 435 - 1,429
Distributions for the period - (1,263) - (1,149)
---------------------------------------
Balance, end of period 5,721,444 $55,794 5,721,444 $57,009
---------------------------------------



Six Months ended
-------------------
June 30, 2007 June 30, 2006
------------- -------------
(Restated
- Note 19)
Units Units
------ ------
Issued Amount Issued Amount
------ ------ ------ ------
Balance, beginning
of period - restated note 19 5,721,444 $56,520 5,494,303 $54,309
June 1, 2006 units issued - - 312,845 3,917
(Heath acquisition)

Exchange units - - (85,704) (1,073)
Salary component Of Heath - 520 - -
acquisition (note 3)
Share of net income for the
period - restated note 19 - 1,225 - 2,138
Distributions for the period - (2,471) - (2,282)
---------------------------------------
Balance, end of period 5,721,444 $55,794 5,721,444 $57,009
---------------------------------------


Distributions on the Subordinated Class B LP Units are subordinated in favour of the Fund Units and the Non-subordinated Class B LP Units. These distributions are paid at the end of a fiscal quarter to the extent that an average monthly distribution of at least $0.06875 per Unit and Non-subordinated Class B LP Unit in respect of that quarter has been paid, and any deficiency in such distributions to holders of Units and Non-subordinated Class B LP Units during the subordination period has been satisfied.

The subordination provisions of the Subordinated Class B LP Units apply until the date on which both of the following conditions have been satisfied: (i) for four consecutive fiscal quarters of the Fund beginning on December 31, 2006, the Fund has earned EBITDA of at least $25,169 during such period; and (ii) commencing with the 12-month period ending September 30, 2007, the Fund and MS Group LP have respectively paid an average distribution of at least $0.06875 per Unit and per Class B LP Unit per month for the preceding 12-month period. "EBITDA" is defined as earnings before interest, income taxes, depreciation and amortization.

9. DISTRIBUTIONS TO UNITHOLDERS

The Board of Trustees determines the amount of distributions. The Fund's Declaration of Trust provides that distributions must be made to ensure that the Fund will not be liable for ordinary income taxes under the Income Tax Act (Canada). Any taxable income of the Fund that is unavailable for cash distribution will be distributed to Unitholders in the form of additional Units.

Commencing on March 2007, the monthly distribution has increased from $0.06875 per Unit to $0.07356 per Unit. Distributions announced during the three and six months ended June 30, 2007 and 2006 were as follows:


Paid or payable
Unitholder record date Total Per Unit for the three and
six months ended June 30, 2007
Trust Units
January 31, 2007 $1,517 $0.06875 February 15, 2007
February 28, 2007 1,517 0.06875 March 15, 2007
March 30, 2007 1,623 0.07356 April 16, 2007
April 30, 2007 1,623 0.07356 May 15, 2007
May 31, 2007 1,623 0.07356 June 15, 2007
June 29, 2007 1,623 0.07356 July 16, 2007
------- ---------
$9,526 $0.43174
------- ---------
Class B LP Units

Non-subordinated
January 31, 2007 $112 $0.06875 February 15, 2007
February 28, 2007 112 0.06875 March 15, 2007
March 30, 2007 120 0.07356 April 16, 2007
April 30, 2007 120 0.07356 May 15, 2007
May 31, 2007 120 0.07356 June 15, 2007
June 29, 2007 120 0.07356 July 16, 2007
------- ---------
$704 $0.43174
------- ---------
Subordinated
March 30, 2007 $864 $0.21106 April 16, 2007
June 29, 2007 $903 $0.22068 July 16, 2007

Paid or payable
Unitholder record date Total Per Unit for the three and
six months ended June 30, 2006
Trust Units
January 31, 2006 $1,511 $0.06875 February 15, 2006
February 28, 2006 1,511 0.06875 March 15, 2006
March 31, 2006 1,511 0.06875 April 17, 2006
April 30, 2006 1,511 0.06875 May 15, 2006
May 31, 2006 1,511 0.06875 June 15, 2006
June 30, 2006 1,517 0.06875 July 17, 2006
------- ---------
$9,072 $0.41250
------- ---------
Class B LP Units

Non-subordinated
January 31, 2006 $96 $0.06875 February 15, 2006
February 28, 2006 96 0.06875 March 15, 2006
March 31, 2006 96 0.06875 April 17, 2006
April 30, 2006 96 0.06875 May 15, 2006
May 31, 2006 96 0.06875 June 15, 2006
June 30, 2006 112 0.06875 July 17, 2006
------- ---------
$592 $0.41250
------- ---------
Subordinated
March 31, 2006 $845 $0.20625 April 17, 2006
June 30, 2006 $845 $0.20625 July 17, 2006


10. LONG-TERM INCENTIVE PLAN

Executives are eligible to participate in Morneau Sobeco's Long-Term Incentive Plan ("LTIP"), which is designed to align compensation with distributable cash earned by the Fund's subsidiaries. The LTIP provides compensation opportunities for performance resulting in the Fund exceeding its distributable cash targets. The Fund's Compensation, Nominating and Corporate Governance Committee of the Board of Trustees (the "Committee") determines (i) who will participate in the LTIP; (ii) the level of participation; and (iii) the time or times when LTIP awards will vest or be paid to each participant.

Pursuant to the LTIP, Morneau Sobeco sets aside a pool of funds based upon the amount, by which the distributable cash per Unit (fully diluted) exceeds defined threshold amounts. Morneau Sobeco or a trustee purchases Units in the market with this pool of funds and holds the Units until such time as ownership vests to each participant. Generally, one-third of these Units vest equally over the three years following the grant of the awards. LTIP participants are entitled to receive distributions on all Units held for their account prior to the applicable vesting date. Unvested Units held by the trustee for an LTIP participant will be forfeited if the participant resigns or is terminated prior to the applicable vesting date and those Units will be sold and the proceeds returned to Morneau Sobeco.

In 2006, the LTIP provided for awards based on the amount by which distributable cash per Unit exceeded a base distribution threshold of $0.825 per Unit per annum. The percentage amount of that excess, which formed the potential LTIP incentive pool, was determined in accordance with the table below:



Percentage by which Distributable Maximum Proportion of Excess
Cash per Unit Exceeds Base Distributable Cash Available
Threshold for LTIP Payments
5% or less 10%
Over 5% to 10% 15% of any excess over 5% to 10%
Greater than 10% 20% of any excess over 10%


The base distribution threshold is subject to review by the Committee at least annually. The Committee awarded a payment under the terms of the LTIP of $386 for the year ended December 31, 2006 which is less than the maximum available pool. This amount is recorded as salary expense over the three-year vesting period of 2007 to 2009. The expense recognized for the three and six months ended June 30, 2007 was $32 and $64, respectively (for the three and six months ended June 30, 2006 - $nil).

11. INCOME TAXES

The Fund currently qualifies as a Mutual Fund Trust for Canadian income tax purposes. Prior to new legislation relating to the federal income taxation of publicly-listed or traded trusts, as discussed below, income earned by the Fund and distributed annually to unitholders was not, and would not be, subject to taxation in the Fund, but was taxed at the individual unitholder level. For financial statement reporting purposes, the tax deductibility of the Fund's distributions was treated as an exemption from taxation as the Fund distributed and was committed to continue distributing all of its income to its unitholders. Accordingly, the Fund did not previously record a provision for income taxes, or future income tax assets or liabilities, in respect of the Fund and its flow through entities. The Fund, however, recorded current and future income tax liability relating to the corporate subsidiaries.

On June 22, 2007, legislation relating to the federal income taxation of a "specified investment flow-through" trust or partnership (a "SIFT"), received royal assent (the "SIFT Rules"). A SIFT includes a publicly-listed or traded partnership and trust, such as an income trust and a real estate investment trust. The Fund is a SIFT, as discussed below.

Under the SIFT Rules, following a transition period for qualifying SIFTs, certain distributions from a SIFT will no longer be deductible in computing a SIFT's taxable income, and a SIFT will be subject to tax on such distributions at a rate that is substantially equivalent to the general tax rate applicable to a Canadian corporation. Distributions paid by a SIFT as returns of capital will not be subject to the tax.

A SIFT which was publicly listed on or before October 31, 2006 (an "Existing Trust") will become subject to the tax on distributions commencing with the 2011 taxation year end. However, an Existing Trust may become subject to this tax prior to the 2011 taxation year if its equity capital increases beyond certain limits measured against the market capitalization of the Existing Trust at the close of trading on October 31, 2006.

Due to the SIFT Rules, the Fund commenced recognizing future income tax assets and liabilities with respect to the temporary differences between the carrying amounts and tax bases of its assets and liabilities, and those of its flow through entities, that are expected to reverse in or after 2011. Future income tax assets or liabilities are recorded using tax rates and laws expected to apply when the temporary differences are expected to reverse. The SIFT Rules resulted in the Fund including a future income tax liability of $2,670 in the consolidated balance sheet at June 30, 2007, with a corresponding future income tax expense of $2,670 reflected as a charge to consolidated earnings for the three and six month periods ended June 30, 2007.

The difference between income taxes calculated using the Fund's effective income tax rates and the amounts that would result from the application of the statutory income tax rates arises from the following:



Three Months ended Six Months ended
June 30 June 30
-----------------------------------------
2007 2006 2007 2006
-----------------------------------------
(Restated- (Restated-
Note 19) Note 19)
Income taxes at statutory
rates:
Federal 22.12% 22.12% 22.12% 22.12%
Provincial 12.25% 12.13% 12.25% 12.13%
-----------------------------------------
34.37% 34.25% 34.37% 34.25%
Income tax provision applied
to income before
income taxes:
Combined basic federal and
provincial income $1,181 $1,575 $2,251 $2,377
taxes at statutory rates
applied to income from
continuing operations
Income taxed in the hands of
the Unitholders (1,906) (2,344) (3,773) (3,986)
Non-deductible expenses 141 36 244 63
Adjustment as a result of new
SIFT rules 2,670 - 2,670 -
Adjustment to future income
assets and liabilities for
change in income tax rate (306) (2,346) (284) (2,387)
Change in taxable subsidiary
share of temporary
differences between the
carrying amounts and tax
bases of its assets and
liabilities (300) 183 (300) 183
Others (158) 35 (207) 72
-----------------------------------------
$1,322 $(2,861) $601 $(3,678)
-----------------------------------------
-----------------------------------------


The significant components of future income tax assets and liabilities related to continuing operations are as follows:



June 30, December 31,
2007 2006
--------------------
(Restated -
Note 19)
Future income tax assets
Initial Fund unit issuance costs $3,185 $3,691
Excess of tax bases of capital assets over
their carrying values 738 638
Other 48 54
--------------------
$3,971 $4,383
--------------------
--------------------
Future income tax liability
Carrying value of intangibles in excess of
tax bases
$(34,929) $(35,047)
--------------------
--------------------


12. EMPLOYEE FUTURE BENEFITS

The Fund offers a pension benefit plan for its employees, which includes a defined benefit option and a defined contribution option. The defined benefit option was closed to new members effective January 1, 1998.

As of January 1, 1998, all new members participate in a defined contribution option, whereby the Fund matches member contributions and may be required to make additional contributions at the option of the members up to a limit prescribed under the Income Tax Act (Canada). Under the defined contribution option, each member is required to contribute a specific dollar amount based on the member's job level classification. Each member may elect to make an optional contribution of between 50% and 300% of the member's required contribution. The Fund matches required contributions. For employees with less than 10 years of service, the Fund contributes 50% of optional contributions and for members with 10 or more years, 75% of optional contributions.

The pension fund assets and obligations were measured as at June 30, 2007. Information about the pension plan's defined benefit option is as follows:



June 30, December 31,
2007 2006
----------------------
Fair value of plan assets $2,685 $2,562
Accrued benefit obligation 3,024 3,164
----------------------
Funded status - deficit $(339) $(602)
----------------------
----------------------
Plan assets:
Fair value, beginning of period $2,562 $2,954
Actual return on plan assets 12 217
Employer contributions 140 260
Benefits paid (29) (869)
----------------------
----------------------
Fair value, end of period $2,685 $2,562
----------------------
----------------------

Accrued benefit obligation:
Balance, beginning of period $3,164 $3,896
Current service cost 46 90
Interest cost 80 169
Benefits paid (29) (869)
Actuarial losses (gains) (237) (122)
----------------------
----------------------
Balance, end of period $3,024 $3,164
----------------------

----------------------

Reconciliation of plan assets to accrued
benefit obligation, end ofperiod:
Fair value of plan assets $2,685 $2,562
Accrued benefit obligation 3,024 3,164
----------------------
Funded status - deficit (339) (602)
Unamortized net actuarial loss (gain) (63) 155
Unamortized transitional obligation 404 449
----------------------
Accrued benefit asset $2 $2
----------------------
----------------------

End of period allocation of fair value
of plan assets (%)
Pooled Equities Fund 45% 45%
----------------------
Pooled Bond Fund 55% 55%
----------------------
100% 100%
----------------------
----------------------


Three Months ended Six Months ended
June 30 June 30
------------------------------------------
2007 2006 2007 2006
------------------------------------------
Pension plan cost
Current service cost $23 $22 $46 $45
Interest cost on
accrued benefit
obligation 40 41 80 83
Return on plan assets 11 82 (12) 3
Actuarial losses
(gains) during the
period (237) (115) (237) (231)
on accrued benefit
obligation
------------------------------------------
$(163) $30 $(123) $(100)
Other adjustments:
Difference between
actual and expected
return on plan assets (58) (127) (80) (93)

Amortization of
actuarial losses
(gains) 298 115 298 330
Transitional amounts 22 22 45 45
------------------------------------------
Net pension plan expense $99 $40 $140 $182
------------------------------------------
------------------------------------------

Other information about the Fund's defined benefit
option is as follows:
------------------------------------------
Employer contributions $101 $40 $140 $182
Benefits paid $14 $6 $29 $851

Actuarial valuation for the Fund's pension plan is generally required every
three years. The most recent actuarial valuation of the Fund's pension plan
was conducted as of December 31, 2003. An actuarial valuation will be
conducted in 2007.

Weighted average assumptions: June 30, December 31,
2007 2006
----------------------
Discount rate at the end of the current fiscal
period used to determine the accrued benefit
obligation 5.50% 5.00%
Discount rate at the end of preceding period used to
determine the benefit cost 5.00% 4.75%
Rate of compensation increase used to determine the
accrued benefit obligation 2.50% 2.50%
Rate of compensation increase used to determine the
benefit cost 2.50% 2.50%
Expected long-term rate of return on plan assets 7.00% 7.00%


The net expense for the Fund's defined contribution option for the three
months ended June 30, 2007 and June 30, 2006 were $449 and $386 and for the
six months ended June 30, 2007 and June 30, 2006 were $918 and $775,
respectively.

13. NET INCOME PER UNIT

Net income per Unit is calculated by dividing Net income by the weighted
average number of Units outstanding during the period. The following table
reconciles the weighted average number of Units outstanding used in
computing basic Net income per Unit to weighted average number of Units
in computing diluted Net income per Unit:

Three Months ended Six Months ended
June 30 June 30
----------------------------------------------
2007 2006 2007 2006
----------------------------------------------
(Restated - (Restated -
Note 19) Note 19)
----------------------------------------------
Basic:
Net income $1,680 $5,646 $4,725 $8,481
----------------------------------------------
Weighted average number of
Units outstanding 22,062,916 21,985,688 22,062,916 21,981,474
----------------------------------------------

Diluted:
Net income $1,680 $5,646 $4,725 $8,481
Non-controlling interest 435 1,429 1,225 2,138
----------------------------------------------
Net income available to
Unitholders and $2,115 $7,075 $5,950 $10,619
----------------------------------------------
Class B LP Unitholders
Weighted average number of
Units 22,062,916 21,985,688 22,062,916 21,981,474
outstanding - Basic
Weighted average
exchangeable Class B
LP Units outstanding 5,721,444 5,597,439 5,721,444 5,546,156
----------------------------------------------
Total weighted average
number of diluted Units 27,784,360 27,583,127 27,784,360 27,527,630
----------------------------------------------
Net income per Unit - basic
and diluted $0.07614 $0.25650 $0.21413 $0.38576
----------------------------------------------
----------------------------------------------


14. COMMITMENTS

The Fund has lease commitments for office premises and equipment with
options for renewal. As at June 30, 2007 the minimum payments not
including operating expenses, due in each of the next five years and
thereafter, are expected to be as follows for each year ending December 31:

Remainder of 2007 $2,655
2008 5,214
2009 4,580
2010 3,519
2011 2,943
Thereafter 3,321
-------
Total $22,232
-------
-------


In addition, the Fund entered into a sublease agreement in 2006 to sublet one of the former Heath office premises. According to the agreement, the Fund is liable for the rent in case of a default by the subtenant. The average annual rent for the lease is $190 and the lease expires on October 30, 2011. The fair value of the total future lease payments as at June 30, 2007 was $748. The Fund considers the risk of default by the subtenant to be low therefore no accrual has been set up for the guarantee.

15. CONTINGENCIES

From time to time, the Fund is involved in routine litigation incidental to the Fund's business. Management believes that adequate provisions have been made where required and the ultimate resolution with respect to any claim will not have a material adverse effect on the financial position or results of operations of the Fund.

16. ECONOMIC DEPENDENCE

Revenue from the Fund's largest client was approximately 10% of total revenue for the three and six months ended June 30, 2007 (for the three and six months ended June 30, 2006 - 12%). Its top 10 clients accounted for approximately 33% of total revenue for the three and six months ended June 30, 2007 (for the three and six months ended June 30, 2006- 36% and 35%, respectively).

The Fund, in its normal course of business, is exposed to credit risk from its clients. Risk associated with concentration of credit risk with respect to accounts receivables are limited due to the credit rating of the Funds top 10 clients. The Fund has over 1,000 clients with no client consisting of greater than 1% of total revenue with the exception of the top 10 clients.

17. SEGMENTED INFORMATION

The Fund's operations consist of one reporting segment, which provides employee pension and benefits consulting and outsourcing services. Geographic data were as follows:



Three Months ended Six Months ended
June 30 June 30
----------------------------------------------
Revenue 2007 2006 2007 2006
----------------------------------------------
Canada $35,322 $31,354 $69,365 $61,959
United States 1,735 1,439 3,783 3,012
----------------------------------------------
$37,057 $32,793 $73,148 $64,971



June 30, December 31,
2007 2006
(Restated-Note 19)
---------------------------------

Assets
Canada $340,644 $343,823
United States 1,925 2,049
$342,569 $345,872
Liabilities
Canada $143,512 $141,967
United States 239 286
$143,751 $142,253


The Fund is not engaged in currency hedging activities and does not own other instruments that may be settled by the delivery of non-financial assets. The Fund realizes a portion of sales in U.S. dollars and is thus exposed to fluctuations in the value of the U.S. dollar relative to the Canadian dollar. The net revenue exposure after accounting for related expenses denominated in U.S. dollars was approximately US$0.7 and $1.6 million for the three and six months ended June 30, 2007, respectively (for the three and six months ended June 30, 2006 - US$0.6 million and US$1.2 million, respectively).

18. FINANCIAL INSTRUMENTS

The fair value of the Fund's financial assets and liabilities approximate carrying values due to their short-term nature or with respect to the long-term debt instruments, because they bear interest at market rates. The Fund does not enter into financial instruments for trading or speculative purposes.

19. RESTATEMENT OF FINANCIAL STATEMENTS

In the course of assessing the impact of the federal government's recent enactment of changes to the taxation of income funds, the Fund discovered an error involving the recognition of future income tax assets and liabilities for a taxable subsidiary of the Fund relating to the differences in the accounting and tax values of the initial Fund unit issuance costs, intangible assets and capital assets. The result of the correction to the historical financial statements has positively impacted net income.

Below is a summary of the line items in the financial statements affected by the correction:



Previously Adjustments As Restated
reported
As at December 31, 2006
Consolidated Balance Sheet

Goodwill $127,767 $41,684 $169,451
Future income tax - assets 741 3,642 4,383
Future income tax - liabilities - 35,047 35,047
Non-controlling interest 55,461 1,059 56,520
Fund units 205,549 5,058 210,607
Deficit (11,150) 4,162 (6,988)

Three months ended June 30, 2006
Consolidated Statement of Income and
Other Comprehensive Income

Future income taxes (recovery) $(162) $(2,871) $(3,033)
Income before non-controlling interest 4,204 2,871 7,075
Non-controlling interest (849) (580) (1,429)
Net income and Comprehensive Income 3,355 2,291 5,646

Six months ended June 30, 2006
Consolidated Statement of Income and
Other Comprehensive Income

Future income taxes (recovery) $(195) $(3,717) $(3,912)
Income before non-controlling interest 6,902 3,717 10,619
Non-controlling interest (1,389) (749) (2,138)
Net income and Comprehensive Income 5,513 2,968 8,481




MANAGEMENT'S DISCUSSION AND ANALYSIS

Morneau Sobeco Income Fund (the "Fund") was formed on August 22, 2005 and commenced operations on September 30, 2005 when it completed an initial public offering ("IPO").

This Management's Discussion and Analysis ("MD&A") covers the three and six months ended June 30, 2007 and should be read in conjunction with the accompanying unaudited interim Consolidated Financial Statements of the Fund and notes thereto for the three and six months ended June 30, 2007 as well as the MD&A and Audited Consolidated Financial Statements and notes thereto contained in the Fund's Annual Report for the year ended December 31, 2006.

All financial information is presented in Canadian dollars and in accordance with Canadian generally accepted accounting principles ("GAAP") unless otherwise noted. Certain totals, subtotals and percentages may not reconcile due to rounding.

This MD&A contains "forward-looking statements" within the meaning of applicable securities laws, such as statements concerning anticipated future events, results, circumstances, performance or expectations that are not historical facts. Use of words such as "may", "will", "expect", "believe", or other words of similar effect may indicate a "forward-looking" statement. These statements are not guarantees of future performance and are subject to numerous risks and uncertainties, including those described in our publicly filed documents (available on SEDAR at www.sedar.com) and in this MD&A under the heading "Risks and Uncertainties". Those risks and uncertainties include income tax matters, ability to maintain profitability and manage growth, reliance on information systems and technology, reputational risk, dependence on key clients, reliance on key professionals and general economic conditions. Many of these risks and uncertainties can affect our actual results and could cause our actual results to differ materially from those expressed or implied in any forward-looking statement made by us or on our behalf. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. All forward-looking statements in this MD&A are qualified by these cautionary statements. These statements are made as of the date of this MD&A and, except as required by applicable law, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. Additionally, we undertake no obligation to comment on analyses, expectations or statements made by third parties in respect of the Fund, its financial or operating results or its securities.

To assist investors in assessing the Fund's financial performance, this discussion also makes reference to certain non-GAAP measures such as EBITDA, Standardized Distributable Cash, Adjusted Consolidated Distributable Cash, Standardized Distributable Cash Payout Ratio and Adjusted Consolidated Distributable Cash Payout Ratio. On July 18, 2007, the Canadian Institute of Chartered Accountants ("CICA") issued an interpretive release "Standardized Distributable Cash in Income Trusts and Other Flow-Through Entities". As such we have amended our non-GAAP measurements to now disclose "Standardized Distributable Cash" which is equivalent to "Distributable Cash available for Unitholders" as previously reported and "Adjusted Consolidated Distributable Cash" which is equivalent to "Distributable Income" as previously reported. We believe that EBITDA is a useful measure in evaluating performance of the Fund. It is used to monitor compliance with debt covenants and to make decisions related to distributions to Unitholders rather than net income due to the significant amount of amortization expense related to our intangible assets. We also believe that Standardized Distributable Cash, Adjusted Consolidated Distributable Cash, Standardized Distributable Cash Payout Ratio and Adjusted Consolidated Distributable Cash Payout Ratio are useful supplemental measures of performance as they are generally used by Canadian open-ended business income funds as indicators of financial performance. See the footnotes to the "Results of Operations" chart for more details. Non-GAAP measures do not have any standard meaning prescribed by GAAP and therefore may not be comparable to similar measures presented by other issuers.

This MD&A is in all material respects in accordance with the recommendations provided in CICA's publication Standardized Distributable Cash in Income Trusts and Other Flow-Through Entities: Guidance on Preparation and Disclosure.

AMENDMENT AND RESTATEMENT OF THE COMPARATIVE PERIODS

In the course of assessing the impact of the federal government's recent enactment of changes to the taxation of income funds, Morneau Sobeco discovered an error involving the recognition of future income tax assets and liabilities for a taxable subsidiary of the Fund relating to the differences in the accounting and tax values of the initial Fund unit issuance costs, intangible assets and capital assets.

The result of the correction to the historical financial statements will positively impact net income, but will have no impact on the Fund's non-GAAP performance measurements of EBITDA, Standardized Distributable Cash and Adjusted Consolidated Distributable Cash, nor will taxable income of the Fund be impacted. There is no impact to Morneau Sobeco's operational performance or its future prospects.

Morneau Sobeco expects to issue the restated financial statements for all periods since September 30, 2005 as soon as possible.

Below is a summary of the line items in the financial statements affected by the correction:



Consolidated Financial Information
(in thousands of dollars except per unit amounts)

Three months Restated Restated Restated Restated Restated Restated
ended March December September June March December
31 31 30 30 31 31
2007 2006 2006 2006 2006 2005
Income and Other
Comprehensive
Income
Income taxes
recovery
(expense) -
future
Previous $(123) $(134) $80 $163 $32 $64
Restated $ 855 $574 $941 $3,033 $878 $-

Net Income
Previous $2,268 $2,449 $1,798 $3,355 $2,158 $2,099
Restated $3,045 $3,010 $2,482 $5,646 $2,835 $2,048

Net Income
per unit
Previous $0.10279 $0.11100 $0.08148 $0.15245 $0.09821 $0.09553
Restated $0.13799 $0.13644 $0.11249 $0.25650 $0.12900 $0.09318

Balance Sheet
Total assets
Previous $293,330 $300,546 $299,723 $307,188 $297,753 $303,718
Restated $338,530 $345,872 $345,398 $353,149 $342,322 $348,551

Future income
tax assets
(liability) -
net basis
Previous $618 $742 $875 $795 $632 $600
Restated $(29,808) $(30,664) $(31,236) $(32,177) $(33,289)$(34,167)

Unitholders'
equity
Previous $192,010 $194,399 $196,754 $199,506 $199,618 $201,992
Restated $202,007 $203,619 $205,413 $207,481 $205,301 $206,999


FORMATION AND OWNERSHIP STRUCTURE OF THE FUND

The Fund is an unincorporated, open-ended, limited purpose trust established under the laws of Ontario. It indirectly owns 22,062,916 Class A Limited Partnership units of Morneau Sobeco Group Limited Partnership ("MS Group LP"), which represents a 79.4% ownership interest. MS Group LP owns directly and indirectly 100% of Morneau Sobeco Limited Partnership and Morneau Sobeco, Ltd. (the "Morneau Sobeco Operating Entities"). The 20.6% non-controlling interest in MS Group LP is held through Class B LP units of the limited partnership (the "Class B LP Units") and an equal number of Special Voting Units of the Fund, which together are exchangeable into Units provided that the Fund achieves certain objectives. Management employees and former owners of the predecessors of the Morneau Sobeco Operating Entities ("Management Securityholders") hold this non-controlling interest.

As at June 30, 2007, 22,062,916 Units and 5,721,444 Special Voting Units of the Fund were issued and outstanding, and 5,721,444 MS Group LP Class B LP Units were issued and outstanding.

BUSINESS OVERVIEW

Morneau Sobeco is the largest Canadian-owned pension and benefits consulting and outsourcing firm, providing services to organizations across Canada and in the United States. We focus on the integrated design and delivery of retirement, employee compensation and benefits programs. We have over 1,100 professionals and support staff with offices in 13 cities across North America. Our clients are primarily large and medium-sized organizations in Canada and the United States, which typically utilize our services on a recurring or contracted basis over a long term.

We derive our revenue primarily from fees charged to clients for pension and benefits consulting and outsourcing engagements. Fees from consulting engagements are charged based on billable hours or a fee-for-service basis. In some cases, consulting engagements may be billed on a fixed-fee basis, although these engagements are typically much smaller and the services are delivered over a shorter period of time. For some benefits consulting assignments which involve the purchase of an insurance policy underwritten by an insurance company, we may be paid commissions (in lieu of fees) by the client's insurance company, which is a common practice in the industry. These commissions are based on a percentage of the premiums paid by the client to the insurance company and our policy is to disclose them to our client. We assume no underwriting risk as the insurance policy is underwritten by the insurance company. In addition, we earn interest income from our cash balances which is included in other revenue. Fees from outsourcing engagements are generally based on negotiated fees or a formula tied to the nature of the service being provided. Our outsourcing business is characterized by fixed contracts, which typically have three-year to five-year terms. Most outsourcing contracts contain an upfront implementation fee and an ongoing monthly service fee. Implementations usually take three to twelve months and involve transferring the administration of a client's pension and/or benefits plans onto our systems, tailoring our systems and training our employees. Additional services provided that are outside the scope of the outsourcing contract are usually paid on a fee-for-service basis.

Our largest operating expense is compensation and related costs. This includes salaries, annual performance-based bonuses, benefits (e.g., pension, health, dental), payroll taxes and temporary staffing services. Other operating expenses include occupancy costs, technology costs (equipment leases, telecommunications and software), non-recoverable client service costs (such as printing, travel and third-party professional services), training, marketing, office costs, professional services (legal and audit) and insurance.

OVERVIEW AND OUTLOOK

In the second quarter we met our positive expectations, from both a revenue and profitability standpoint. For the three and six months ended June 30, 2007 revenue growth was 13.0% and 12.6% and EBITDA growth was 5.6% and 7.2% compared to same periods in 2006 respectively. Adjusting for the salary component of the Heath acquisition(1) of $0.3 million and $0.5 million the EBITDA growth was 9.6% and 10.7% respectively for the three and six months ended June 30, 2007. For the three and six months ended June 30, 2007 our EBITDA margin remained strong at 22.7% and 22.5% respectively, adjusting for the Heath acquisition accounting(1).

The Standardized Distributable Cash Payout Ratio for the three and six months ended June 30, 2007 were 83.4% and 194.1% respectively compared to 63.0% and 117.9% for the same period in 2006. This reflects the payment of our year end accrued liabilities in the first quarter. On a twelve-month rolling basis, the Standardized Distributable Cash Payout Ratio was 90.6% . Adjusted Consolidated Distributable Cash Payout Ratio for the three and six months ended June 30, 2007 were 84.9% and 81.8% respectively compared to 83.3% and 84.8% for the same period in 2006. The Adjusted Consolidated Distributable Cash Payout Ratio on a twelve-month rolling basis was 84.3% .

As a result of our consistent growth, the Board of Trustees authorized a 7% increase to our target monthly distribution from $0.06875 per Unit to $0.07356 per Unit, commencing with the March 2007 distribution paid April 16, 2007.

On June 1, 2007, a subsidiary of the Fund directly acquired certain assets, liabilities and contracts of the defined benefit pension administration and actuarial consulting practices ("Cowan DB business") of Cowan Benefits Consulting Limited, a benefits consulting firm based in the Waterloo region, in Ontario. The purchase price is based on the final pension administration and actuarial consulting services revenue and certain other integration conditions and is expected to be approximately $6 million. The first instalment of the purchase price was made on the closing date of June 1, 2007 and was funded by an operating line of credit of $3.8 million. The balance of the purchase price will be paid in two instalments on August 1, 2008 and August 1, 2009. The integration of the Cowan DB business is proceeding well with expenses being incurred over our second and third quarters. It will be accretive in the third quarter.

On June 22, 2007, previously announced legislation providing for the income taxation of specified investment flow through entities ("SIFT") received Royal Assent. As a result, the Fund has recognized a $2.7 million future income tax liability as at June 30, 2007 which represents the temporary differences between the accounting and tax basis of the intangible assets. The charge has no current impact on our cash flow, EBITDA Standardized Distributable Cash and Adjusted Consolidated Distributable cash.

Our business development is on track. We continue to achieve organic growth. In addition, the market for our services continues to be positive as we have successfully obtained a number of new clients which will contribute positively to our 2008 organic growth. As part of our growth strategy, we continue to look for new acquisitions and alliances to expand our business in underserved areas including the United States.

DISTRIBUTION TO UNITHOLDERS

Monthly distributions are declared by the Fund for Unitholders of record on the last business day of each month and are paid on about the 15th day of the following month.

To reduce Unitholder risk, approximately 72% of the Class B LP Units are subordinated in their rights to distributions until Unitholders of the Fund receive their target distributions. This subordination is in place until September 30, 2007, or later if the Fund has not made its target distributions.

(1) On June 1, 2006, the Fund indirectly acquired all of the issued and outstanding shares of Heath Benefits Consulting Inc. ("Heath"). A portion of the purchase price, which is conditional on the continuing employment of certain selling shareholders is being recorded as salary expense over the required employment period to December 2008.



ANALYSIS OF 2007 SECOND QUARTER OPERATING RESULTS

Results of Operations Three months ended Six months ended
June 30 June 30
Selected Unaudited Consolidated
Financial Information 2007 2006 2007 2006
------------------------------------------------------------------------
(In thousands of dollars Restated Restated
except per unit amounts)

Revenue $37,057 $32,793 $73,148 $64,971
Deduct:
Salaries and
benefits expense 21,574 18,737 43,247 37,636
Other operating expense 7,377 6,384 13,930 12,436
Interest 315 (692) 768 (231)
Amortization of capital
and intangible assets 4,354 4,150 8,652 8,189
Income taxes
(recovery)(1) 1,322 (2,861) 601 (3,678)
Non-controlling
interest(1) 435 1,429 1,225 2,138
------------------------------------------------------------------------
Net income for the
period(1) 1,680 5,646 4,725 8,481
Add (deduct):
Amortization of capital
and intangible assets 4,354 4,150 8,652 8,189
Income taxes (recovery) (1) 1,322 (2,862) 601 (3,678)
Interest 315 (692) 768 (231)
Non-controlling interest(1) 435 1,429 1,225 2,138
------------------------------------------------------------------------
EBITDA(2) 8,106 7,672 15,971 14,899
------------------------------------------------------------------------
EBITDA margin 21.9% 23.4% 21.8% 22.9%
------------------------------------------------------------------------

Cash from operating
activities $7,923 $9,250 $6,891 $9,999
Deduct: Capital
expenditures 576 211 712 353
------------------------------------------------------------------------
Consolidated
Distributable Cash (3) $7,347 $9,039 $6,179 $9,646
Deduct: Consolidated
Distributable Cash available
to non controlling interest 1,512 1,826 1,272 1,947
------------------------------------------------------------------------
Standardized Distributable
Cash (available for
Unitholders) (4) 5,835 7,213 4,907 7,699
------------------------------------------------------------------------

Consolidated
Distributable Cash (3) $7,347 $9,039 $6,179 $9,646
Deduct: non -cash
operating working capital 124 2,171 (8,483) (3,785)
------------------------------------------------------------------------
Adjusted Consolidated
Distributable Cash (5) 7,223 6,868 14,662 13,431
------------------------------------------------------------------------

Net income per Unit
(basic and diluted) (1) $0.07614 $0.25650 $0.21413 $0.38576
Standardized Distributable
Cash per Unit
(basic and diluted) $0.26447 $0.32777 $0.22241 $0.34989
Adjusted Consolidated
Distributable Cash per
Unit (basic and diluted) $0.26000 $0.24769 $0.52771 $0.48671
Standardized Distributions

declared per Unit
(basic and diluted) $0.22068 $0.20625 $0.43174 $0.41250
Standardized Distributable
Cash Payout Ratio (6) 83.4% 63.0% 194.1% 117.9%
Adjusted Consolidated
Distributable Cash
Payout Ratio (7) 84.9% 83.3% 81.8% 84.8%
Twelve-month rolling
Standardized Distributable
Cash 90.6% n/a 90.6% n/a
Payout Ratio
Twelve-month rolling Adjusted
Consolidated Distributable 84.3% n/a 84.3% n/a
Cash Payout Ratio

Footnotes:

(1) See "Amendment and Restatement of the Comparative Periods" section

(2) "EBITDA" is defined as earnings (loss) before interest expense, income
taxes, depreciation, amortization and non-controlling interest.

(3) "Consolidated Distributable Cash" is defined as Cash from operating
activities adjusted for maintenance capital expenditures.

(4) "Standardized Distributable Cash" is defined as Cash from operating
activities, including the effects of changes in non-cash operating
working capital, less maintenance capital expenditures and Consolidated
Distributable Cash available to non-controlling interest.

(5) "Adjusted Consolidated Distributable Cash" is defined as Consolidated
Distributable Cash excluding changes in non-cash operating working
capital.

(6) "Standardized Distributable Cash Payout Ratio" is defined as declared
distributions divided by Standardized Distributable Cash.

(7) "Adjusted Consolidated Distributable Cash Payout Ratio" is defined as
declared distributions divided by Adjusted Consolidated Distributable
Cash.


ANALYSIS OF 2007 SECOND QUARTER RESULTS

Revenue

Revenue for the three months ended June 30, 2007 increased by $4.3 million, or 13.0%, to $37.1 million compared to $32.8 million for the same period in 2006. The increase in revenue was a result of additional consulting and outsourcing business from a variety of clients. Revenue also increased by $1.6 million due to the Heath acquisition and $0.3 million due to the Cowan DB business acquisition.

Salaries and Benefits

Salaries and benefits for the three months ended June 30, 2007 increased by $2.9 million, or 15.1%, to $21.6 million compared to $18.7 million for the same period in 2006. The increase was attributable to salary and benefits of $0.9 million for Heath, the salary component of the Heath acquisition of $0.3 million, salary and benefits of $0.2 million for the Cowan DB business and general increases of $1.5 million.

Other Operating Expenses

Other operating expenses for the three months ended June 30, 2007 increased by $1.0 million, or 15.6%, to $7.4 million compared to $6.4 million for the same period in 2006. The increase was primarily attributable to Heath operating expenses of $0.3 million and general expenses of $0.7 million.

Interest Expense

Interest expense for the three months ended June 30, 2007 was $0.3 million compared to interest income of $0.7 million for the same period in 2006. The change was primarily related to the reduction in interest expenses of $1.1 million in 2006 as a result of the recognition of the fair value of the interest rate swap compared to a $0.1 million reduction for this quarter.

Amortization of Capital and Intangible Assets

Amortization for the three months ended June 30, 2007 increased by $0.2 million, or 4.9%, to $4.4 million compared to $4.2 million for the same period in 2006. The increase was primarily attributable to the increase in the amortization of intangible assets as a result of the acquisitions of Heath and the Cowan DB business.

Income Tax Expense (Recovery)

Income tax expense for the three months ended June 30, 2007 was $1.3 million compared to a tax recovery of $2.9 million for the same period in 2006. The change in tax expense is primarily attributable to the recognition of a future tax liability of $2.7 million as a result of the change in tax legislation related to SIFT in 2007 and an income tax recovery of $2.4 million in 2006 related to a decline in the future income tax rates.

Net Income

As a result of the changes noted above, in particular the change in income tax expense (recovery), the net income for the three months ended June 30, 2007 was $1.7 million compared to the net income of $5.6 million for the same period in 2006.

Cash from Operating Activities

Cash from operating activities for the three months ended June 30, 2007 decreased by $1.4 million to $7.9 million compared to $9.3 million for the same period in 2006. This decrease was primarily due to decreased changes in non-cash operating working capital of $2.1 million (see below) offset by improved EBITDA of $0.7 million after taking into account the salary component of the Heath acquisition of $0.3 million.

Changes in Non-Cash Operating Working Capital

Changes in non-cash operating working capital for the three months ended June 30, 2007 decreased by $2.1 million to a source of $0.1 million compared to a source of $2.2 million for the same period in 2006. The decrease was primarily attributable to the increased receivable net of unbilled fees of $2.2 million due to the 13% growth in revenue.

Non-GAAP Financial Measures: EBITDA, Standardized Distributable Cash and Adjusted Consolidated Distributable Cash

EBITDA

EBITDA for the three months ended June 30, 2007 increased $0.4 million, or 5.6%, to $8.1 million compared to $7.7 million for the same period in 2006. The increase was due to increased revenue of $4.3 million partially offset by increased salaries and benefits expense and operating costs of $3.9 million.

Standardized Distributable Cash

Standardized Distributable Cash for the three months ended June 30, 2007 decreased by $1.4 million, or 19.1%, to $5.8 million compared to $7.2 million for the same period in 2006. This decrease was primarily due to decreased cash from operating activities of $1.4 million and increased capital expenditures of $0.3 million as a result of additional leasehold improvements due to the expansion of our Montreal location. This was partially offset by a decrease of $0.3 million in Consolidated Distributable Cash available to non-controlling interest.

Adjusted Consolidated Distributable Cash

Adjusted Consolidated Distributable Cash for the three months ended June 30, 2007 increased by $0.4 million or 5.2%, to $7.2 million compared to $6.8 million for the same period in 2006. The increase was primarily due to increased EBITDA of $0.7 million after taking into account the salary component of the Heath acquisition in the amount of $0.3 million. This was partially offset by increased capital expenditures of $0.3 million as a result of additional leasehold improvements due to the expansion of our Montreal location.

ANALYSIS OF SIX MONTHS ENDED JUNE 30, 2007 AND 2006 RESULTS

Revenue

Revenue for the six months ended June 30, 2007 increased by $8.2 million, or 12.6%, to $73.2 million compared to $65.0 million for the same period in 2006. The increase in revenue was a result of additional consulting and outsourcing business from a variety of clients, with one existing client increasing our revenue by $1.6 million. Revenue also increased by $3.8 million due to the Heath acquisition and $0.3 million due to the Cowan DB business acquisition.

Salaries and Benefits

Salaries and benefits for the six months ended June 30, 2007 increased by $5.6 million, or 14.9%, to $43.2 million compared to $37.6 million for the same period in 2006. The increase was attributable to salary and benefits of $2.2 million for Heath, the salary component of the Heath acquisition of $0.5 million, salary and benefits of $0.2 million for the Cowan DB business and general increases of $2.7 million.

Other Operating Expenses

Other operating expenses for the six months ended June 30, 2007 increased by $1.5 million, or 12.0%, to $13.9 million compared to $12.4 million for the same period in 2006. The increase was primarily attributable to Heath operating expenses of $0.8 million and increased general expenses of $0.7 million.

Interest Expense

Interest expense for the six months ended June 30, 2007 was $0.8 million compared to interest income of $0.2 million for the same period in 2006. The change was primarily related to the reduction in interest expenses of $1.1 million in 2006 as a result of the recognition of the fair value of the interest rate swap compared to a $0.1 million reduction for the six months ended June 30, 2007.

Amortization of Capital and Intangible Assets

Amortization for the six months ended June 30, 2007 increased by $0.5 million, or 5.6%, to $8.7 million compared to $8.2 million for the same period in 2006. The increase was primarily attributable to the increase in the amortization of intangible assets as a result of the acquisitions of Heath and the Cowan DB business.

Income Tax Expense (Recovery)

Income tax expense for the six months ended June 30, 2007 was $0.6 million compared to a tax recovery of $3.7 million for the same period in 2006. The change in tax expense is primarily attributable to the recognition of a future tax liability of $2.7 million as a result of the change in tax legislation related to SIFT in 2007 and an income tax recovery of $2.4 million in 2006 related to a decline in the future income tax rates.


Net Income

As a result of the changes noted above, in particular the change in income tax expense (recovery), the net income for the six months ended June 30, 2007 was $4.7 million compared to the net income of $8.5 million for the same period in 2006.

Cash from Operating Activities

Cash from operating activities for the six months ended June 30, 2007 decreased by $3.1 million to $6.9 million compared to $10.0 million for the same period in 2006. This decrease was primarily due to decreased changes in non-cash operating working capital of $4.7 million (see below) partially offset by improved EBITDA of $1.6 million after taking into account the salary component of the Heath acquisition of $0.5 million.

Changes in Non-Cash Operating Working Capital

Changes in non-cash operating working capital for the six months ended June 30, 2007 decreased by $4.7 million to a use of $8.5 million compared to a use of $3.8 million for the same period in 2006. The decrease was primarily attributable to increased receivables net of unbilled fees of $3.1 million due to our growth in revenue, higher bonus payments of $0.9 million in 2007 for 2006 bonuses since a portion of 2005 bonuses were paid prior to the IPO, payment of the 2006 long-term incentive plan awarded amount of $0.4 million in 2007 and the timing of supplier payments and prepaid expenses of $0.3 million.

Non-GAAP Financial Measures: EBITDA, Standardized Distributable Cash and Adjusted Consolidated Distributable Cash

EBITDA

EBITDA for the six months ended June 30, 2007 increased $1.1 million, or 7.2%, to $16.0 million compared to $14.9 million for the same period in 2006. The increase was due to increased revenue of $8.2 million partially offset by increased salaries and benefits expense and operating costs of $7.1 million.

Standardized Distributable Cash

Standardized Distributable Cash for the six months ended June 30, 2007 decreased by $2.8 million, or 36.4%, to $4.9 million compared to $7.7 million for the same period in 2006. This decrease was primarily due to lower cash from operating activities of $3.1 million and increased capital expenditures of $0.4 million as a result of additional leasehold improvements due to the expansion of our Montreal location. This was partially offset by a decrease of $0.7 million in Consolidated Distributable Cash available to non-controlling interest.

Adjusted Consolidated Distributable Cash

Adjusted Consolidated Distributable Cash for the six months ended June 30, 2007 increased by $1.3 million or 9.2%, to $14.7 million compared to $13.4 million for the same period in 2006. The increase was primarily due to increased EBITDA of $1.6 million after taking into account the salary component of the Heath acquisition in the amount of $0.5 million. This was partially offset by increased capital expenditures of $0.3 million as a result of additional leasehold improvements due to the expansion of our Montreal location.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

The following table provides an overview of the Fund's cash flows for the periods indicated:



Cash Flow Information Three Months Six Months
Selected Unaudited Ended June 30 Ended June 30
Consolidated Financial Information
(In thousands of dollars) 2007 2006 2007 2006
------------------------------------------------------------------------
Cash provided by (used in)

Operating Activities $7,923 $9,250 $6,891 $9,999

Investing Activities (4,103) (6,235) (4,239) (6,375)

Financing Activities (2,292) (544) (8,343) (6,220)

------------------------------------------------------------------------
Increase (decrease) in cash $1,528 $2,471 $(5,691) $(2,596)
------------------------------------------------------------------------


2007 Second Quarter Results

Cash from operating activities for the three months ended June 30, 2007 decreased by $1.4 million to $7.9 million compared to $9.3 million for the same period in 2006. This decrease was primarily due to decreased changes in non-cash operating working capital of $2.1 million offset by improved EBITDA of $0.7 million after taking into account the salary component of the Heath acquisition of $0.3 million.

Cash outflow from investing activities for the three months ended June 30, 2007 decreased by $2.1 million to $4.1 million compared to cash outflow of $6.2 million for the same period in 2006. This decrease was primarily attributable to lower business acquisition spending net of cash assumed of $2.5 million for the acquisition of the Cowan DB business compared to the acquisition of Heath during the same period in 2006. This was partially offset by increased capital expenditures of $0.3 million compared to the same period in 2006 as a result of additional leasehold improvements due to the expansion of our Montreal location.

Cash outflows from financing activities for the three months ended June 30, 2007 increased by $1.7 million to $2.3 million compared to cash outflows of $0.6 million for the same period in 2006. The increase was attributed to the 7% increase in monthly distribution commencing March 2007 together with the additional cash distribution for the two months related to Units issued as part of the Heath acquisition. In addition, the Fund drew $1.3 million less from the operating line of credit due to lower acquisition costs for the Cowan DB business compared to Heath.

Six Months Ended June 30, 2007 and 2006

Cash from operating activities for the six months ended June 30, 2007 decreased by $3.1 million to $6.9 million compared to $10.0 million for the same period in 2006. This decrease was primarily due to decreased changes in non-cash operating working capital of $4.7 million offset by improved EBITDA of $1.6 million after taking into account the salary component of the Heath acquisition of $0.5 million.

Cash outflow from investing activities for the six months ended June 30, 2007 decreased by $2.2 million to $4.2 million compared to cash outflows of $6.4 million for the same period in 2006. This decrease was primarily attributable to lower business acquisition spending net of cash assumed of $2.5 million for the acquisition of the Cowan DB business compared to the acquisition of Heath during the same period in 2006. This was partially offset by increased capital expenditures of $0.3 million compared to the same period in 2006 as a result of additional leasehold improvements due to the expansion of our Montreal location.

Cash outflows from financing activities for the six months ended June 30, 2007 increased by $2.1 million to $8.3 million compared to cash outflows of $6.2 million for the same period in 2006. The increase was attributed to the 7% increase in monthly distribution commencing March 2007 together with additional cash distribution for the two months related to Units issued as part of the Heath acquisition. In addition, the Fund drew $1.3 million less from the operating line of credit due to lower acquisition costs of the Cowan DB business compared to Heath.

Capital Expenditures

Pension and benefits consulting and outsourcing is not a capital intensive business. Our capital expenditures typically include office furniture, facility improvements, and information technology software and hardware. Additional capital expenditure requirements may result from significant business expansion. Such amounts are expected to be funded from our operating cash flow.

Contractual Obligations


Commitments

We lease office space and selected equipment under operating lease agreements with terms ranging from one to seven years. We also have a term loan described under "Capital Resources". Future expected payments are as follows:



Summary of Contractual Obligations
(In thousands of dollars)
Total 2007 to 2009 2010 to 2011 Beyond 2011
---------------------------------------------------------------------------
Term loan $35,000 $35,000 $- $-
Operating line of credit 3,800 3,800 - -
Operating leases 22,232 12,449 6,462 3,321
---------------------------------------------------------------------------
Total $61,032 $51,249 $6,462 $3,321
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In addition, the Fund has entered into a sublease agreement to sublet one of Heath's office premises. According to the agreement, we are liable for the rent in case of a default by the subtenant. The average annual rent for the lease is $190 thousand and the lease expires on October 30, 2011.

Contingent Considerations

The purchase price for the Cowan DB business is expected to be approximately $6 million and the amount will be paid in three instalments. The first instalment of $3.8 million was made on the closing date of June 1, 2007. The second and third instalments are subject to adjustment based on final pension administration and actuarial consulting services revenue and will be payable on August 1, 2008 and August 1, 2009, respectively. In addition, we have issued a standby letter of credit in the amount of $0.4 million which will be paid before December 31, 2008 to the extent the vendor has performed all of its transition services obligations.

The purchase price for Heath is estimated to be approximately $15 million and is being paid in three instalments. The first instalment of $9.0 million was made on closing in 2006. The second and third instalment are conditional upon the success in retaining and growing revenue from specified Heath clients and will be settled on June 30 and December 1 of 2008. These instalments will be settled by issuing a number of Class B LP Units of MS Group LP based on a pre-determined value of $12.52 per unit. In addition to the estimate of $15 million, contingent consideration will include amounts to compensate for forgone distributions payable on its second and third instalments during the period June 1, 2006 to December 31, 2008, which amounted to approximately $0.4 million to the end of June 30,2007

The Fund has no material contractual obligations other than those described in this MD&A and has no off-balance sheet financing arrangements.

Capital Resources

The following table provides an overview of the Fund's capital resources:



Capital Resources As at June As at December
(In thousands of dollars) 30, 2007 31, 2006
Restated
Cash (bank indebtedness) $(434) $5,257

Working capital $18,402 $19,652

Operating line of credit $3,800 $-

Long-term debt, net of unamortized
debt issue cost $34,888 $35,000

Unitholders' equity $198,818 $203,619


We have historically utilized cash from operations to finance working capital requirements and fund growth. As at June 30, 2007, the Fund's working capital (current assets minus current liabilities) was approximately $18.4 million.

We have also maintained credit facilities to manage working capital requirements throughout the year. The Fund's credit facilities include a secured term loan of $35 million repayable in full on September 30, 2009. The term loan bears interest at bankers' acceptance rates plus 1%, which have been fixed at 4.4% using an interest-rate swap. This secured term loan requires the Fund to maintain certain financial covenants on a consolidated basis as follows:

(i) Ratio of Debt to EBITDA not to exceed 2.5 to 1.0

(ii) Ratio of EBITDA to interest expense of not less than 3.0 to 1.0

The Fund complied with all the required financial covenants and the ratios at June 30, 2007 were 1.2 and 28.4 respectively.

The credit facilities also include a secured operating line of credit of up to $15 million bearing interest at bankers' acceptance rates plus 1% and a standby fee of 0.2% on the undrawn portion. As at June 30, 2007, the Fund had drawn $4.2 million from the secured operating line of credit. This includes 3.8 million drawn to purchase certain assets, liabilities and contracts of the Cowan DB business on June 1, 2007.

It is our intention to renew the long-term debt on maturity.

SELECTED BALANCE SHEET DATA

The following table provides an overview of the Fund's selected balance sheet data:



Selected Balance Sheet Data As at June As at December
(in thousands of dollars) 30, 2007 31, 2006
Restated

Current assets $34,498 $35,338

Other long-term assets $308,071 $310,534

Current liabilities $16,096 $15,686


Current Assets

Current assets as at June 30, 2007 decreased by $0.8 million to $34.5 million from $35.3 million as at December 31, 2006. The decrease was primarily due to decreased cash of $5.2 million as a result of the payment of our annual bonuses, decreased income tax recoverable of $0.8 million and prepaid expenses of $0.1 million. This was partially offset by increased accounts receivables and unbilled fees of $5.3 million due to the growth in revenue.

Other Long-Term Assets

Other long-term assets as at June 30, 2007 decreased by $2.4 million to $308.1 million from $310.5 million as at December 31, 2006. The decrease was as a result of the amortization expense of $8.6 million and the change in the future income tax asset of $0.4 million. This was partially offset by increased intangibles of $5.8 million related to the Cowan DB business acquisition and capital asset expenditures of $0.7 million.

Current Liabilities

Current liabilities as at June 30, 2007 increased by $0.4 million to $16.1 million from $15.7 million as at December 31, 2006. The increase was primarily due to the utilization of the operating line of credit of $4.2 million to finance the Cowan DB business acquisition and to meet short-term cash requirements. This is partially offset by decreased accrued compensation and related benefits of $3.7 million due to the payment of 2006 annual bonuses and the funding of the 2006 LTIP in 2007.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements, in accordance with GAAP, requires us to make estimates and assumptions that affect the reported values of assets and liabilities as well as disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. These estimates are reviewed periodically and, as adjustments become necessary, they are reported in earnings in the periods in which they become known. Accordingly, actual results could differ from these estimates. The accounting policies and estimates that are critical to the Fund's business relate to the following items:

Revenue Recognition

We earn fee-for-service revenue based on hourly rates and the time spent delivering those services. We also earn contracted revenue based on negotiated fixed amounts or on a formula tied to the nature of the service, rather than the time spent. Revenue is recognized in the period that the service is rendered, irrespective of when it is invoiced. Unbilled fees are recorded at the lower of unbilled hours worked at standard billing rates and the amount which we estimate can be recovered upon invoicing. Expenses are recognized as incurred. Losses on fixed-fee contracts are recognized during the period in which the loss becomes probable. Billings in excess of revenue are recorded as a deferred revenue liability, included with accounts payable and accrued liabilities, until services are rendered. Revenue does not include reimbursements for recoverable expenses, such as employee travel expenses, outside printing and third-party professional services. Reimbursements are accounted for as a reduction to expenses.

We also earn commission revenue as payment for the provision of benefits consulting services to clients, as a percentage of insurance premiums paid by our clients. Commission revenue is received annually, semi-annually, quarterly or monthly. Annual fees are typically paid at the beginning of the insurance policy period and are recognized as income at the later of the billing or effective date of the policy, net of a provision for return commissions due to policy cancellations or change of broker.

Amortization of Finite-Life Intangible Assets

Intangible assets consist of customer relationships, proprietary software and customer contracts. These finite-life intangible assets are being amortized over their estimated useful lives of 15 to 20, 5 and 3 years respectively. Impairment is assessed annually, or when events or changes in circumstances indicate the carrying amount of assets may not be recoverable.

Goodwill is not amortized and is subject to an impairment test at least annually or when it is more likely than not that the carrying amount of the Fund's net assets exceeds its fair value. Goodwill impairment is assessed based on a comparison of the fair value of the Fund and its net assets including goodwill.

Allowance for Doubtful Accounts

A provision for accounts receivable resulting from the potential risk that the receivable will not be collected has been recorded. We continually monitor past due accounts to assess the likelihood of collection to estimate the required provision.

Litigation and Claims

We are involved in litigation and other claims arising in the normal course of business. We must use judgment to determine whether or not a claim has any merit, the amount of the claim and whether to record a provision, which is dependent upon the potential success of the claim. We believe that none of the current claims will have a material adverse impact on the financial position of the Fund.

Future income taxes

The Fund uses the asset and liability method of accounting for income taxes. Future income taxes are recognized for the temporary differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Future income tax assets and liabilities are measured using enacted or substantively enacted tax rates and laws that are expected to apply to taxable income in the years in which those temporary differences are expected to be reversed or settled. The effect on future income tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the date of enactment or substantive enactment.

Financial Instruments

Effective January 1, 2007, the Fund adopted the new recommendations of the Canadian Institute of Chartered Accountants (CICA) Handbook Section 1530, Comprehensive Income; Section 3855, Financial Instruments -- Recognition and Measurement; and, Section 3865, Hedges, retroactively without restatement. These new Handbook Sections provide requirements for the recognition and measurement of financial instruments and the use of hedge accounting. Section 1530 establishes standards for reporting and presenting comprehensive income, which is defined as the change in equity from transactions and other events from non-owner sources. Other comprehensive income refers to items recognized in comprehensive income that are excluded from net income calculated in accordance with generally accepted accounting principles.

Under Section 3855, financial instruments must be classified into one of these five categories: held-for-trading, held-to-maturity, loans and receivables, available-for-sale financial assets or other financial liabilities. All financial instruments, including derivatives, are measured in the balance sheet at fair value except for loans and receivables, held-to-maturity investments and other financial liabilities which are measured at amortized cost. Subsequent measurement and changes in fair value will depend on their initial classification, as follows: held-for-trading financial assets are measured at fair value and changes in fair value are recognized in net income; available-for-sale financial instruments are measured at fair value with changes in fair value recorded in other comprehensive income until the investment is derecognized or impaired at which time the amounts would be recorded in net income; and financial assets held-to-maturity, loan and receivables and other financial liabilities are measured at amortized cost using the effective interest method of amortization. Transaction costs are expensed as incurred for financial instruments classified or designated as held--for-trading. For other financial instruments, transaction costs are capitalized on initial recognition.

Upon adoption of these new standards, the Fund designated its cash and short-term investments as held-for-trading, which are measured at fair value. Accounts receivable is classified as loans and receivables, which are measured at amortized cost. Bank indebtedness, Accounts payable and accrued liabilities, Accrued compensation and related benefits, Unitholder distributions payable and Long-term debt, are classified as other financial liabilities. The Fund had neither available for sale, nor held-to-maturity instruments during the three and six months ended June 30, 2007.

Interest-rate swap agreements are used as part of the Fund's program to manage the fixed and floating interest rate mix of the Fund's total debt outstanding and related overall cost of borrowing. The interest-rate swap agreements involve the periodic exchange of payments without the exchange of the notional principal amount upon which the payments are based. The interest-rate swap agreements are classified as held-for-trading and are recorded at their fair value with a corresponding adjustment to interest expense.

The adoption of these Handbook Sections had no impact on opening deficit. The Fund had no "other comprehensive income or loss" transactions during the three and six months ended June 30, 2007 and no opening or closing balances for accumulated other comprehensive income or loss.

The carrying value of the financial instruments approximates their fair values due to their short-term nature with the exception of the interest-rate swap agreements in place on the term loan, which have been recorded at the current market rate.

We are not engaged in currency hedging activities and do not own other instruments that may be settled by the delivery of non-financial assets. We realize a portion of our sales in U.S. dollars and are thus exposed to fluctuations in the value of the U.S. dollar relative to the Canadian dollar. The net revenue exposure after accounting for related expenses denominated in U.S. dollars was approximately US$0.7 million and US$1.6 million respectively for the three and six months ended June 30, 2007.

In our normal course of business, we are exposed to credit risk from our clients. Risk associated with concentrations of credit risk with respect to accounts receivables are limited due to the credit rating of our top 10 clients. We have over 1,000 clients with no client consisting of greater than 1% of total revenue with the exception of our top ten clients.

In our view, we are not exposed to significant interest, currency or credit risks arising from financial instruments.

RISKS AND UNCERTAINTIES

The results of operations, business prospects and financial condition of the Fund are subject to a number of risks and uncertainties and are affected by a number of factors outside our control.

Risk Related to the Business of Morneau Sobeco

Ability to Maintain Profitability and Manage Growth

There can be no assurance that Morneau Sobeco will be able to sustain profitability in future periods. Morneau Sobeco's future operating results will depend on a number of factors, including its ability to continue to successfully execute its strategic initiatives.

There can be no assurance that Morneau Sobeco will be successful in achieving its strategic plan or that its strategic plan will enable the firm to maintain its historical revenue growth rates or to sustain profitability. Failure to successfully execute any material part of Morneau Sobeco's strategic plan could have a material adverse effect on its business, financial condition and operating results, and the ability of the Fund to make distributions on the Units.

There can be no assurance that Morneau Sobeco will be able to effectively manage its growth, and any failure to do so could have a material adverse effect on the firm's and the Fund's business, financial condition and operating results, and on the ability of the Fund to make distributions on the Units.

Reliance on Information Systems and Technology

Information systems are an integral part of Morneau Sobeco's business and the products and services offered to its clients. Morneau Sobeco relies on systems to maintain accurate records and to carry out required administrative functions in accordance with the terms of its contractual obligations to its clients. Morneau Sobeco relies on the Internet as a key mechanism for delivering services to clients and achieving efficiencies in its service model. The Internet has experienced, and is expected to continue to experience, significant growth in the number of users and volume of traffic. As a result, its performance and reliability may decline. In order to maintain the level of security, service and reliability that clients require, Morneau Sobeco may be required to make significant investments in the online means of delivering consulting and outsourcing services. In addition, Web sites and proprietary online services have experienced service interruptions and other delays. If these outages or delays occur frequently in the future, Internet usage as a medium of exchange of information could decline and the Internet might not adequately support the firm's Web-based tools. The adoption of additional laws or regulations with respect to the Internet may impede the efficiency of the Internet as a medium of exchange of information and decrease the demand for Morneau Sobeco's services.

Any disruptions in Morneau Sobeco's systems, the failure of the systems to operate as expected or the firm's ability to use the Internet effectively to deliver services could, depending on the magnitude of the problem, result in a loss of current or future business and/or potential claims against Morneau Sobeco, all of which could have a material adverse effect on Morneau Sobeco's business, financial condition and operating results, and on the ability of the Fund to make distributions on the Units.

Reputational Risk

Morneau Sobeco depends, to a large extent, on its relationships with its clients and its reputation for high-quality outsourcing and consulting services. As a result, the impact of a client not being satisfied with Morneau Sobeco's services or products may be more damaging in Morneau Sobeco's business than in other businesses. Moreover, if the firm fails to meet its contractual obligations, Morneau Sobeco could be subject to legal liability and a loss of client relationships.

Dependence on Key Clients

For the three and six months ended June 30, 2007, Morneau Sobeco's largest client accounted for approximately 10% of revenue (three and six months ended June 30, 2006 - 12%) and its top 10 clients, in the aggregate, accounted for approximately 33% of revenue (three and six months ended June 30, 2006 --36% and 35% respectively). As clients may terminate engagements with minimal notice, there can be no assurance that Morneau Sobeco will be able to retain relationships with its largest clients. Moreover, there can be no assurance that such clients will continue to use Morneau Sobeco's services in the future. Any negative change involving any of Morneau Sobeco's largest clients, including but not limited to a client's financial condition or desire to continue using the firm's services, could result in a significant reduction in revenue which could have a material adverse effect on Morneau Sobeco's business, financial condition and operating results, and on the ability of the Fund to make distributions on the Units.

Risk of Future Legal Proceedings

Morneau Sobeco may be threatened with, or may be named as a defendant in, or may become subject to, various legal proceedings in the ordinary course of conducting its business, including lawsuits based upon professional errors and omissions. Morneau Sobeco's business involves assumptions and estimates concerning future events, the actual outcome of which cannot be known with certainty in advance. In addition, computational, software programming or data management errors could occur. For example, possible legal proceedings could result from:

(i) a client's assertion that actuarial assumptions used in a pension plan were unreasonable, leading to plan underfunding;

(ii) a claim that inaccurate data was used, which could lead to an underestimation of plan liabilities; or

(iii) a claim that employee benefits plan documents were misinterpreted or plan amendments were misstated in plan documents, which could lead to overpayments to beneficiaries.

Defending lawsuits of this nature could require much management attention, which could divert its focus from operations. Such claims could produce negative publicity that could hurt Morneau Sobeco's reputation and business. A significant judgment against Morneau Sobeco, or the imposition of a significant fine or penalty as a result of a finding that Morneau Sobeco failed to comply with laws or regulations, could have a material adverse effect on Morneau Sobeco's business, financial condition and operating results, and on the ability of the Fund to make distributions on the Units.

Reliance on Key Professionals

Morneau Sobeco's operations are dependent on the abilities, experiences and efforts of its professionals, many of whom have excellent reputations and a significant number of contacts in the industry in which Morneau Sobeco operates. Morneau Sobeco's business depends, in part, on its professionals' ability to develop and maintain alliances with businesses such as brokerage firms, financial services companies, healthcare organizations, insurance companies, business process outsourcing organizations and other companies, in order to develop, market and deliver its services. If Morneau Sobeco's strategic alliances are discontinued due to the loss of professional staff or if the firm has difficulty developing new alliances, profitability could be negatively impacted. Should any member of its professional staff be unable or unwilling to continue his or her relationship with Morneau Sobeco, this change could have a material adverse effect on Morneau Sobeco's business, financial condition and operating results, and on the ability of the Fund to make distributions on the Units.

Competition

Morneau Sobeco operates in a highly competitive North American market. As a result, Morneau Sobeco competes with many domestic and international firms. Some of its competitors have achieved substantially more market penetration in certain of the areas in which Morneau Sobeco competes. In addition, some of Morneau Sobeco's competitors have substantially more financial resources and/or financial flexibility than Morneau Sobeco. Competitive forces could result in reduced market share and thus have a material adverse effect on Morneau Sobeco's business, financial condition and operating results, and on the ability of the Fund to make distributions on the Units.

Legislative and Regulatory Changes

The business of pension and benefits consulting and outsourcing is highly regulated and laws are constantly evolving. Any changes to laws, rules, regulations or policies could have a material adverse effect on Morneau Sobeco's business, financial condition and operating results, and on the ability of the Fund to make distributions on the Units.

Changes in Business Conditions

Morneau Sobeco's future success depends, in part, on its ability to develop and implement technology solutions that anticipate and keep pace with rapid and continuing changes in technology, industry standards and client preferences. The firm may not be successful in anticipating or responding to these developments on a timely basis and its ideas may not be accepted in the marketplace. The effort to gain technological expertise and develop new technologies in its business requires Morneau Sobeco to incur significant expenses. If Morneau Sobeco cannot offer new technologies as quickly as its competitors, or if the competition develops more cost-effective technologies, Morneau Sobeco could lose market share. Also, products and technologies developed by Morneau Sobeco's competitors may make the firm's service or product offerings non-competitive or obsolete. Any one of these circumstances could have a material adverse effect on Morneau Sobeco's ability to obtain and fulfill important client engagements, and thus could have a material adverse effect on Morneau Sobeco's business, financial condition and operating results, and on the ability of the Fund to make distributions on the Units.

Timely Completion of Projects and Performance of Obligations

In its contracts with clients, Morneau Sobeco is sometimes committed to complete a project by a scheduled date. If the project is not completed by the scheduled date, Morneau Sobeco may either incur significant additional costs or be held responsible for the costs incurred by the client to rectify damages due to the late completion. Morneau Sobeco's success depends in large part on whether it fulfills these and other contractual obligations with clients and maintains client satisfaction. If Morneau Sobeco fails to satisfactorily perform its contractual obligations, its clients could terminate contracts and/or take legal action against Morneau Sobeco. Such occurrences could result in a loss of its professional reputation and extra costs needed to defend or rectify the situation and thus have a material adverse effect on Morneau Sobeco's business, financial condition and operating results, and on the ability of the Fund to make distributions on the Units.

Implications of Fixed-Price Contracts

A portion of Morneau Sobeco's revenue comes from fixed-price contracts. A fixed-price contract requires Morneau Sobeco to perform either all or a specified portion of work under the contract for a fixed price. Fixed-price contracts expose Morneau Sobeco to a number of risks, including underestimation of costs, ambiguities in specifications, unforeseen costs or difficulties, problems with new technologies, delays beyond the control of Morneau Sobeco, failures of subcontractors to perform, and economic or other changes that may occur during the contract period. Increasing use of fixed-price contracts and/or increasing the size of such contracts would increase Morneau Sobeco's exposure to these risks. Losses under fixed-price contracts could have a material adverse effect on Morneau Sobeco's business, financial condition and operating results, and on the ability of the Fund to make distributions on the Units.

Interest Rate Fluctuations

Morneau Sobeco may be exposed to fluctuations in interest rates under its borrowings. Increases in interest rates may have a material adverse effect on Morneau Sobeco's business, financial condition and operating results, and on the ability of the Fund to make distributions on the Units.

Protection of Intellectual Property

Morneau Sobeco continually develops and improves its proprietary technology solutions for clients. No assurance can be given that Morneau Sobeco's competitors will not develop substantially similar technology. Morneau Sobeco relies on one or more of the following to protect its proprietary rights: trademarks, copyrights, trade secrets, confidentiality procedures and contractual provisions. Despite Morneau Sobeco's efforts to protect its proprietary rights, unauthorized parties may attempt to obtain and use information that Morneau Sobeco regards as proprietary. Stopping unauthorized use of Morneau Sobeco's proprietary rights may be difficult, time-consuming and costly. There can be no assurance that Morneau Sobeco will be successful in protecting its proprietary rights and, if it is not, this could have a material adverse effect on Morneau Sobeco's business, financial condition and operating results, and on the ability of the Fund to make distributions on the Units.

Rising Insurance Costs

The cost of maintaining professional errors and omissions insurance as well as director and officer liability insurance is significant. Morneau Sobeco could experience higher insurance premiums as a result of adverse claims experience or because of general increases in premiums by insurance carriers for reasons unrelated to its own claims experience. Generally, Morneau Sobeco's insurance policies must be renewed annually. Its ability to continue to obtain insurance at affordable premiums depends upon its ability to continue to operate with an acceptable claims record. A significant increase in the number of claims, the existence of one or more claims in excess of its policy limits or the inability to obtain adequate insurance coverage at acceptable rates, or at all, could have a material adverse effect on Morneau Sobeco's business, financial condition and operating results, and on the ability of the Fund to make distributions on the Units.

Risk Related to the Structure of the Fund

Income Tax Matters

There can be no assurance that Canadian federal income tax laws and administrative policies respecting the treatment of mutual fund trusts will not be changed in a manner which may adversely affect the Unitholders.

The Fund Declaration of Trust provides that a sufficient amount of the Fund's net income and net realized capital gains shall be distributed each year to Unitholders in order to eliminate the Fund's liability for tax under Part 1 of the Income Tax Act (Canada). Where such amount of net income and net realized capital gains of the Fund in a taxation year exceeds the cash available for distribution in the year, such excess net income and net realized capital gains will be distributed to Unitholders in the form of additional Units. Unitholders are generally required to include an amount equal to the fair market value of those Units in their taxable income, in circumstances when they do not directly receive a cash distribution.

On June 22, 2007, legislation that proposed changes to the taxation of publicly traded income trusts, received Royal Assent. Certain income of (and distributions made by) the Fund will be taxed in a manner similar to income earned by (and distributions made by) a corporation in the 2011 taxation year.

As a result, the Fund has recognized a $2.7 million future income tax liability as at June 30, 2007 on temporary differences in the reported amounts for financial statement and tax purposes in the intangible and capital assets. The Fund will be liable for income tax at a rate of 31.5% on its taxable income earned after December 31, 2010.

Dependence on Morneau Sobeco Group LP and Its Subsidiaries


The Fund is an unincorporated open-ended, limited purpose trust that is entirely dependent on the operations and assets of the Trust. Cash distributions to Unitholders will be dependent on, among other things, the ability of the Trust to pay interest on the Trust Notes and to make cash distributions in respect of the Trust Units, which, in turn, are dependent on MS Group LP making cash distributions. MS Group LP's ability to make cash distributions is dependent on the ability of its subsidiaries to make cash distributions or other payments or advances. This will be subject to applicable laws and regulations and contractual restrictions contained in the instruments governing any indebtedness of those entities, including restrictive covenants in the credit facilities.

Cash Distributions Are Not Guaranteed and Will Fluctuate With the Business Performance

Although the Fund intends to distribute the interest received in respect of the Trust Notes and the cash distributions received in respect of the Trust Units, less expenses and amounts, if any, paid by the Fund in connection with the redemption of Units, there can be no assurance regarding the amounts of income to be generated by MS Group LP's businesses or ultimately distributed to the Fund. The ability of the Fund to make cash distributions, and the actual amount distributed, will be entirely dependent on the operations and assets of MS Group LP (and its subsidiaries), and will be subject to various factors including each of its financial performance, its obligations under applicable credit facilities, fluctuations in its working capital, the sustainability of its margins and its capital expenditure requirements. The market value of the Units may deteriorate if the Fund is unable to meet its distribution targets in the future, and that deterioration may be significant. In addition, the composition of cash distributions for tax purposes may change over time and may affect the after-tax return for investors.

Restrictions on Potential Growth

The payout by Morneau Sobeco of substantially all of its operating cash flow will make additional capital and operating expenditures dependent on increased cash flow or additional financing in the future. Lack of those funds could limit the future growth of Morneau Sobeco and its cash flow.

Nature of Units

The Units share certain attributes common to both equity securities and debt instruments. The Units do not represent a direct investment in the businesses of Morneau Sobeco and should not be viewed by investors as direct securities of MS Corp or its subsidiaries. As holders of Units, Unitholders will not have the statutory rights normally associated with ownership of shares of a corporation including, for example, the right to bring "oppression" or "derivative" actions or rights of dissent. The Units represent a fractional interest in the Fund. The Fund's primary assets are Trust Units and Trust Notes.

The Units are not "deposits" within the meaning of the Canada Deposit Insurance Corporations Act (Canada) and are not insured under the provisions of that Act or any other legislation. Furthermore, the Fund is not a trust company and, accordingly, is not registered under any trust and loan company legislation as it does not carry on or intend to carry on the business of a trust company.

Market Price of Units

Publicly traded investment trusts such as the Fund do not necessarily trade at prices determined solely by reference to the underlying value of their investments. Increases in market rates of interest may lead purchasers to demand a higher yield on the Units, which may adversely affect their price. In addition, the market price for the Units may be affected by changes in general market conditions, fluctuations in the markets for equity securities and other factors beyond the Fund's control.

The market value of the Units may deteriorate if the Fund is unable to meet its distribution targets in the future, and that deterioration may be material. In addition, the composition of cash distributions for tax purposes may change over time and may affect the after-tax return for investors.

Leverage and Restrictive Covenants in Agreements Relating to Indebtedness of Morneau Sobeco

The ability of the Trust and its subsidiaries to make distributions or make other payments or advances will be subject to applicable laws and contractual restrictions contained in the instruments governing any indebtedness of those entities. The degree to which MS Group LP or Morneau Sobeco is leveraged could have important consequences to the Unitholders including: Morneau Sobeco's ability to obtain additional financing for working capital, capital expenditures or acquisitions in the future may be limited; a significant portion of Morneau Sobeco's cash flow from operations may be dedicated to the payment of the principal of and interest on its indebtedness, thereby reducing funds available for future operations; certain borrowings will be at variable rates of interests, which exposes Morneau Sobeco to the risk of increased interest rates; and, Morneau Sobeco may be more vulnerable to economic downturns and be limited in its ability to withstand competitive pressures. These factors may increase the sensitivity of Standardized Distributable Cash to interest rate variations.

Distribution of Securities on Redemption or Termination of the Fund

It is anticipated that the redemption right will not be the primary mechanism for Unitholders to liquidate their investments. Upon redemption of Units or termination of the Fund, the Trustees may distribute the Trust Notes and Trust Units directly to the Unitholders, subject to obtaining all required regulatory approvals. Trust Units and Trust Notes so distributed may not be qualified investments for registered plans(1) depending upon the circumstances at the time. There is currently no market for the Trust Notes and the Trust Units.

Dilution of Existing Unitholders and MS Group LP Unitholders

The Fund Declaration of Trust authorizes the Fund to issue an unlimited number of Units for that consideration and on those terms and conditions as shall be established by the Trustees without the approval of any Unitholders. The Unitholders will have no pre-emptive rights in connection with such further issues. Additional Units will be issued by the Fund in connection with the indirect exchange of the Class B MS Group LP Units. In addition, MS Group LP is permitted to issue additional MS Group LP Units for any consideration and on any terms and conditions.

Future Sales of Units by the Management Securityholders

The Management Securityholders hold all of the Class B LP Units, representing in aggregate 20.6% of the outstanding MS Group LP Units, which, pursuant to the Exchange Agreement, can be exchanged for Units at any time, subject to certain conditions. Certain of the Management Securityholders have also been granted certain registration rights by the Fund. If the Management Securityholders sell a substantial number of Units in the public market, the market price of the Units could fall. The perception among the public that these sales will occur could also contribute to a decline in the market price of the Units.

Restrictions on Certain Unitholders and Liquidity of Units

The Fund Declaration of Trust imposes various restrictions on Unitholders. Non-resident Unitholders are prohibited from beneficially owning either more than 40% of Units and/or the Special Voting Units (on non-diluted and fully diluted base). These restrictions may limit (or inhibit the exercise of) the rights of certain persons, including non-residents of Canada and U.S. persons, to acquire Units, to exercise their rights as Unitholders and to initiate and complete takeover bids in respect of the Units. As a result, these restrictions may limit the demand for Units from certain Unitholders and thereby adversely affect the liquidity and market value of the Units held by the public.

(1) Trusts governed by registered retirement savings plans, registered retirement income funds, deferred profit sharing plans and registered education savings plans, each as defined in the Income Tax Act (Canada).

Statutory Remedies

The Fund is not a legally recognized entity within the relevant definitions of the Bankruptcy and Insolvency Act, the Companies' Creditors Arrangement Act and in some cases, the Winding- up and Restructuring Act. As a result, in the event that a restructuring of the Fund is necessary, the Fund and its stakeholders may not be able to access the remedies and procedures available thereunder.



SUPPLEMENTARY SUMMARY OF QUARTERLY RESULTS

Operating results, distribution summary and condensed balance sheet
history are as follows:

Operating Results, Distribution
and Condensed Balance Sheets
Selected Unaudited Consolidated
Financial Information
(in thousands of dollars
except per unit amounts)

Restated Restated Restated
Three months ended June 30 March 31 December 31 September 30
2007 2007 2006 2006

Revenue $37,057 $36,091 $34,079 $33,037
Net Income(1)(2) 1,680 3,045 3,010 2,482
EBITDA 8,106 7,865 7,890 7,053
EBITDA Margin 21.9% 21.8% 23.2% 21.3%
Standardized
Distributable Cash(3) 5,835 (927) 7,210 8,725
Adjusted Consolidated
Distributable Cash 7,223 7,439 6,977 6,753
Distributions declared 6,131 5,865 6,050 5,731
Net income per Unit
(basic and diluted(1)(2) $0.07614 $0.13799 $0.13644 $0.11249
Standardized
Distributable Cash per
Unit (basic and diluted) $0.26447 $(0.04204) $0.32680 $0.39559
Adjusted Consolidated
Distributable Cash per
Unit (basic and diluted) $0.26000 $0.26774 $0.25111 $0.24305
Distributions declared
per Unit (basic
and diluted) $0.22068 $0.21106 $0.21775 $0.20625
Standardized
Distributable Cash
Payout Ratio 83.4% (502.1)% 66.6% 52.1%
Adjusted Consolidated
Distributable Cash
Payout Ratio 84.9% 78.8% 86.7% 84.9%
Twelve-month rolling
Standardized
Distributable Cash
Payout Ratio 90.6% 83.5% 77.9% 85.2%
Twelve-month rolling
Adjusted Consolidated
Distributable
Cash Payout Ratio 84.3% 83.3% 85.3% 85.5%

Total Assets(1) $342,569 $338,530 $345,872 $345,398
Total Long-term debt $34,888 $34,876 $35,000 $35,000


Restated Restated Restated
Three months ended June 30 March 31 December 31
2006 2006 2005

Revenue $32,793 $32,178 $30,071
Net Income(1)(2) 5,646 2,835 2,048
EBITDA 7,672 7,228 7,146
EBITDA Margin 23.4% 22.5% 23.8%
Standardized
Distributable Cash(3) 7,213 486 4,978
Adjusted Consolidated
Distributable Cash 6,868 6,566 6,543
Distributions declared 5,688 5,666 5,729
Net income per Unit
(basic and diluted)(1)(2) $0.25650 $0.12900 $0.09318
Standardized Distributable
Cash per Unit
(basic and diluted) $0.32777 $0.02212 $0.22886
Adjusted Consolidated
Distributable Cash per Unit
(basic and diluted) $0.24769 $0.23902 $0.23817
Distributions declared per
Unit (basic and diluted) $0.20625 $0.20625 $0.20854
Standardized Distributable
Cash Payout Ratio 63.0% 932.0% 91.1%
Adjusted Consolidated
Distributable Cash
Payout Ratio 83.3% 86.3% 87.6%
Twelve-month rolling n/a n/a n/a
Standardized Distributable
Cash PayoutRatio
Twelve-month rolling Adjusted
Consolidated Distributable
Cash Payout Ratio n/a n/a n/a

Total Assets(1) $353,149 $342,322 $348,551
Total Long-term debt $35,000 $35,000 $35,000


(1) See "Amendment and Restatement of the Comparative Periods" section

(2) In the second quarter of 2007 we recorded a non-cash charge to earnings
of $2.7 million. The charge relates to our future tax liabilities
recorded as a result of Bill C-52 which received Royal Assent on June
22, 2007. This non-cash charge relates to temporary differences between
the accounting and tax basis of our assets and liabilities primarily
related to intangible assets. The charge has no current impact on our
Cash flow, EBITDA, Standardized Distributable Cash and Adjusted
Consolidated Distributable Cash.

(3) Standardized Distributable Cash (formerly Distributable Cash) has been
restated for the quarters ended March 31, 2006 and June 30, 2006 to
include changes in non-cash operating working capital and restated for
periods prior to June 30, 2007 by removing the non-controlling interest
of Distributable Cash. The Standardized Distributable Cash for the
three months ended March 31, 2007 and 2006 are significantly lower than
the Distributions declared as the Fund pays its employees their annual
bonuses in the first quarter of each year.


Disclosure Controls and Procedures

The Fund's disclosure controls and procedures have been designed to provide reasonable assurance that all relevant information is identified to its Disclosure Committee to ensure appropriate and timely decisions are made regarding public disclosure.

The Chief Executive Officer and the Chief Financial Officer have concluded that the disclosure controls and procedures are operating effectively based on the evaluation of these controls and procedures conducted at June 30, 2007.

Additional Information

The Fund's Units trade on the Toronto Stock Exchange under the symbol MSI.UN. Additional information relating to the Fund, including all public filings, is available on the SEDAR Web site (www.sedar.com) and on our own Web site at www.morneausobeco.com.

The content of this MD&A reflects information known as of August 14, 2007.

Renseignements

  • Fonds de revenu Morneau Sobeco
    William Morneau
    Président et chef de la direction
    (416) 445-2700
    ou
    Morneau Sobeco
    André Pinsonneault
    Directeur des communications d'entreprise
    (416) 383-6499