Fonds de revenu Morneau Sobeco
TSX : MSI.UN

Fonds de revenu Morneau Sobeco

13 août 2008 20h06 HE

Morneau Sobeco dévoile ses résultats du deuxième trimestre de 2008

Points saillants : - Augmentation des revenus du trimestre de 41,3 % par rapport à la même période en 2007 - Hausse de 17,3 % de l'encaisse distribuable consolidée rajustée par unité (de base) - Intégration et rendement de Shepell-fgi conformes aux objectifs - Augmentation de 7 % des distributions en espèces au cours du trimestre

TORONTO, ONTARIO--(Marketwire - 13 août 2008) - Ne pas acheminer aux fils de presse américains ni distribuer aux Etats-Unis.

Le Fonds de revenu Morneau Sobeco (le "Fonds") (TSX:MSI.UN) a annoncé aujourd'hui des résultats d'exploitation favorables, marqués par une croissance des revenus de 41,3 % pour le deuxième trimestre de 2008. Le Fonds a également confirmé que l'intégration et la transition consécutives à l'acquisition de Shepell-fgi vont bon train.

"Notre entreprise est solide, et nous sommes persuadés que l'année 2008 sera une autre très bonne année pour le Fonds", a déclaré Bill Morneau, président du conseil d'administration et chef de la direction. "Au cours de ce trimestre, les revenus et les bénéfices ont tous deux été conformes aux attentes optimistes que nous avions, et nous avons complété avec succès notre acquisition de Shepell-fgi. Le processus d'intégration se déroule selon les plans, et l'acquisition est immédiatement avantageuse pour nos détenteurs de parts."

Résultats du deuxième trimestre de 2008

Les résultats financiers du Fonds pour le deuxième trimestre de 2008 révèlent une croissance des revenus de 15,3 millions de dollars, soit 41,3 %, pour atteindre 52,4 millions de dollars, en comparaison de 37,1 millions de dollars pour la même période en 2007. Cette hausse des revenus provient principalement de revenus de 12,4 millions de dollars résultant de l'acquisition de Shepell-fgi. Cette opération a été conclue le 2 juin dernier, et les données du deuxième trimestre comprennent, pour la première fois, les résultats d'un mois d'exploitation de Shepell-fgi. Une tranche supplémentaire de revenus de 1,1 million de dollars est le fruit de l'acquisition des services-conseils actuariels en régimes de retraite à prestations déterminées et des services administratifs de Cowan, en juin 2007. De nouveaux mandats pour divers clients dans le secteur des services d'impartition expliquent également l'accroissement des revenus durant le trimestre.

Le bénéfice net pour le trimestre terminé le 30 juin 2008 a été de 2,5 millions de dollars, alors qu'il était de 1,7 million de dollars durant la même période en 2007.

Le bénéfice avant intérêts, impôts et amortissement (BAIIA) pour la période de trois mois terminée le 30 juin 2008 est en hausse de 2,4 millions de dollars, ou 30,0 %, pour s'établir à 10,5 millions de dollars, en regard de 8,1 millions de dollars pour la période correspondante en 2007. La marge du BAIIA demeure forte à 21,0 % pour le trimestre conclu le 30 juin 2008, après un rajustement de 0,5 million de dollars pour une composante salariale liée à l'acquisition de Heath Benefits Consulting en juin 2006.

Le BAIIA par unité (de base) pour la période à l'étude était de 0,329 $, soit une progression de 12,7 % par rapport à la même période en 2007. Ce résultat concorde avec la croissance de l'encaisse distribuable consolidée rajustée par unité (de base), en hausse de 17,3 % par rapport à la même période l'an dernier, et illustre la structure et l'accroissement attribuables à l'acquisition de Shepell-fgi. Parallèlement, l'encaisse distribuable normalisée par unité (de base) a augmenté de 17,4 % par rapport à la même période l'année dernière.

Le Fonds continue d'entrevoir l'année 2008 avec optimisme pour ce qui est de son rendement financier, de ses activités et de ses stratégies d'acquisition.

Acquisition de Shepell-fgi

Le 2 juin 2008, une filiale du Fonds a fait l'acquisition de la presque totalité des actifs de Shepell-fgi auprès de Clairvest Group Inc. et de ses partenaires minoritaires, pour une contrepartie totale d'environ 320 millions de dollars devant être versée sur deux ans.

"L'intégration de Shepell-fgi se poursuit conformément à notre plan de transition, et le rendement de l'entreprise répond à nos attentes", a indiqué Alan Torrie, président de Morneau Sobeco. "Nous sommes ravis de la très grande efficacité et des efforts de l'équipe de transition provenant des deux sociétés, soit Shepell-fgi et Morneau Sobeco."

Déjà, des synergies ont été créées par le Fonds dans les domaines des finances, des TI et du soutien administratif. Plusieurs projets commerciaux sont en cours pour accroître le rendement et augmenter de manière quantitative la valeur de l'organisation.

Cette opération fait ressortir la volonté de croissance de Morneau Sobeco dans le secteur de la santé et de la productivité, au Canada. En sa qualité de chef de file au Canada en matière de programmes d'aide aux employés, de gestion de la santé et de santé organisationnelle et formation, Shepell-fgi possède l'expertise requise dans ce domaine. Ensemble, Shepell-fgi et Morneau Sobeco créent un nouveau chef de file qui saura répondre aux besoins des entreprises canadiennes en matière de services relatifs aux ressources humaines.

Cette acquisition procurera aussi environ 220 millions de dollars de déductions d'impôt admissibles. Compte tenu de l'économie d'impôt réalisée, le Fonds sera favorablement positionné après 2010, lorsque le traitement fiscal auquel ont droit les fiducies de revenu sera modifié.

Alliance stratégique avec Sibson Consulting

Le 12 mai, le Fonds a annoncé l'établissement d'une alliance stratégique avec Sibson Consulting, division de services-conseils en gestion des ressources humaines de The Segal Company. Cette annonce s'inscrit dans la stratégie de Morneau Sobeco qui vise à renforcer sa présence aux Etats-Unis par des alliances avec des entreprises offrant des services complémentaires aux siens.

Au deuxième trimestre de 2008, Morneau Sobeco et Sibson ont commencé à collaborer à des propositions conjointes pour des clients communs et des clients éventuels. Morneau Sobeco a désigné des ressources afin d'assurer l'efficacité de ses efforts de coordination dans ses interactions avec Sibson pour des projets de marketing en cours.

Augmentation des distributions

Le Fonds a annoncé, au cours du trimestre, une augmentation de sa distribution en espèces. Ainsi, la distribution de juin 2008 qui a été versée le 15 juillet dernier aux détenteurs d'unités du Fonds inscrits au 30 juin 2008 reflétait l'augmentation annoncée plus tôt de 7 % de l'objectif de distribution mensuelle du Fonds, qui est passée de 0,07356 $ à 0,07871 $ l'unité.

La distribution en espèces normalisée était en hausse de 2,4 millions de dollars, pour atteindre 8,2 millions de dollars, par rapport à 5,8 millions de dollars pour la même période en 2007. L'encaisse distribuable consolidée rajustée (la direction met l'accent sur cette unité de mesure) pour le trimestre terminé le 30 juin 2008 a augmenté de 2,5 millions de dollars, pour totaliser 9,7 millions de dollars en comparaison de 7,2 millions de dollars pour la même période en 2007. Le ratio de distribution de l'encaisse distribuable consolidée rajustée a diminué de près de 10 % au deuxième trimestre de 2008, fléchissant de 84,9 % à 75,0 %.

Conférence téléphonique

Les résultats du deuxième trimestre de 2008 du Fonds feront l'objet d'une discussion, lors d'une conférence téléphonique avec Bill Morneau, président du conseil d'administration et chef de la direction, Alan Torrie, président, et Nancy Lala, chef des finances, demain matin, le jeudi 14 août 2008, à 8 h 30 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 416 695-7806, dans la région de Toronto, ou au 1 888 789-9572 ailleurs au Canada, et composer le code d'accès 3268510#. La conférence sera rediffusée sur le site Web de Morneau Sobeco, à l'adresse www.morneausobeco.com.

A propos du Fonds de revenu Morneau Sobeco

Le Fonds de revenu Morneau Sobeco est la plus importante société de services-conseils et d'impartition en ressources humaines détenue par des intérêts canadiens. Par l'entremise de Morneau Sobeco et Shepell-fgi, la société offre des solutions permettant aux employeurs de mieux gérer la sécurité financière, la santé et la productivité de leurs employés. Comptant plus de 2 300 employés répartis dans des bureaux en Amérique du Nord, le Fonds de revenu Morneau Sobeco offre ses services à des entreprises au Canada, aux Etats-Unis et partout dans le monde.

Mesures financières hors PCGR

Afin d'aider les investisseurs à évaluer le rendement financier du Fonds, le présent communiqué de presse fait aussi mention de certaines mesures financières non définies par les PCGR, comme le BAIIA, l'encaisse distribuable normalisée, l'encaisse distribuable consolidée rajustée, le ratio de distribution de l'encaisse distribuable normalisée et le ratio de distribution de l'encaisse distribuable consolidée rajustée. Morneau Sobeco estime que le BAIIA est une mesure utile pour évaluer le Fonds. Comparativement au bénéfice net qui tient compte d'une charge d'amortissement considérable relative aux actifs incorporels de la société, il permet de mieux déterminer le respect des clauses restrictives de contrats de prêt et de prendre des décisions plus précises concernant les distributions aux porteurs de parts. Morneau Sobeco croit également que l'encaisse distribuable normalisée, l'encaisse distribuable consolidée rajustée, le ratio de distribution de l'encaisse distribuable normalisée et le ratio de distribution de l'encaisse distribuable consolidée rajustée constituent des mesures supplémentaires du rendement généralement utilisées comme des indicateurs de rendement financier par les fonds de revenu à capital variable canadiens. Voir les notes de bas de page du graphique " Résultats d'exploitation " dans le rapport de gestion de la société pour un complément d'information. Les mesures financières non définies par les PCGR n'ont pas de signification normalisée prescrite par les PCGR et, en conséquence, il est possible qu'elles soient difficilement comparables à des mesures semblables présentées par d'autres émetteurs.

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 les 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. L'acquisition et les activités de Shepell-fgi engendreront des risques et incertitudes supplémentaires liés notamment, et sans s'y limiter, aux éléments suivants : un endettement accru et des clauses restrictives plus contraignantes, l'émergence éventuelle de passifs encore inconnus relatifs à l'acquisition et les indemnités limitées offertes au Fonds par le vendeur de Shepell-fgi, l'intégration des activités de l'entreprise issue du regroupement, les ententes de Shepell-fgi avec ses clients, les relations avec les partenaires, la concurrence, la dépendance à l'égard de clients ou d'employés clés, les relations avec les fournisseurs de services, les risques réglementaires, les délais de recouvrement des honoraires, les contrats à prix fixe, les fluctuations des taux de change, la confidentialité des renseignements sur les clients, les risques de poursuites judiciaires futures et certains risques fiscaux inhérents à l'acquisition. Un grand nombre de ces risques et incertitudes peuvent influencer les résultats réels de la société et faire en sorte que ceux-ci diffèrent considérablement de ceux exprimés explicitement ou implicitement dans tout énoncé prospectif émis par Morneau Sobeco ou en son 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 se conformer aux lois applicables, Morneau Sobeco n'assume 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, Morneau Sobeco n'assume 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 2008 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.


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Unaudited Consolidated Financial Statements of
MORNEAU SOBECO INCOME FUND
For the Three and Six Months Ended June 30, 2008 and 2007

MORNEAU SOBECO INCOME FUND
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands of dollars)

-----------------------------------------------------------------------
As at As at
June 30, December 31,
2008 2007
-----------------------------------------------------------------------

Assets
Current assets:
Cash $- $2,898
Accounts receivable 45,799 27,855
Unbilled fees 12,205 2,067
Income taxes recoverable 1,489 388
Prepaid expenses and other 5,416 2,016
-----------------------------------------------------------------------
64,909 35,224
Future income taxes (note 14) 5,901 3,258
Interest-rate swaps (note 7) 951 785
Capital assets (note 4) 16,941 10,186
Intangible assets (note 5) 304,450 115,524
Goodwill (note 6) 295,652 169,451
-----------------------------------------------------------------------
$688,804 $334,428
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-----------------------------------------------------------------------

Liabilities and Unitholders' Equity
Current liabilities:
Bank indebtedness (note 7) $1,701 $-
Accounts payable and accrued liabilities 36,031 12,689
Deferred revenue 3,068 807
Current portion of long-term debt (note 7) 2,300 -
Unitholder distributions payable (including
non-controlling) 3,212 2,045
-----------------------------------------------------------------------
46,312 15,541

Insurance premium liabilities:
Payable to insurance companies 8,356 9,946
Less related cash and investments held (8,356) (9,946)
-----------------------------------------------------------------------
- -

Long-term debt (note 7) 135,162 34,913
Promissory notes (note 8) 71,928 -
Other liabilities (note 9) 6,885 -
Future considerations related to
acquisition (note 3) 2,044 2,044
Future income taxes (note 14) 30,156 29,810
-----------------------------------------------------------------------
292,487 82,308
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Non-controlling interests (note 11) 56,120 54,452
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Unitholders' equity 340,197 197,668
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$688,804 $334,428
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Commitments and Contingencies (notes 3,7,18 and 19)

See accompanying notes to consolidated financial statements


"Robert Chisholm" "William Morneau"
Robert Chisholm William Morneau
Trustee, Audit Committee Chair Trustee, Chairman and CEO



MORNEAU SOBECO INCOME FUND
CONSOLIDATED STATEMENTS OF INCOME AND
OTHER COMPREHENSIVE INCOME
(Unaudited)
(In thousands of dollars, except per unit amounts)

-----------------------------------------------------------------------
Three Months Ended Six Months Ended
-----------------------------------------------------------------------
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
-----------------------------------------------------------------------

Revenue
Fees $47,433 $32,289 $81,596 $63,467
Commissions 4,790 4,626 9,606 9,402
Other 140 142 295 279
-----------------------------------------------------------------------
52,363 37,057 91,497 73,148

Expenses
Salary, benefit and
contractor expenses 32,428 21,574 56,765 43,247
Other operating 9,449 7,377 15,857 13,930
Amortization of capital
assets (note 4) 1,015 547 1,675 1,070
Amortization of
intangible
assets (note 5) 5,931 3,807 9,574 7,582
Interest expenses (note 7) 1,915 315 3,006 768
-----------------------------------------------------------------------
50,738 33,620 86,877 66,597

Income before income taxes
and non-controlling
interest 1,625 3,437 4,620 6,551

Income taxes (recovery)
(note 14)
Current (333) 173 (49) 307
Future (988) 1,149 (1,748) 294
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(1,321) 1,322 (1,797) 601
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Income before
non-controlling interest 2,946 2,115 6,417 5,950

Non-controlling
interest (note 11) (490) (435) (1,181) (1,225)
-----------------------------------------------------------------------
Net income 2,456 1,680 5,236 4,725

Other comprehensive income
Unrealized gain on interest
rate cash flow hedges 951 - 951 -
-----------------------------------------------------------------------
Comprehensive income for
the period $3,407 $1,680 $6,187 $4,725
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Net income per Unit (note 16)
- Basic $0.093 $0.076 $0.215 $0.214
- Diluted $0.091 $0.076 $0.212 $0.214
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See accompanying notes to consolidated financial statements



MORNEAU SOBECO INCOME FUND
CONSOLIDATED STATEMENTS OF CHANGES IN UNITHOLDERS' EQUITY
For the six months ended June 30, 2008
(Unaudited)
(In thousands of dollars)

-----------------------------------------------------------------------
Accumulated
Other
Unitholders' Comprehensive
Capital Income (Loss) Deficit Total
-----------------------------------------------------------------------
Balance, December
31, 2006 $210,607 $- $(6,988) $203,619
Exchange of Class B
LP Units 1,226 - - 1,226
Net income for
the period - - 12,120 12,120
Distributions - - (19,297) (19,297)
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Balance, December
31,2007 $211,833 $- (14,165) $197,668
Exchange of Class B LP
Units (note 11) 1,626 - - 1,626
Issuance of Units
(note 10) 153,000 - - 153,000
Units issuance costs,
net of future income
tax benefits (note 10) (7,316) - - (7,316)
Net income for
the period - - 5,236 5,236
Comprehensive income
for the period - 951 - 951
Distributions (note 12) - - (10,968) (10,968)
-----------------------------------------------------------------------
Balance, June 30, 2008 $359,143 $951 (19,897) $340,197
-----------------------------------------------------------------------
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See accompanying notes to consolidated financial statements



MORNEAU SOBECO INCOME FUND
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands of dollars)

-----------------------------------------------------------------------
Three Months Ended Six Months Ended
-----------------------------------------------------------------------
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
-----------------------------------------------------------------------

Cash provided by (used in):
Operating activities
Net income $2,456 $1,680 $5,236 $4,725
Items not involving cash:
Amortization of capital
assets 1,015 547 1,675 1,070
Amortization of intangible
assets 5,931 3,807 9,574 7,582
Amortization of debt issue
costs (note 7) 108 13 121 26
Amortization of leasehold
inducement 37 - 37 -
Non-controlling interest of
Class B LP Units 490 435 1,181 1,225
Future income taxes (988) 1,149 (1,748) 294
Salary component of Heath
acquisition (note 3(C)) 518 300 758 520
Accretion on promissory
notes (note 7) 570 - 570 -
Fair value of interest-rate
swap agreements (note 7) 86 (132) 785 (68)
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10,223 7,799 18,189 15,374
Change in non-cash operating
working capital (note 17) 305 124 (7,717) (8,483)
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10,528 7,923 10,472 6,891

Financing activities
Issuance of units (note 10) 153,000 - 153,000 -
Expenses related to issuance
of units (note 10) (10,467) - (10,467) -
Proceeds from long-term
debt (note 7) 137,000 - 137,000 -
Repayment of term
loan (note 7) (35,000) - (35,000) -
Deferred financing
cost (note 7) (1,875) - (1,875) -
Operating line of
credit (note 7) 2,300 3,800 2,300 3,800
Distributions paid (6,131) (6,092) (12,262) (12,143)
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238,827 (2,292) 232,696 (8,343)

Investing activities
Business acquisition -
Shepell-fgi (note 3(a)) (246,466) - (246,466) -
Business acquisition - Cowan
(note 3(b)) - (3,783) - (3,783)
Business acquisition - Heath
(note 3(C)) (813) - (813) -
Cash assumed from
acquisitions (note 3) 272 256 272 256
Purchase of capital assets (493) (576) (760) (712)
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(247,500) (4,103) (247,767) (4,239)

Net increase (decrease) in cash
for the period 1,855 1,528 (4,599) (5,691)
Cash (bank indebtedness),
beginning of period (3,556) (1,962) 2,898 5,257
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Cash (bank indebtedness), end
of period $(1,701) $(434) $(1,701) $(434)
-----------------------------------------------------------------------
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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, 2008 and 2007
(Unaudited)
(In thousands of dollars, except unit and 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 firm providing human resource consulting and outsourcing services. The firm delivers solutions to assist employers in managing the financial security, health and productivity of their employees. With over 2,300 employees in offices across North America, the Fund offers its services to organizations that are situated in Canada, in the United States and around the globe.

On June 2, 2008, the Fund indirectly acquired substantially all the assets of Shepell FGI LP ("Shepell-fgi") (Note 3(a) - Business Acquisition). The primary services provided by Shepell-fgi are employee assistance programs ("EAP"), employee health management and workplace training and education.

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
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Morneau Sobeco Trust ("Trust") 100.0
Morneau Sobeco GP Inc. ("MS GP") 100.0
Morneau Sobeco Limited Partnership ("MSLP") 86.1
Morneau Sobeco Group Limited Partnership ("MS Group LP") 86.1
Morneau Sobeco, Ltd. ("MSUS") 86.1
HRCO Inc ("HRCO") (formerly Morneau Sobeco Corporation) 86.1
FGI World France S.A.R.L.("FGIW") 86.1
FGI World New Caledonia ("FGIN") 86.1
1137273 Ontario Limited ("ONTL") 86.1
Innu-Med Inc. ("IMI") 41.3


All material intercompany transactions and balances 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.

EAP revenue is recognized through a combination of the minimum contracted amount and incremental usage above the minimum thresholds. The minimum contracted amount is recognized on a straight-line basis over the term of the contract. Incremental usage is recognized when the minimum usage threshold is exceeded.

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 the effective date of the policy, net of a provision for return commissions due to policy cancellations or change of brokers.

Other revenue includes investment income 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 rates prevailing at the consolidated balance sheet dates. Non-monetary items have been translated into Canadian dollars at the exchange rates 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
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Computer equipment Declining balance 30%
Computer software Declining balance 50%
Furniture and equipment Declining balance 20%
Leasehold improvements Straight-line Over term of the lease


(f) Intangible assets

Intangible assets are recorded at cost less accumulated amortization. Intangible assets acquired through acquisitions or business combinations are initially recognized at fair value based on an allocation of the purchase price. Intangible assets with finite life are amortized on a straight-line basis over their estimated useful lives. Intangible assets with an indefinite life are not amortized but are tested for impairment annually or more frequently if events or circumstances indicate there may be an impairment by comparing the estimated discounted future net cash flows from the asset to its carrying amount.

Amortization is calculated using the straight-line method based on following estimated useful lives:



Asset Estimated useful lives
-------------------------------------------------------------
Customer relationships 15 to 20 years
Customer contracts 1 to 2 years
Proprietary software 5 years
Non-compete agreements 16 months
Trade names Indefinite


(g) Impairment of long-lived assets

Long-lived assets with finite lives are reviewed for impairment annually or whenever events or changes in circumstances cause their carrying amount to exceed the total undiscounted cash flow expected from their use and eventual disposition. An impairment loss is measured at the amount by which the carrying amount of the long-lived asset exceeds its fair value.

(h) Goodwill

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.

(i) 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 sheets.

(j) 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 salary, benefit and contractor expenses over the three-year vesting period.

(k) 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, 2008. 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.

(l) 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.

(m) Deferred lease inducements

Lease inducements comprise rent-free periods and leasehold improvement allowances. Lease inducements are deferred and amortized to rental expense on a straight-line basis over the term of the related lease.

(n) Financial instruments

Financial assets and financial liabilities held-for-trading are measured at fair value with changes in those fair values recognized in the income statement. Loans and receivables and other financial liabilities are measured at amortized cost using the effective interest method of amortization. The Fund had neither available-for-sale nor held-to-maturity instruments.

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 and are included in the underlying balance.

Derivative financial instruments are used by the Fund in the management of its interest rate risk exposure on debt financing. Derivatives that have been designated and function effectively as a hedge are accounted for using hedge accounting principles. The effective portions of changes in fair value of derivatives that qualify for hedge accounting are recorded in other comprehensive income. Any ineffective portions of changes in the fair value are recognized in net income in the period in which the change occurred. If the hedging relationship ceases to be highly effective, changes in the fair value of the interest-rate swap are recognized in income beginning in the period in which the change occurs. Derivatives that do not qualify for hedge accounting are recorded on the consolidated balance sheet at fair value with changes in fair value recorded as income or expense in the consolidated statement of income.

The Fund does not use derivative financial instruments for trading or speculative purposes.

(o) New accounting policies

Effective January 1, 2008 the Fund adopted the following new accounting standards:

(i) Section 3862, Financial Instruments - Disclosures and Section 3863, Financial Instruments - Presentation, which replace the existing Section 3861, Financial Instruments - Disclosure and Presentation. These new sections revise and enhance disclosure requirements and carry forward unchanged existing presentation requirements. These new sections place an increased emphasis on disclosures and presentation regarding the risks associated with both recognized and unrecognized financial instruments and how the Fund manages those risks.

(ii) Section 1535, Capital Disclosure. This section requires disclosure of the Fund's objectives, policies and processes for managing capital, quantitative data about what the Fund regards as capital and whether the Fund has complied with any capital requirements.

These new standards relate to disclosures and presentation only and did not have an impact on the Fund's financial results or position. Disclosures required as a result of adopting the above sections can be found in notes 22 and 23.

(p) Future accounting changes

(i) Goodwill and intangible assets - In February 2008, the CICA issued new Handbook Section 3064, Goodwill and Intangible Assets, replacing Section 3062, Goodwill and Other Intangible Assets and Section 3450, Research and Development Costs. The new standard will be applicable to financial statements relating to fiscal years beginning on or after October 1, 2008. This section establishes standards for the recognition, measurement, presentation and disclosure of goodwill subsequent to its initial recognition and of intangible assets. The standards concerning goodwill are unchanged from the standards included in the previous section 3062. The Fund is currently assessing the impact this new standard will have on its consolidated financial statements, if any.

(ii) International Financial Reporting Standards - The Canadian Accounting Standards Board confirmed in February 2008 plans to converge Canadian GAAP with International Financial Reporting Standards ("IFRS") over a transition period expected to be effective for interim and annual periods commencing January 1, 2011. The Fund is currently assessing the new standards and has not yet determined the impact on its consolidated financial condition.

3. BUSINESS ACQUISITIONS

(a) Shepell-FGI Holdings LP ("Shepell-fgi")

On June 2, 2008, the Fund indirectly acquired certain assets, shares of certain subsidiaries, liabilities and contracts of Shepell-fgi. The total purchase price is $319,960 including estimated transaction cost of $1,243. The consideration was satisfied by cash of $247,359 and two non-interest bearing promissory notes of $75,000 and $4,500 repayable on July 2, 2009 and July 2, 2010 respectively. The promissory notes have been recorded at their combined present value of $71,358.

The acquisition was financed by the issuance of Fund's units for proceeds of $153,000, net of underwriters' fees and estimated issuance expenses of approximately $10,467. The remaining amount was financed through cash from operations and the utilization of a new credit facility. $246,466 of the cash consideration was paid on closing and the remainder of $2,136 was settled in July 2008 after the finalization of the working capital and included under accounts payable and accrued liabilities as at June 30, 2008

The acquisition has been accounted for using the purchase method. The purchase price allocation is preliminary pending finalization of valuations of the net identifiable assets acquired and liabilities assumed. The preliminary estimated fair values of the assets acquired and liabilities assumed in the acquisition are as follows:



Assets and liabilities acquired:
Cash $272
Accounts receivable 14,672
Unbilled fees 8,041
Income taxes recoverable 572
Prepaid expenses and other 2,225
Capital assets 7,669
Intangible assets:
Customer relationship 90,000
Customer contracts 27,500
Trade name 70,000
Non-compete agreements 5,000
Proprietary software 6,000
Goodwill 121,604
Accounts payable and accrued liabilities (21,848)
Deferred revenue (2,298)
Future income tax liabilities (2,601)
Other liabilities (6,848)
-----------------------------------------------------------------------
$319,960
-----------------------------------------------------------------------
-----------------------------------------------------------------------

Consideration:
Cash $247,359
Transaction costs 1,243
Promissory notes issued to vendors, at present value 71,358
-----------------------------------------------------------------------
$319,960
-----------------------------------------------------------------------
-----------------------------------------------------------------------


As a result of the transaction being an asset purchase, a subsidiary of the Fund has approximately $220,000 of eligible tax deductions which are deductible from taxable income at 7% per annum on a declining balance basis.

These consolidated financial statements include the results of Shepell-fgi from the date of acquisition on June 2, 2008.

(b) Cowan Benefits Consulting Limited ("Cowan")

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 instalment is $960 and payable on August 1, 2008. The third instalment is subject to the purchase price adjustment and will be payable on August 1, 2009.

The contingent consideration has been recognized to the extent the acquired assets net of liabilities assumed exceed the first and second installments 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 and liabilities acquired:
Cash $256
Prepaid expenses and other 6
Intangible assets 5,821
Accounts payable and accrued liabilities (256)
-----------------------------------------------------------------------
$5,827
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Consideration:
Cash $3,783
Instalment 2 payable on August 1, 2008 960
Future considerations 1,084
-----------------------------------------------------------------------
$5,827
-----------------------------------------------------------------------
-----------------------------------------------------------------------


These consolidated financial statements include the results of the Cowan DB business from the date of acquisition on June 1, 2007.

(C) 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 purchase price is $16,853. The consideration was satisfied primarily through cash, the assumption and repayment of the Heath debt and the issuance of Class B LP Units of MS Group LP based on a predetermined value of $12.52 per unit and a final installment of cash and units of MS Group LP due on December 1, 2008.

A portion of the purchase price is conditional on the continuing employment of certain selling shareholders ("salary component of the Heath acquisition") and is being recorded as salary expense over the required employment period to December 2008.

The expenses related to the salary component of the Heath acquisition for the three months ended June 30, 2008 and June 30, 2007 were $518 and $300 and for the six months ended June 30, 2008 and June 30, 2007 were $758 and $520, respectively. The expense for this quarter included an adjustment as a result of the finalization of the contingent consideration.

Total consideration also includes amounts to compensate for forgone distributions payable on the unpaid purchase price since June 1, 2006 which amounted to $408 as at June 30, 2008.

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 purchase price has been accounted as follows:



Assets and liabilities acquired:
Cash $827
Accounts receivable 1,530
Income taxes recoverable 66
Prepaid expenses and other 101
Capital assets 365
Intangible assets 8,090
Goodwill 7,776
Bank indebtedness (1,734)
Accounts payable and accrued liabilities (969)
Future income tax liability (1,923)
Payable to insurance companies (3,156)
Related cash and investments held 3,156
-----------------------------------------------------------------------
$14,129
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Consideration:
Cash $1,261
Debt assumed and repaid 4,648
Exchangeable Units 6,960
Future considerations 3,984
-----------------------------------------------------------------------
$16,853
Salary component of the Heath acquisition (2,724)
-----------------------------------------------------------------------
$14,129
-----------------------------------------------------------------------
-----------------------------------------------------------------------


These consolidated financial statements include the results of Heath from the date of acquisition on June 1, 2006.

4. CAPITAL ASSETS

The Fund's capital assets are comprised of:



-----------------------------------------------------------------------
Accumulated Net Book Net Book
Amortization Value Value
June 30, June 30, December 31,
Cost 2008 2008 2007
-----------------------------------------------------------------------
Computer equipment $3,253 $(985) $2,268 $1,201
Computer software 638 (437) 201 230
Furniture and
equipment 6,626 (1,705) 4,921 2,381
Leasehold
improvements 13,047 (3,496) 9,551 6,374
-----------------------------------------------------------------------
$23,564 $(6,623) $16,941 $10,186
-----------------------------------------------------------------------
-----------------------------------------------------------------------


Amortization for the three months ended June 30, 2008 and June 30, 2007 were $1,015 and $547 and for the six months ended June 30, 2008 and June 30, 2007 were $1,675 and $1,070, respectively.

5. INTANGIBLE ASSETS

The Fund's intangible assets are comprised of:



-----------------------------------------------------------------------
Accumulated Net Book Net Book
Amortization Value Value
June 30, June 30, December 31,
Cost 2008 2008 2007
-----------------------------------------------------------------------
Customer
relationships $193,911 $(14,459) $179,452 $92,666
Customer contracts 32,500 (6,089) 26,411 858
Proprietary software 46,000 (22,100) 23,900 22,000
Non-compete
agreements 5,000 (313) 4,687 -
Trade names 70,000 - 70,000 -
-----------------------------------------------------------------------
$347,411 $(42,961) $304,450 $115,524
-----------------------------------------------------------------------
-----------------------------------------------------------------------


Amortization for the three months ended June 30, 2008 and June 30, 2007 were $5,931 and $3,807 and for the six months ended June 30, 2008 and June 30, 2007 were $9,574 and $7,582, respectively.

6. GOODWILL



June 30, December 31,
2008 2007
-----------------------------------------------------------------------
Balance, beginning of year $169,451 $169,451
Acquisition (note 3(a)) 121,604 -
Acquisition (note 3(C)) 4,597 -
-----------------------------------------------------------------------
$295,652 $169,451
-----------------------------------------------------------------------
-----------------------------------------------------------------------


$3,179 of goodwill related to the Heath acquisition was recognized as part of the first instalment paid on June 1, 2006.

7. BANK INDEBTEDNESS AND LONG-TERM DEBT



June 30, December 31,
2008 2007
-----------------------------------------------------------------------
Non-revolving term loan $137,000 $35,000
Revolving loan 2,300 -
-----------------------------------------------------------------------
139,300 35,000
Less: current portion of long term debt (2,300) -
Less: debt issue costs, net of accumulated
amortization (1,838) (87)
-----------------------------------------------------------------------
$135,162 $34,913
-----------------------------------------------------------------------
-----------------------------------------------------------------------


New credit agreement

As part of the Shepell-fgi acquisition the Fund entered into a new credit agreement with a syndicate of Canadian chartered banks for a period of four years maturing on June 1, 2012. Under the agreement, the following credit facilities are available:

- $20,000 senior secured revolving facility ("revolving loan").

- $137,000 senior secured non-revolving term loan ("term loan").

- $40,000 senior secured non-revolving delayed draw term facility. This facility shall be available until July 2, 2009 by way of a single draw to fund a portion of the $75,000 promissory note issued in connection with the Shepell-fgi acquisition.

The interest rates for the facilities are floating, based on a margin over certain reference rates of interest. The applicable margin may vary up and down depending on the ratio of the Fund's consolidated debt to Adjusted EBITDA as calculated in the new credit agreement. Adjusted EBITDA is defined as the rolling twelve months earnings before interest, taxes, deprecation and amortization of the Fund and Shepell-fgi.

The credit facilities are secured by a general assignment of all the assets of the Fund. The new credit agreement also requires the Fund to maintain the following financial covenants on a consolidated basis:

(i) Debt to Adjusted EBITDA ratio shall not exceed 3.5:1.0 for the period up to December 30, 2009 and declining to 2.5:1.0 by June 30, 2011.

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

EBITDA is defined as net income before interest expense, income taxes (recovery), depreciation, amortization and non-controlling interest.

The Fund complied with all the required financial covenants and the ratios as at June 30, 2008 were 3.0 and 16.0 respectively.

At June 30, 2008 the Fund has utilized the following credit facilities:

- $137,000 of term loan. The term loan is repayable in full on June 1, 2012 and bears interest at one month banker acceptance ("BA") rate plus an applicable margin.

- $2,300 of revolving loan. The loan matures on September 2, 2008 and bears interest at three months banker acceptance rate plus an applicable margin.

- Bank indebtedness of $1,701 under the revolving facilities. The overdraft carries interest at prime plus an applicable margin.

- $400 letter of credit under the revolving facility, as part of the Cowan DB business acquisition.

As a result of the new credit agreement, the Fund wrote off the remaining $74 of debt issue costs related to the previous credit agreement and incurred $1,875 of new costs.

Interest-rate swap

In connection with the term loan, the Fund entered into new interest-rate swap agreements for a total notional amount of $102,000, increasing to $137,000 from July 2, 2008 to and ending on June 1, 2012. These swaps are used to fix the variable component of the interest rate at 3.657%, before the applicable margin, for the duration of the loan and have been designated as cash flow hedges. The fair value of the swaps as at June 30, 2008 was $951.

The Fund also terminated its existing swap agreements associated with the original $35,000 borrowing and incurred a loss of $282, which represents a mark to market adjustment of $196 on the cancellation date and the write off the remaining fair value of $86. These swap agreements were not designated as cash flow hedges and as such are included in the interest expense.

Interest expenses

Interest expense is comprised of the following:



Three Months Ended Six Months Ended
June 30 June 30
-----------------------------------------------------------------------
2008 2007 2008 2007
-----------------------------------------------------------------------
Interest on term loan $907 $384 $1,278 $759
Accretion of interest on
promissory notes (note 8) 570 - 570 -
Interest on revolving loan,
bank indebtedness and
other charges 48 50 56 51
Amortization of debt issue costs 108 13 121 26
Swap termination fees 196 - 196 -
Interest-rate swap agreements
fair value adjustment 86 (132) 785 (68)
-----------------------------------------------------------------------
$1,915 $315 $3,006 $768
-----------------------------------------------------------------------
-----------------------------------------------------------------------


8. PROMISSORY NOTES

The promissory notes issued as part of the Shepell-fgi acquisition in the amounts of $75,000 and $4,500 are due on July 2, 2009 and July 2, 2010, respectively. The notes are non-interest bearing and are secured by a general assignment of all the assets of the Fund, which is subordinated to the credit facilities. The notes have been recorded at their initial combined present value of $71,358 plus accreted interest to date of $570.

The Fund has the option to repay up to 50% of the $75,000 promissory note and 100% of the $4,500 promissory note through the issuance of Units at a 5% discounted value, subject to the Fund's ability to issue new Units under the guidance for income trusts that qualify for the four-year transitional relief. It is the Fund's intention is to repay the notes through future cash flow and as a result the notes are recorded as liabilities.

The promissory notes also include a covenant that the Fund and its subsidiaries shall not incur any debt other than permitted debt as defined in the promissory note agreements unless, after the incurrence of such debt, the Fund would have on a pro forma consolidated basis of ratio of debt to adjusted EBITDA of not greater than 4.5:1.0 determined as of end of the fiscal quarter ending immediately prior to the date of determination.

9. OTHER LIABILITIES



June 30, December 31,
2008 2007
-----------------------------------------------------------------------
Acquired above market rent leases $5,835 $-
Sub-lease loss 1,050 -
-----------------------------------------------------------------------
$6,885 $-
-----------------------------------------------------------------------
-----------------------------------------------------------------------


As part of the Shepell-fgi acquisition, the Fund assumed lease agreements for several offices. The above amounts represent the difference between estimated market rates and the lease agreements as well as the estimated sub-lease loss as a result of a planned office relocation.

10. 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:



Special
Units Voting
Issued Units Total Units Amount
-----------------------------------------------------------------------
Balance, December
31, 2006 22,062,916 5,721,444 27,784,360 $ 210,607
Exchange of Class B
LP Units 130,003 (130,003) - 1,226
-----------------------------------------------------------------------
Balance, December
31, 2007 22,192,919 5,591,441 27,784,360 211,833
Exchange of Class B
LP Units 153,994 (153,994) - 1,626
Class A LP Units - (i) 12,750,000 - 12,750,000 153,000
Units issuance costs,
net of future income
tax benefits- (i) - - - (7,316)
Class B LP Units - (ii) - 242,997 242,997 -
-----------------------------------------------------------------------
Balance, June 30, 2008 35,096,913 5,680,444 40,777,357 $ 359,143
-----------------------------------------------------------------------


(i) On June 2, 2008, as part of the Shepell-fgi acquisition, the Fund completed a public offering and issued 12,750,000 Units at price of $12.00 per unit for cash proceeds of $153,000. The Unit issuance costs, net of future income tax benefits of $3,151, is $7,316.

(ii) On June 30, 2008, the Fund issued 242,997 Special Voting Units in connection with the settlement of the second instalment of the Heath acquisition.

11. NON-CONTROLLING INTERESTS

The former shareholders of Morneau Sobeco and Heath own 5,680,444 Class B LP Units of MS Group LP. The Class B LP Units are fully exchangeable for an equal number of Units in the Fund and provide the former shareholders of Morneau Sobeco and Heath with a non-controlling interest of 13.9% (December 31, 2007 - 20.1%) in the Fund. Some of the Class B LP Units were subordinated in their rights to receive distributions.

Distributions on the Subordinated Class B LP Units were subordinated in favour of the Fund Units and the Non-subordinated Class B LP Units. The distributions on the Subordinated Class B LP Units were 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 had been paid. On October 16, 2007, the Audit Committee of the Fund declared that the conditions of the subordination provisions had been satisfied and the subordination end date was determined to be September 30, 2007.



-----------------------------------------------------------------------
Class B LP
Units Issued
Non-
Subordinated subordinated Total Amount
-----------------------------------------------------------------------
Balance, December
31, 2006 4,095,060 1,626,384 5,721,444 $56,520
Exchange Units - (130,003) (130,003) (1,226)
Subordinated
conditions met (4,095,060) 4,095,060 - -
Salary component of
Heath acquisition 999
Share of income for
the year 3,119
Distribution for
the year (4,960)
-----------------------------------------------------------------------
Balance, December
31, 2007 - 5,591,441 5,591,441 54,452

Units issued related
to Heath acquisition 242,997 242,997 3,042
Salary component of
Heath acquisition 758
Heath 3rd instalment
excluding salary
component 773
Exchange Units - (153,994) (153,994) (1,626)
Share of income for
the period 1,181
Distributions for
the period (2,460)
-----------------------------------------------------------------------
Balance, June 30, 2008 - 5,680,444 5,680,444 $56,120
-----------------------------------------------------------------------


12. 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, which Units will be immediately consolidated such that each Unitholder will hold after consolidation the same number of Units as the Unitholder held prior to the distribution, subject to certain exceptions.

Distributions announced during the six months ended June 30, 2008 and 2007 were as follows:



Unitholder record date Total Per Unit Paid or payable for the
six months ended June 30, 2008

Trust Units
January 31, 2008 $1,635 $0.07356 February 15, 2008
February 28, 2008 1,642 0.07356 March 17, 2008
March 31, 2008 1,642 0.07356 April 15, 2008
April 30, 2008 1,643 0.07356 May 15, 2008
May 30, 2008 1,643 0.07356 June 16, 2008
June 30, 2008 2,763 0.07871 July 15, 2008
------------------------------------------------------------------------
$10,968 $0.44651
------------------------------------------------------------------------

Class B LP Units
Non-subordinated
January 31, 2008 $409 $0.07356 February 15, 2008
February 28, 2008 403 0.07356 March 17, 2008
March 31, 2008 401 0.07356 April 15, 2008
April 30, 2008 400 0.07356 May 15, 2008
May 30, 2008 400 0.07356 June 16, 2008
June 30, 2008 447 0.07871 July 15, 2008
------------------------------------------------------------------------
$2,460 $0.44651
------------------------------------------------------------------------

Unitholder record date Total Per Unit Paid or payable for the
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


13. LONG-TERM INCENTIVE PLAN

Senior management is eligible to participate in Morneau Sobeco's Long-Term Incentive Plan ("LTIP"), which is designed to align compensation with the performance of the Fund's subsidiaries and to aid in the retention of a select group of senior professionals. The Fund's Compensation, Nominating and Corporate Governance Committee of the Board of Trustees 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 in an amount determined by the Board. 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, Units will either vest upon departure from the firm after a period of at least three years, or in equal amounts over a period of 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, or as otherwise directed.

Amounts awarded under the terms of the LTIP since inception of the plan and their associated expenses by year based on vesting periods are summarized as follow:



------------------------------------------------------------------------
Expense by year - December 31
Year Year units Award -------------------------------------
awarded purchased amount 2007 2008 2009 2010
------------------------------------------------------------------------
2006 2007 $386 $146 $198 $42 $-
2007 2008 1,340 484 439 417
------------------------------------------------------------------------
$1,726 $146 $682 $481 $417
------------------------------------------------------------------------


Once awarded, the LTIP amount to be recognized as an expense in future periods is classified as a prepaid expense on the consolidated balance sheet. As at June 30, 2008 the amount recorded under prepaid is $1,231 The expense recognized for the three months ended June 30, 2008 and June 30, 2007 was $170 and $32 and for the six months ended June 30, 2008 and June 30, 2007 was $341 and $64 respectively. Under the LTIP, the Fund redeemed proceeds of $17 related to 2006 awards forfeited.

14. 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. 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.

As a result of 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 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
------------------------------------------------------------------------
2008 2007 2008 2007
------------------------------------------------------------------------

Income taxes at statutory rates:
Federal 19.50% 22.12% 19.50% 22.12%
Provincial 12.64% 12.25% 12.64% 12.25%
------------------------------------------------------------------------
32.14% 34.37% 32.14% 34.37%

Income tax provision applied
to income before income taxes:
Combined basic federal and
provincial income
taxes at statutory rates
applied to income from
continuing operations $574 $1,181 $1,538 $2,251
Income taxed in the hands of
the Unitholders (2,025) (1,906) (3,608) (3,773)
Non-deductible expenses 197 141 301 244
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) - (284)
Change in taxable subsidiary
share of temporary differences
between the carrying amounts and
tax bases of its assets and
liabilities - (300) - (300)
Other (67) (158) (28) (207)
------------------------------------------------------------------------
$(1,321) $1,322 $(1,797) $601
------------------------------------------------------------------------
------------------------------------------------------------------------


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



June 30, December 31,
2008 2007
------------------------------------------------------------------------

Future income tax assets:
Fund Unit issuance costs $5,157 $2,581
Capital assets 744 652
Other - 25
------------------------------------------------------------------------
$5,901 $3,258
------------------------------------------------------------------------
------------------------------------------------------------------------

Future income tax liability:
Intangible assets $27,737 $29,810
Other liabilities 2,419 -
------------------------------------------------------------------------
$30,156 $29,810
------------------------------------------------------------------------
------------------------------------------------------------------------


15. 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.

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 are measured as at June 30, 2008. Information about the pension plan's defined benefit option is as follows:



June 30, December 31,
2008 2007
------------------------------------------------------------------------

Fair value of plan assets $3,076 $2,897
Accrued benefit obligation 3,100 3,218
------------------------------------------------------------------------
Funded status - deficit $(24) $(321)
------------------------------------------------------------------------
------------------------------------------------------------------------

Plan assets:
Fair value, beginning of year $2,897 $2,562
Actual return on plan assets 64 108
Employer contributions 144 285
Benefits paid (29) (58)
------------------------------------------------------------------------
Fair value, end of period/year $3,076 $2,897
------------------------------------------------------------------------
------------------------------------------------------------------------

Accrued benefit obligation:
Balance, beginning of year $3,218 $3,164
Current service cost 28 91
Interest cost 89 161
Benefits paid (29) (58)
Actuarial gains (206) (140)
------------------------------------------------------------------------
Balance, end of period/year $3,100 $3,218
------------------------------------------------------------------------
------------------------------------------------------------------------


June 30, December 31,
2008 2007
------------------------------------------------------------------------
Reconciliation of plan assets to accrued
benefit obligation, end of period/year:
Fair value of plan assets $3,076 $2,897
Accrued benefit obligation 3,100 3,218
------------------------------------------------------------------------
Funded status - deficit (24) (321)
Unamortized net actuarial loss (gain) (288) (36)
Unamortized transitional obligation 314 359
------------------------------------------------------------------------
Accrued benefit asset $2 $2
------------------------------------------------------------------------
------------------------------------------------------------------------
End of year 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
------------------------------------------------------------------------
2008 2007 2008 2007
------------------------------------------------------------------------
Pension plan cost
Current service cost $14 $23 $28 $46
Interest cost on accrued benefit
obligation 45 40 89 80
Return on plan assets (60) 11 (64) (12)
Actuarial losses (gains) during
the period on accrued
benefit obligation (1) (237) (206) (237)
------------------------------------------------------------------------
$(2) $(163) $(153) $(123)
Other adjustments:
Difference between actual
and expected return
on plan assets 8 (58) (39) (80)
Amortization of actuarial
losses (gains) 42 298 291 298
Transitional amounts 22 22 45 45
------------------------------------------------------------------------
Net pension plan expense $70 $99 $144 $140
------------------------------------------------------------------------
------------------------------------------------------------------------


Other information about the Fund's defined benefit option is as follows:


Three Months Ended Six Months Ended
June 30 June 30
2008 2007 2008 2007
------------------------------------------------------------------------

Employer contributions $70 $101 $144 $140
Benefits paid $14 $14 $29 $29


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, 2006.

Weighted average assumptions:



Weighted average of the amounts assumed in June 30, December 31,
accounting for the plan: 2008 2007
------------------------------------------------------------------------
Discount rate at the end of the current fiscal
period used to determine the accrued
benefit obligation 6.00% 5.50%
Discount rate at the end of preceding period
used to determine the benefit cost 5.50% 5.00%
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, 2008 and 2007 was $527 and $449 and for the six months ended June 30, 2008 and 2007 was $1,038 and $918, respectively.

16. 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
2008 2007 2008 2007
---------------------------------------------------------------------------

Basic:
Net income $2,456 $1,680 $5,236 $4,725
---------------------------------------------------------------------------
Weighted average number
of Units outstanding 26,402,372 22,062,916 24,326,996 22,062,916

Diluted:
Net income $2,456 $1,680 $5,236 $4,725
Non-controlling interest 490 435 1,181 1,225
---------------------------------------------------------------------------
Net income available to
Unitholders and Class B
LP Unitholders $2,946 $2,115 $6,417 $5,950
---------------------------------------------------------------------------
Weighted average number of
Units outstanding - Basic 26,402,372 22,062,916 24,326,996 22,062,916
Weighted average
exchangeable Class B
LP Units outstanding 5,447,845 5,721,444 5,490,293 5,721,444
Dilutive effect of Class B
LP Units in connection with
the Heath acquisition 483,321 - 484,656 -
---------------------------------------------------------------------------
Total weighted average
number of diluted Units 32,333,538 27,784,360 30,301,945 27,784,360
---------------------------------------------------------------------------

Net income per Unit
- Basic $0.093 $0.076 $0.215 $0.214
- Diluted $0.091 $0.076 $0.212 $0.214
---------------------------------------------------------------------------
---------------------------------------------------------------------------


17. SUPPLEMENT DISCLOSURE OF CASH FLOW INFORMATION

Change in non-cash operating working capital:

Three Months Ended Six Months Ended
June 30 June 30
-----------------------------------------------------------------------
2008 2007 2008 2007
-----------------------------------------------------------------------
Accounts receivable $(1,362) $(3,755) $(3,272) $(6,072)
Unbilled fees (1,580) 1,870 (2,097) 772
Income taxes
recoverable/payable (321) 166 (529) 840
Prepaid expense and other (1,694) (236) (1,175) (22)
Accounts payable and
accrued liabilities 5,457 2,079 (607) (4,001)
Deferred revenue (195) - (37) -
-----------------------------------------------------------------------
$305 $124 $(7,717) $(8,483)
-----------------------------------------------------------------------
-----------------------------------------------------------------------

Three Months Ended Six Months Ended
June 30 June 30
-----------------------------------------------------------------------
2008 2007 2008 2007
-----------------------------------------------------------------------
Interest paid $908 $468 $1,212 $845
Income taxes paid
(refunded) $142 $(9) $240 $(486)


18. COMMITMENTS

The Fund has lease commitments for office premises and equipment with options for renewal. As at June 30, 2008 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:



2008 (remainder) $6,786
2009 13,031
2010 12,476
2011 11,164
2012 9,733
Thereafter 35,953
-----------------------------------------------------------------------
Total $89,143
-----------------------------------------------------------------------
-----------------------------------------------------------------------


In addition, the Fund has two subleases for which the Fund is liable for the rent in case of a default by the subtenants. The average annual rent for the leases are $192 and $244 and expire on October 30, 2011 and June 29, 2017, respectively. The fair value of the total future lease payments as at June 30, 2008 was $2,028. The Fund considers the risk of default by the subtenants to be low therefore no accrual has been set up for the guarantee.

19. 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.

20. ECONOMIC DEPENDENCE

Revenue from the Fund's largest client for the three and six months ended June 30, 2008 was approximately 7% and 9%, respectively (for three and six months ended June 30, 2007 - 10%) and its top 10 clients, in the aggregate, accounted for approximately 26% and 27%, respectively (for three and six months ended June 30, 2007 - 33%).

Accounts receivable from the Fund's largest client was approximately 1% of the total accounts receivable as at June 30, 2008 (December 31, 2007 - 2%). The Fund's top 10 clients accounted for approximately 19% of the total accounts receivable as at June 30, 2008 (December 31, 2007 - 24%).

21. SEGMENTED INFORMATION

The Fund's operations consist of one reporting segment, which provides human resource, consulting and outsourcing services. Geographic data is as follows:



Three Months Ended Six Months Ended
June 30 June 30
-----------------------------------------------------------------
Revenue 2008 2007 2008 2007
-----------------------------------------------------------------
Canada $48,967 $35,322 $85,668 $69,365
United States 3,396 1,735 5,829 3,783
-----------------------------------------------------------------
$52,363 $37,057 $91,497 $73,148

June 30, December 31,
2008 2007
-----------------------------------------------------------------
Assets:
Canada $682,613 $332,397
United States 6,191 2,031

Liabilities:
Canada $346,655 $136,367
United States 1,952 393


22. MANAGEMENT OF CAPITAL

The Fund views its capital as the combination of its cash (bank indebtedness), long-term debt, promissory notes non-controlling interests and Unitholders' equity. The Fund's objectives when managing capital are to safeguard the entity's ability to continue as a going concern while maintaining the distributions to its Unitholders and the growth of the Fund's business through organic growth and new acquisitions.

The Fund manages the capital structure and makes adjustments to it in accordance with the aforementioned objectives, as well as taking into consideration changes in economic conditions and the risk characteristics of the underlying assets. To maintain or adjust the capital structure, the Fund may adjust the amount of distributions paid to Unitholders, issue new or repurchase existing Units and assume new or repay existing debt. The Fund will also review its level of equity in the context of the change in taxation impacting the Fund commencing in 2011.

The credit facilities and promissory notes require the Fund to maintain certain financial covenants. Management also uses these ratios as key indicators in managing the Fund's capital.

Distributions are made to Unitholders monthly. Various ratios of distributions to available cash, cash from operating activities and EBITDA are used by management and the Board of Trustees to assist with the determination of distributions.

23. FINANCIAL INSTRUMENTS

The following table summarizes information regarding the carrying value of the Fund's financial instruments:



June 30, December 31,
2008 2007
----------------------------------------------------------------------
Held for trading (i) $- $3,683
Loans and receivables (ii) 47,288 28,243
Other financial liabilities (iii) 261,236 50,454


(i) Includes cash and Interest-rate swap agreements not designated as hedges.

(ii) Includes accounts receivable and income taxes recoverable.

(iii) Includes accounts payable and accrued liabilities, accrued compensation and related benefits, deferred revenue, Unitholder distributions payable, bank indebtedness, operating line of credit, long-term debt, promissory notes and other liabilities

Fair value

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 fair value of interest-rate swaps was determined using estimated future discounted cash flows using a comparable market rate of interest. The Fund does not enter into financial instruments for trading or speculative purposes.

Interest rate risk

The Fund is subject to interest rate risk as its secured term loan bears interest at market rates. 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.

A sensitivity analysis that assumes interest rates increased or decreased by 50 basis points with all other variables held constant would result in an increase (decrease) of the Fund's interest expense, excluding the interest subjected to interest-rate swap agreements, by $3.

Credit risk

The Fund's exposure to credit risk is limited to carrying amount of cash, accounts receivable and interest-rate swap agreements recognized at the balance sheet date.

The aging of fees receivable was:



June 30, December 31,
2008 2007
----------------------------------------------------------------------
Current $19,306 $9,524
Past due 0- 30 days 11,660 9,416
Past due 31- 90 days 9,484 5,643
Past due over 90 days 5,987 2,946
----------------------------------------------------------------------
$46,437 $27,529
----------------------------------------------------------------------


The Fund believes that the credit risk of accounts receivable is limited for the following reasons:

(1) Risk associated with concentration of credit risk with respect to accounts receivable is limited due to the credit rating of the Fund's top 10 clients (note 20). The Fund has over 8,000 clients, with no client accounting for greater than 1% of total revenue with the exception of the top 10 clients.

(2) Management regularly reviews and assesses customer accounts and credit risk. Historically, bad debt as a percentage of revenue has been minimal.

The Fund determines its allowance for doubtful accounts based on it's best estimate of the net recoverable amount by customer account. Accounts that are considered uncollectible are written off. The allowance for doubtful accounts as at June 30, 2008 was $941 (December 31, 2007 - $76).

The Credit risk on cash and interest-rate swap agreements is limited because the counterparties are banks with high credit ratings assigned by international credit-rating agencies.

Foreign exchange risk

The Fund realizes a portion of sales in U.S. dollars and has operations in the United States and thus is 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 for three and six months ended June 30, 2008 were approximately US$1,503 and US$2,681, respectively.

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 exchange gain (loss) for the three months ended June 30, 2008 and 2007 were $(43) and $271 and for the six months ended June 30, 2008 and June 30, 2007 were $(115) and $218, respectively.

As at June 30, 2008, the Fund's net exposure to currency risk through its current assets and liabilities dominated in US dollars was US$4,202. Assuming that all other variables remain constant, a 5% depreciation or appreciation of the Canadian dollar against the US dollars would result in an increase (decrease) of $210 in the Fund's net income.

Liquidity risk

Liquidity risk is the risk that the Fund is not able to meet its financial obligations as they fall due. The Fund manages liquidity risk through regular monitoring of financial results and actual cash flows, and also the management of its capital structure and financial leverage as outlined in Note 22.

All current liabilities are due for payment within twelve months of the balance sheet date. The maturities date for Future considerations related to acquisitions and long-term debt are disclosed in Notes 3, 7 and 8.

24. ENVIRONMENTAL REPORTING

As a consulting company, the Fund does not have environmental concerns.

25. COMPARATIVE FIGURES

Certain comparative figures have been reclassified or regrouped to conform with the financial presentation adopted in the current period.


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

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, 2008 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, 2008 as well as the MD&A, and the Audited Consolidated Financial Statements and notes thereto contained in the Fund's Annual Report for the year ended December 31, 2007.

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. 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.


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 35,096,913 Class A Limited Partnership units of Morneau Sobeco Group Limited Partnership ("MS Group LP"), which represents a 86.1% ownership interest. MS Group LP owns directly and indirectly 100% of Morneau Sobeco Limited Partnership, HRCO Inc. and Morneau Sobeco, Ltd. (the "Morneau Sobeco Operating Entities"). The 13.9% 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. Management employees and former owners of the predecessors of the Morneau Sobeco Operating Entities ("Management Securityholders") hold this non-controlling interest.

On June 2, 2008, the Fund acquired substantially all the assets of Shepell FGI LP ("Shepell-fgi") from Clairvest Group Inc. and its partners. The Canadian Shepell-fgi business has been incorporated into HRCO Inc. (formerly Morneau Sobeco Corporation), a 100% owned subsidiary of MS Group LP. The US Shepell-fgi business has been amalgamated with Morneau Sobeco, Ltd..

As at June 30, 2008, 35,096,913 Units and 5,680,444 Special Voting Units of the Fund were issued and outstanding, and 5,680,444 MS Group LP Class B LP Units were issued and outstanding.


BUSINESS OVERVIEW

Morneau Sobeco Income Fund is the largest Canadian-owned firm providing human resource consulting and outsourcing services. The firm delivers solutions to assist employers in managing the financial security, health and productivity of their employees. With over 2,300 employees in offices across North America, Morneau Sobeco Income Fund offers its services to over 7,000 organizations situated in Canada, in the United States and around the globe.

We derive our revenue primarily from fees charged to clients for consulting engagements, outsourcing engagements and employee assistance program services. 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.

As a result of the acquisition of the business of Shepell-fgi , the firm offers employee assistance program ("EAP") services. The terms of many EAP client agreements require payment of a minimum retainer and incremental usage-based fees. The remainder of EAP agreements are billed based on a actual usage or fixed fees. Most EAP agreements may be terminated by the client upon 30 to 60 days' notice to the firm, however, it is typical for EAP agreements to continue for multiple years and many automatically renew on an annual 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, independent service providers and temporary staffing services. The remaining 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.


SUMMARY AND OUTLOOK

In the second quarter of 2008 we met our expectations, from both a revenue and profitability standpoint. This quarter includes, for the first time, one month of results from the acquisition of Shepell-fgi which closed June 2, 2008. For the three and six months ended June 30, 2008 revenue growth including the one month of revenue from Shepell-fgi was 41.3% and 25.1%. Net Income for the three and six months ended June 30, 2008 was $2.5 million and $5.2 million respectively. Our EBITDA margin for the three and six months ended June 30, 2008 remained strong at 20.0% and 20.6%, respectively. Adjusting for the salary component of the Heath acquisition(1) in the amount of $0.5 million and $0.8 million for the three and six months ended June 30, 2008 and in the amount of $0.3 million and 0.5 million for the three and six months ended June 30, 2007, respectively, the EBITDA margin was 21.0% and 21.5% for the three and six months ended June 30, 2008 compared to 22.7% and 22.5% for the same period in 2007, respectively. EBITDA per Unit (basic) for the three and six months ended June 30, 2008 was $0.329 and $0.633 respectively which represents an increase of 12.7% and 10.1% respectively over the same periods in 2007. This is consistent with the growth in the Adjusted Consolidated Distributable Cash per Unit (basic) which grew 17.3% and 10.8% over the same periods and reflects the structure and accretion of the Shepell-fgi acquisition.

During the quarter, we completed our acquisition of Shepell-fgi. The total purchase price is $320 million including estimated transaction cost of $1.2 million. The consideration was satisfied by cash of $247.4 million and two non-interest bearing promissory notes of $75 million and $4.5 million repayable on July 2, 2009 and July 2, 2010, respectively. The promissory notes have been recorded at their combined present value of $71.4 million. The integration is proceeding as planned and the acquisition is immediately accretive. In addition as a result of the transaction being an asset purchase, a subsidiary of the Fund has approximately $220 million of eligible tax deductions which are deductible from taxable income at 7% per annum on a declining balance basis. Management believes the net present value of these tax deductions to be approximately $25 million and that they will result in substantial tax savings of approximately $15 million in 2011, with additional benefits beyond. As a result of these savings, the Fund is favourably positioned post 2010, when tax treatment of income funds changes.

On May 12, 2008, we announced our alliance with Sibson Consulting ("Sibson"), a division of Segal Company. This announcement reflects our goal to strengthen our presence in the US market through alliances with a firm offering complementary services. Sibson will turn to Morneau Sobeco to offer employee benefits administration outsourcing services to its clients in the U.S. Likewise, Morneau Sobeco will refer U.S. consulting mandates to Sibson. Since forming of the alliance, Morneau Sobeco and Sibson have been working on joint proposals for mutual and prospective clients. We have committed key resources to ensure we are effective in our efforts to coordinate our interactions with Sibson.

We are pleased with our results so far in 2008. We are achieving solid organic growth and are starting to realize the investment we have made in our outsourcing business over previous quarters. In addition, the market for our services continues to be positive as we have successfully obtained a number of new clients which we have invested in and are contributing positively to our organic growth.



(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.


DISTRIBUTIONS 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.

As a result of the Shepell-fgi acquisition, which is immediately accretive to the Fund's distribution to Unitholders, the Board of Trustees authorized a 7% increase to our target monthly distribution from $0.07356 per Unit to $0.07871 per Unit effective to Unitholders of record on June 30, 2008.

The following table presents excess / (shortfall) cash flow from operating activities and net income over distributions to Unitholders for the three and six months ended June 30, 2008 and 2007 and for the years ended December 31, 2007 and 2006.



Three Three Six Six Year Year
Months Months Months Months Ended Ended
Ended Ended Ended Ended December December
(In thousands June 30, June 30, June 30, June 30, 31, 31,
of dollars) 2008 2007 2008 2007 2007 2006
--------------------------------------------------------------------------

Cash flow
from /
(used in)
operating
activities $10,528 $7,923 $10,472 $6,891 $27,878 $31,023
Net income 2,456 1,680 5,236 4,725 12,120 13,973
Distributions to
Unitholders,
including
Class B
LP Units 7,296 6,132 13,428 11,997 24,257 23,134
Excess/
(shortfall)
of cash
flow from
operating
activities
over
distributions 3,232 1,791 (2,956) (5,106) 3,621 7,889
(Shortfall)
of net
income from
operating
activities
over
distributions (4,840) (4,452) (8,192) (7,272) (12,137) (9,161)


We consider the amount of cash generated by the business in determining the amount of distributions payable to Unitholders. In general, we do not take into account quarterly working capital fluctuations as these tend to be temporary in nature. We do not generally consider net income in setting the level of distributions as this is a non-cash metric and is not reflective of the level of cash flow that we generate. The divergence is particularly relevant for us since we have a relatively high level of amortization expense as well as non-controlling interest related to the Class B LP Units. Our annual excess cash from operating activities over distributions has been used to finance growth in accounts receivable, capital expenditures and acquisitions.

The shortfall of cash flow from operating activities over distributions for the six months ended June 30, 2008 and 2007 are the result of the annual payment of employee bonuses which are paid in the first quarter of each year. We are confident based on our current budget and past history that our cash flow from operating activities will exceed our distributions on a year to date basis in future quarters.

The Standardized Distributable Cash Payout Ratios for the three and six months ended June 30, 2008 were 73.9% and 138.4% respectively compared to 83.4% and 194.1% for the same period in 2007. The Standardized Distributable Cash Payout Ratio was 87.0% on a twelve-month rolling basis ending June 30, 2008 compared to 90.6% for the same period in 2007. The Adjusted Consolidated Distributable Cash Payout Ratio for the three and six months ended June 30, 2008 was 75.0% and 77.0% compared to 84.9% and 81.8% for the same period in 2007. The Adjusted Consolidated Distributable Cash Payout Ratio was 82.9% on a twelve-month rolling basis ending June 30, 2008 compared to 84.3% for the same period in 2007. The favorable decline in the above ratios is due to the Shepell-fgi acquisition which, as expected, has provided a positive impact on the Fund's Standardized and Adjusted Consolidated Distributable Cash.



ANALYSIS OF 2008 SECOND QUARTER OPERATING RESULTS

Results of Operations Three Months Ended Six Months Ended
June 30 June 30
--------------------------------------------------------------------------
Selected Unaudited Consolidated
Financial Information 2008 2007 2008 2007
--------------------------------------------------------------------------
(In thousands of dollars except
per unit amounts)

Revenue $52,363 $37,057 $91,497 $73,148
Deduct:
Salary, benefit and contractor
expenses 32,428 21,574 56,765 43,247
Other operating expenses 9,449 7,377 15,857 13,930
Interest 1,915 315 3,006 768
Amortization of capital and
intangible assets 6,946 4,354 11,249 8,652
Income taxes (recovery) (1,321) 1,322 (1,797) 601
Non-controlling interest 490 435 1,181 1,225
--------------------------------------------------------------------------
Net income for the period 2,456 1,680 5,236 4,725
Add (deduct):
Amortization of capital and
intangible assets 6,946 4,354 11,249 8,652
Income taxes (recovery) (1,321) 1,322 (1,797) 601
Interest 1,915 315 3,006 768
Non-controlling interest 490 435 1,181 1,225
--------------------------------------------------------------------------
EBITDA(1) $10,486 $8,106 $18,875 $15,971
--------------------------------------------------------------------------
EBITDA margin 20.0% 21.9% 20.6% 21.8%
--------------------------------------------------------------------------

Cash from operating activities $10,528 $7,923 $10,472 $6,891
Deduct: Capital expenditures 493 576 760 712
--------------------------------------------------------------------------
Consolidated
Distributable Cash(2) 10,035 7,347 9,712 6,179
Deduct: Consolidated
Distributable Cash
available to non-
controlling interest 1,853 1,512 1,789 1,272
--------------------------------------------------------------------------
Standardized Distributable Cash
(available for Unitholders)(3) $8,182 $5,835 $7,923 $4,907
--------------------------------------------------------------------------
Consolidated Distributable
Cash(2) $10,035 $7,347 $9,712 $6,179
Add (deduct): Non-cash
operating working capital (305) (124) 7,717 8,483
--------------------------------------------------------------------------
Adjusted Consolidated
Distributable Cash (4) $9,730 $7,223 $17,429 $14,662
--------------------------------------------------------------------------
Net income per Unit (basic) $0.093 $0.076 $0.215 $0.214
Net income per Unit (diluted) $0.091 $0.076 $0.212 $0.214
EBITDA per Unit (basic) $0.329 $0.292 $0.633 $0.575
Standardized Distributable Cash
per Unit (basic) $0.310 $0.264 $0.326 $0.222
Adjusted Consolidated
Distributable Cash per Unit
(basic) $0.305 $0.260 $0.585 $0.528
Standardized Distributions
declared per Unit (basic) $0.226 $0.221 $0.447 $0.432
Standardized Distributable Cash
Payout Ratio(5) 73.9% 83.4% 138.4% 194.1%
Adjusted Consolidated
Distributable Cash Payout Ratio(6) 75.0% 84.9% 77.0% 81.8%
Twelve-month rolling
Standardized Distributable Cash
Payout Ratio 87.0% 90.6% 87.0% 90.6%
Twelve-month rolling Adjusted
Consolidated Distributable Cash
Payout Ratio 82.9% 84.3% 82.9% 84.3%


Footnotes:

(1) "EBITDA" is defined as net income before interest expense, income taxes
(recovery), depreciation, amortization and non-controlling interest.

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

(3) "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.

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

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

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


ANALYSIS OF 2008 SECOND QUARTER RESULTS

Revenue

Revenue for the three months ended June 30, 2008 increased by $15.3 million, or 41.3%, to $52.4 million compared to $37.1 million for the same period in 2007. The increase in revenue was primarily due to revenue related to Shepell-fgi of $12.4 million, the inclusion of Cowan DB business(2) of $1.1 million and additional outsourcing business from a variety of clients.

Salary, benefit and contractor expenses

Salary, benefit and contractor expenses for the three months ended June 30, 2008 increased by $10.8 million, or 50.3%, to $32.4 million compared to $21.6 million for the same period in 2007. The increase was attributable to salary, benefit and contractor costs of $8.2 million due to the Shepell-fgi acquisition, $0.5 million due to the Cowan DB business acquisition, the additional staffing costs related to the outsourcing business of $0.7 million, adjustment related to Heath salary component of $0.2 million and general increases of $1.1 million.

Other Operating Expenses

Other operating expenses for the three months ended June 30, 2008 increased by $2.1 million or 28.1%, to $9.5 million compared to $7.4 million for the same period in 2007. The increase was primarily attributable to operating expenses of $1.9 million related to Shepell-fgi and general increases of $0.2 million.

Interest Expense

Interest expense for the three months ended June 30, 2008 increased by $1.6 million to $1.9 million compared to $0.3 million for the same period in 2007. The increase was primarily due to $0.5 million higher interest expense on the new term loan obtained to finance the Shepell-fgi acquisition, accretion interest of $ 0.6 million on the promissory notes issued as part of the Shepell-fgi acquisition and $0.4 million of loss incurred related to the termination of the interest rate swap agreements and write off of debt issue costs associated with the previous term loan.

Amortization of Capital and Intangible Assets

Amortization for the three months ended June 30, 2008 increased by $2.6 million, or 59.1%, to $7.0 million compared to $4.4 million for the same period in 2007. The increase was attributable to the increase in capital and intangible assets as a result of the acquisition of Shepell-fgi on June 2, 2008.

Income Tax Expense (Recovery)

Income tax recovery for the three months ended June 30, 2008 increased by $2.6 million to $1.3 million compared to income tax expenses of $1.3 million for the same period in 2007. The increase was primarily attributable to the recognition of a future tax expense of $2.7 million at the initial application of the SIFT rules in June 2007 and current income tax recovery of $0.3 million for the quarter due to the availability of the eligible tax deductions resulting from the acquisition of Shepell-fgi. This is partially offset by the favorable change in future tax rate in June 2007 of $0.3 million.



(2) 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.


Net Income

As a result of the changes noted above, the net income for the three months ended June 30, 2008 was $2.5 million compared to the net income of $1.7 million for the same period in 2007.

Cash from Operating Activities

Cash from operating activities for the three months ended June 30, 2008 increased by $2.6 million to $10.5 million compared to $7.9 million for the same period in 2007. This increase was primarily due to improved EBITDA of $2.6 million after taking into account the salary component of Heath acquisition of $0.2 million and a net decrease in current taxes of $0.5 million and a net increase in changes in non-cash operating working capital of $0.2 million (see below).This is offset by additional interest paid (including swap termination fees) of $0.7 million related to the refinancing of the Fund's debt.

Changes in Non-Cash Operating Working Capital

Changes in non-cash operating working capital for the three months ended June 30, 2008 increased by $0.2 million to $0.3 million compared to $0.1 million for the same period in 2007. The increase was primarily attributable to increased accounts payable and accrued liabilities net of deferred revenue of $3.2 million. This was partially offset by increased receivables net of unbilled fees of $1.1 million, increased prepaid expenses of $1.4 million and increased income tax recoverable of $0.5 million.

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

EBITDA

EBITDA for the three months ended June 30, 2008 increased by $2.4 million, or 30.0%, to $10.5 million compared to $8.1 million for the same period in 2007. The increase was due to increased revenue of $15.3 million offset by increased salary, benefit and contractor expenses and other operating expenses of $12.9 million.

Standardized Distributable Cash

Standardized Distributable Cash for the three months ended June 30, 2008 increased by $2.4 million to $8.2 million compared to $5.8 million for the same period in 2007. This increase was primarily due to increased cash from operating activities of $2.6 million and lower capital expenditures of $0.1 million, which was partially offset by an increase 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, 2008 increased by $2.5 million to $9.7 million compared to $7.2 million for the same period in 2007. The increase was primarily due to increased EBITDA of $2.6 million after taking into account the salary component of Heath acquisition of $0.2 million, a net decrease in current taxes of $0.5 million and lower capital expenditures of $0.1 million. This was partially offset by additional interest paid (including swap termination fees) of $0.7 million.


ANALYSIS OF SIX MONTHS ENDED JUNE 30, 2008 AND 2007 RESULTS

Revenue

Revenue for the six months ended June 30, 2008 increased by $18.3 million, or 25.1%, to $91.5 million compared to $73.2 million for the same period in 2007. The increase in revenue was primarily due to revenue related to Shepell-fgi of $12.4 million, the inclusion of Cowan DB business(2) of $2.5 million and additional outsourcing business from a variety of clients.

Salary, benefit and contractor expenses

Salary, benefit and contractor expenses for the six months ended June 30, 2008 increased by $13.5 million, or 31.3%, to $56.7 million compared to $43.2 million for the same period in 2007. The increase was attributable to increased salary, benefit and contractor costs of $8.2 million due to the Shepell-fgi acquisition and $1.2 million due to the Cowan DB business acquisition, the additional staffing costs related to the outsourcing business of $1.3 million, adjustment related to Heath salary component of $0.2 million and general increases of $2.5 million.

Other Operating Expenses

Other operating expenses for the six months ended June 30, 2008 increased by $1.9 million or 13.8%, to $15.8 million compared to $13.9 million for the same period in 2007. The increase was primarily attributable to operating expenses of $1.9 million related to Shepell-fgi.

Interest Expense

Interest expense for the six months ended June 30, 2008 increased by $2.2 million to $3.0 million compared to $0.8 million for the same period in 2007. The increase was primarily due to higher interest expense of 0.5 million on new term loan obtained to finance the Shepell-fgi acquisition, accretion interest of $ 0.6 million on the promissory notes issued as part of the acquisition and $0.4 million in loss incurred related to the termination of the interest rate swap agreements and write off of debt issue costs associated with the previous term loan. In addition, the Fund recognized a loss of $0.7 million during the first quarter of 2008 due to change in the market value of the interest-rate swap.

Amortization of Capital and Intangible Assets

Amortization for the six months ended June 30, 2008 increased by $2.6 million, or 30.0%, to $11.3 million compared to $8.7 million for the same period in 2007. The increase was attributable to the increase in capital and intangible assets as a result of the acquisition of Shepell-fgi on June 2, 2008.

Income Tax Expense (Recovery)

Income tax recovery for the six months ended June 30, 2008 increased by $2.4 million to $1.8 million compared to income tax expenses of $0.6 million for the same period in 2007. The increase was primarily attributable to the recognition of a future tax expense of $2.7 million at the initial application of the SIFT rules in June 2007 and current income tax recovery of $0.1 million for the period due the availability of the eligible tax deductions resulting from the acquisition of Shepell-fgi. This is partially offset by the favorable change in future tax rate in June 2007 of $0.3 million.

Net Income

As a result of the changes noted above, the net income for the six months ended June 30, 2008 was $5.2 million compared to the net income of $4.7 million for the same period in 2007.

Cash from Operating Activities

Cash from operating activities for the six months ended June 30, 2008 increased by $3.6 million to $10.5 million compared to $6.9 million for the same period in 2007. This increase was primarily due to improved EBITDA of $3.1 million after taking into account the salary component of Heath acquisition of $0.2 million, a net decrease in current taxes of $0.4 million and a net increase in change in non-cash operating working capital of $0.8 million (see below). This is offset by additional interest paid (including swap termination fees) of $0.7 million.

Changes in Non-Cash Operating Working Capital

Changes in non-cash operating working capital for the six months ended June 30, 2008 increased by $0.8 million to a use of cash of $7.7 million compared to use of cash of $8.5 million for the same period in 2007. The increase was primarily attributable to increased accounts payable and accrued liabilities net of deferred revenue of $3.4 million, partially offset by increased receivable net of unbilled fees of $0.1 million, increased prepaid expenses of $1.1 million and increased income tax recoverable of $1.4 million.

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

EBITDA

EBITDA for the six months ended June 30, 2008 increased by $2.9 million, or 18.2%, to $18.9 million compared to $16.0 million for the same period in 2007. The increase was due to increased revenue of $18.3 million offset by increased salary, benefit and contractor expenses and other operating expenses of $15.4 million.

Standardized Distributable Cash

Standardized Distributable Cash for the six months ended June 30, 2008 increased by $3.0 million to $7.9 million compared to $4.9 million for the same period in 2007. This increase was primarily due to increased cash from operating activities of $3.6 million, which was partially offset by an increase in capital expenditures of $0.1 million and $0.5 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, 2008 increased by $2.7 million to $17.4 million compared to $14.7 million for the same period in 2007. The increase was primarily due to increased EBITDA of $3.1 million after taking into account the salary component of Heath acquisition of $0.2 million, a net decrease in current taxes of $0.4 million. This is partially offset by additional interest paid (including swap termination fees) of $0.7 million and higher capital expenditures of $0.1 million.

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
Selected Unaudited Consolidated Financial Information
(In thousands of dollars)
Three Months Ended Six Months Ended
June 30 June 30
--------------------------------------------------------------------------
2008 2007 2008 2007
--------------------------------------------------------------------------
Cash provided by (used in):
Operating activities $10,528 $7,923 $10,472 $6,891
Investing activities (247,500) (4,103) (247,767) (4,239)
Financing activities 238,827 (2,292) 232,696 (8,343)
--------------------------------------------------------------------------
Increase (decrease) in cash $1,855 $1,528 $(4,599) $(5,691)
--------------------------------------------------------------------------


2008 Second Quarter Results

Cash from operating activities for the three months ended June 30, 2008 increased by $2.6 million to $10.5 million compared to $7.9 million for the same period in 2007. This increase was primarily due to improved EBITDA of $2.6 million after taking into account the salary component of Heath acquisition of $0.2 million and a net decrease in current taxes of $0.5 million and a net increase in changes in non-cash operating working capital of $0.2 million. This is offset by additional interest paid (including swap termination fees) of $0.7 million related to the refinancing of the Fund's debt.

Cash outflows from investing activities for the three months ended June 30, 2008 decreased by $243.4 million to $247.5 million compared to cash outflows of $4.1 million for the same period in 2007. This increase was primarily attributable to cash consideration paid, net of cash assumed, during the quarter for the Shepell-fgi acquisition of $246.2 million and the second instalment of the Heath acquisition of $0.8 million compared to cash consideration paid for Cowan DB business acquisition in June 2007 of $3.5 million.

Cash from financing activities for the three months ended June 30, 2008 increased by $241.1 million to $238.8 million compared to cash outflows of $2.3 million for the same period in 2007. This increase was primarily attributable to the proceeds from the public offering net of share issuance cost of $142.5 million and net proceeds from long term debt net of debt issue costs of $100.1 million. This was partially offset by a lower utilization of the revolving loan of $1.5 million which was used to finance a small portion of the Shepell-fgi acquisition compared to the Cowan DB business acquisition in 2007.

Six Months Ended June 30, 2008 and 2007

Cash from operating activities for the six months ended June 30, 2008 increased by $3.6 million to $10.5 million compared to $6.9 million for the same period in 2007. This increase was primarily due to improved EBITDA of $3.1 million after taking into account the salary component of Heath acquisition of $0.2 million, a net decrease in current taxes of $0.4 million and a net increase in changes in non-cash operating working capital of $0.8 million. This was partially offset by additional interest paid (including swap termination fees) of $0.7 million.

Cash outflows from investing activities for the six months ended June 30, 2008 decreased by $243.5 million to $247.7 million compared to cash outflows of $4.2 million for the same period in 2007. This increase was primarily attributable to cash consideration paid, net of cash assumed, during the quarter for the Shepell-fgi acquisition of $246.2 million and the second instalment of the Heath acquisition of $0.8 million compared to cash consideration paid for Cowan DB business acquisition in June 2007 of $3.5 million.

Cash from financing activities for the six months ended June 30, 2008 increased by $241.0 million to $232.7 million compared to cash outflows of $8.3 million for the same period in 2007. This increase was primarily attributable to the proceeds from the public offering net of share issuance cost of $142.5 million and net proceeds from long term debt net of debt issue costs of $100.1 million. This was partially offset by lower utilization of revolving loan of $1.5 million which was used to finance a small portion of the Shepell-fgi acquisition compared to Cowan DB business acquisition in 2007 and $0.1 million increased in distribution payment due to the 7% increase to our target monthly distribution from $0.07356 per Unit to $0.07871 per Unit, following the closing of Shepell-fgi acquisition.

Capital Expenditures

Human resource consulting and outsourcing are not capital intensive. Our capital expenditures typically include office furniture, facility improvements and information technology hardware and software. 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 fifteen years. We also have a term loan, a revolving loan and two promissory notes described under "Capital Resources". Future expected payments are as follows:



Summary of Contractual Obligations
(In thousands of dollars)
Total 2008 to 2009 2010 to 2011 Beyond 2011
---------------------------------------------------------------------------
Term loan $137,000 $- $- $137,000
Revolving loan 2,300 2,300 - -
Promissory notes 79,500 75,000 4,500 -
Operating leases 89,143 19,817 23,640 45,686
---------------------------------------------------------------------------
Total $307,943 $97,117 $28,140 $182,686
---------------------------------------------------------------------------


In addition, the Fund has two subleases for which the Fund is liable for the rent in case of a default by the subtenants. The average annual rent for each of the leases is $0.2 million, expiring on October 30, 2011 and June 29, 2017, respectively.

Contingent Considerations

The purchase price for the Cowan DB business is expected to be approximately $6.0 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 instalment has been determined to be $1.0 million and was paid on August 1, 2008. The third instalment is subject to adjustment based on final pension administration and actuarial consulting services revenue and will be payable on August 1, 2009. 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 $16.8 million, including estimated consideration to compensate for forgone distributions payable on its third instalment during the period June 1, 2006 to December 31, 2008. The purchase price is being paid in three instalments. The first instalment of $9.0 million was made on closing in 2006. The second instalment of was paid on June 30, 2008 by cash of $0.8 million and $3.0 million in Class B LP Units of MS Group LP based on a predetermined value of $12.52 per Unit. The third instalment will be settled on December 1 of 2008 in the same manner as the second instalment.

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 As at
(In thousands of dollars) June 30,2008 December 31, 2007
--------------------------------------------------------------------------

Cash (bank indebtedness) $(1,701) $2,898
Revolving loan $2,300 $-
Long-term debt, net of
unamortized debt issue cost $135,162 $34,913
Promissory notes $71,928 $-
Unitholders' equity $340,197 $ 197,668


We have historically utilized cash from operations to finance working capital requirements and fund growth. As at June 30, 2008, the Fund's working capital (current assets minus current liabilities) was approximately $18.6 million.

New credit agreement

As part of the Shepell-fgi acquisition the Fund entered into a new credit agreement with a syndicate of Canadian chartered banks for a period of four years maturing on June 1, 2012. Under the agreement, the following credit facilities are available:

- $20 million senior secured revolving facility ("revolving loan").

- $137 million senior secured non-revolving term loan ("term loan").

- $40 million senior secured non-revolving delayed draw term facility. This facility shall be available until July 2, 2009 by way of a single draw to fund a portion of the $75 million promissory note issued in connection with the acquisition.

The interest rates for the facilities are floating, based on a margin over certain reference rates of interest. The applicable margin may vary up and down depending on the ratio of the Fund's consolidated debt to Adjusted EBITDA as calculated in the new credit agreement. Adjusted EBITDA is defined as the rolling twelve months earnings before interest, taxes, deprecation and amortization of the Fund and Shepell-fgi.

The credit facilities are secured by a general assignment of all the assets of the Fund. The new credit agreement also requires the Fund to maintain the following financial covenants on a consolidated basis:

(i) Ratio of debt to Adjusted EBITDA shall commence at 3.5:1.0 for the period up to December 30, 2009 and decline to 2.5:1.0 by June 30, 2011.

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


EBITDA is defined as net income before interest expense, income taxes (recovery), depreciation, amortization and non-controlling interest.

The Fund complied with all the required financial covenants and the ratios as at June 30, 2008 were 3.0 and 16.0 respectively.

Promissory notes

The promissory notes issued as part of the Shepell-fgi acquisition in the amounts of $75 million and $4.5 million are due on July 2, 2009 and July 2, 2010, respectively. The notes are non-interest bearing and are secured by a general assignment of all the assets of the Fund, which is subordinated to the credit facilities. The notes have been recorded at their initial combined present value of $71.4 million plus accreted interest to date of $0.57 million.

The Fund has the option to repay up to 50% of the $75 million promissory note and 100% of the $4.5 million promissory note through the issuance of Units at a 5% discounted value, subject to the Fund's ability to issue new Units under the guidance for income trusts and other flow-through entities that qualify for the four-year transitional relief. It is the Fund's intention to repay the notes through future cash flow and as a result, the notes are recorded as liabilities.

The promissory notes also include a covenant that the Fund and its subsidiaries shall not incur any debt other than permitted debt as defined in the promissory note agreements unless, after the incurrence of such debt, the Fund would have on a pro forma consolidated basis a ratio of debt to adjusted EBITDA of not greater than 4.5:1.0 determined as of end of the fiscal quarter ending immediately prior to the date of determination.

SELECTED BALANCE SHEET DATA

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



Selected Balance Sheet Data As at As at
(in thousands of dollars) June 30, December 31,
2008 2007
--------------------------------------------------------------------------

Current assets $64,909 $35,224
Other long-term assets $623,895 $299,204
Current liabilities $46,312 $ 15,541


Current Assets

Current assets as at June 30, 2008 increased by $29.7 million to $64.9 million from $35.2 million as at December 31, 2007. The increase was primarily due increased accounts receivable net of unbilled fees of $28.1 million, increased prepaid expenses of $3.4 million and increased income tax recoverable of $1.1 million, largely due to the Shepell-fgi acquisition. This was partially offset by decreased cash of $2.9 million due to the payment of our annual bonuses in the first quarter of 2008.

Other Long-Term Assets

Other long-term assets as at June 30, 2008 increased by $324.7 million to $623.9 million from $299.2 million as at December 31, 2007. The increase was primarily due to the addition of capital assets net of amortization of $6.8 million, the addition of intangible assets net of amortization of $188.9 million, the addition of goodwill of $121.6 million, an increase in future income tax assets of $2.6 million and an increase in the interest-rate-swap of $0.2 million, primarily related to the Shepell-fgi acquisition. In addition, goodwill also increased by $4.6 million during the period due to the recognition of the second and third instalments with respect to the Heath acquisition.

Current Liabilities

Current liabilities as at June 30, 2008 increased by $30.8 million to $46.3 million from $15.5 million as at December 31, 2007. The increase was primarily related to increased accounts payable and accrued liabilities of $23.3 million, increased deferred revenue of $2.3 million, increased bank borrowing of $4.0 million and increased Unitholder distributions payable of $1.2 million, largely due to the Shepell-fgi acquisition.


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. EAP revenue is recognized through a combination of the minimum contracted amount and incremental usage above the minimum thresholds. The minimum contracted amount is recognized on a straight-line basis over the term of the contract. Incremental usage is recognized when the minimum usage threshold is exceeded. 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 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 commissions 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.

Intangible Assets and Goodwill

Intangible assets consist of trade names, customer relationships, proprietary software, customer contracts and non-compete agreements. Intangible assets with a finite life are amortized on a straight-line basis over their estimated useful lives. Intangible assets with an indefinite life are not amortized but are tested for impairment annually or more frequently if events or circumstances indicate there may be an impairment by comparing the estimated discounted future net cash flows from the asset to its carrying amount.

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.

Allowance for Doubtful Accounts

A provision for accounts receivable resulting from the potential risk that the accounts 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

Financial assets and financial liabilities held-for-trading are measured at fair value with changes in those fair values recognized in the income statement. Loans and receivables and other financial liabilities are measured at amortized cost using the effective interest method of amortization. The Fund had neither available-for-sale nor held-to-maturity instruments.

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 and are included in the underlying balance.

The interest-rate swap agreements, that are not subject to hedge accounting are classified as held-for-trading and are recorded at their fair value with a corresponding adjustment to interest expense.

Derivative financial instruments are used by the Fund in the management of its interest rate risk exposure on debt financing. Derivatives that have been designated and function effectively as a hedge are accounted for using hedge accounting principles. The effective portion of changes in fair value of derivatives that qualify for hedge accounting are recorded in other comprehensive income. Any ineffective portions of changes in the fair value are recognized in net income in the period in which the change occurred. If the hedging relationship ceases to be highly effective, changes in the fair value of the interest-rate swap are recognized in income beginning in the period in which the change occurs. Derivatives that do not qualify for hedge accounting are recorded on the consolidated balance sheet at fair value with changes in fair value recorded as income or expense in the consolidated statement of income.

New Accounting Policies

Effective January 1, 2008 the Fund adopted the following new accounting standards:

1. Section 3862, Financial Instruments - Disclosures and Section 3863, Financial Instruments - Presentation, which replace the existing Section 3861, Financial Instruments - Disclosure and Presentation. These new sections revise and enhance disclosure requirements and carry forward unchanged existing presentation requirements. These new sections place an increased emphasis on disclosures and presentation regarding the risks associated with both recognized and unrecognized financial instruments and how the Fund manages those risks.

2. Section 1535, Capital Disclosure. This section requires disclosure of the Fund's objectives, policies and processes for managing capital, quantitative data about what the Fund regards as capital and whether the Fund has complied with any capital requirements.

These new standards relate to disclosures and presentation only and did not have an impact on the Fund's financial results or position.

Future Accounting Changes

1. Section 3064, Goodwill and intangible assets - In February 2008, the CICA issued the new Handbook replacing Section 3062, Goodwill and Other Intangible Assets and Section 3450, Research and Development Costs. The new standard will be applicable to financial statements relating to fiscal years beginning on or after October 1, 2008. This section establishes standards for the recognition, measurement, presentation and disclosure of goodwill subsequent to its initial recognition and of intangible assets. The standards concerning goodwill are unchanged from the standards included in the previous section 3062. The Fund is currently assessing the impact this new standard will have on its consolidated financial statements, if any.

2. International Financial Reporting Standards - The Canadian Accounting Standards Board confirmed in February 2008 plans to converge Canadian GAAP with International Financial Reporting Standards ("IFRS") over a transition period expected to be effective for interim and annual periods commencing January 1, 2011. The Fund is currently assessing the new standards and has not yet determined the impact on its consolidated financial condition.

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 Fund's business, financial condition and operating results, and on the ability of the Fund to make distributions on the Units.

Integration of Shepell-fgi

While Management believes that the operation of Morneau Sobeco and Shepell-fgi can be successfully integrated, there can be no assurance that this will be the case. Morneau Sobeco could face impediments in its ability to implement its integration strategy. In addition, there can be no assurance that unforeseen costs and expenses or other factors will not offset, in whole or in part, the expected benefits of Morneau Sobeco's integration and operating plans.

The successful integration and management of the business involves numerous risks that could adversely affect the Fund's growth and profitability, including: (i) the risk that Management may not be able to successfully manage the operations of Shepell-fgi and the integration may place significant demands on Management, diverting their attention from existing operations; (ii) the risk that the Fund's operational, financial and management systems may be incompatible with or inadequate to effectively integrate and manage the acquired systems; (iii) the risk that the acquisition may require unforeseen substantial financial resources that otherwise could be used in the development of other aspects of the business; and (iv) the risk that customers and channel partners may not be retained following the acquisition, which could be significant to the Fund's operation. The successful integration of the acquisition is also subject to the risk that personnel from the Shepell-fgi business and the existing Morneau Sobeco business may not be able to work together successfully, which could affect the operation of the combined business.

Failure to successfully integrate the operations of Morneau Sobeco and Shepell-fgi could have a material adverse effect on the Fund's business, financial condition, liquidity and results of operations.

Potential Undisclosed Liabilities Associated with Acquisition/Limited Indemnification

In connection with the acquisitions completed by the Fund, there may be liabilities and contingencies that the Fund failed to discover or was unable to quantify in its due diligence which it conducted prior to the execution of an acquisition, and the Fund may not be indemnified for some or all of these liabilities and contingencies. The existence of any material liabilities or contingencies could have a material adverse effect on the Fund's business, financial condition, liquidity and results of operations.

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, 2008, Morneau Sobeco's largest client accounted for approximately 7% and 9% of revenue (three and six months ended June 30, 2007 - 10%) and its top 10 clients, in the aggregate, accounted for approximately 26% and 27% of revenue, respectively (three and six months ended June 30, 2007 - 33%). 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.

The pension and benefits consulting and outsourcing service 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.

The employee health and productivity services involve confidential counseling, occupational health activities and case management. Each of these activities could potentially put the Fund in conflict with its customers, their employees, or both.

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.

Reliance on Service Providers

Morneau Sobeco relies on a network of independent service providers to provide its EAP services to clients in numerous countries. There can be no assurance that the cost of retaining these service providers in the future will not increase or that any increases can be passed on to the clients. In addition, some of EAP service providers in certain jurisdictions have, in the past, become its competitors. 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.

Relationships with Channel Partners

Morneau Sobeco markets its services directly to end user employers as well as through certain channel partners, primarily insurance companies (many of which compete amongst themselves directly). There can be no assurance that Morneau Sobeco will be able to maintain its existing relationships with all these channel partners 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.

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. Currently the provisions of employee health and productivity services are not generally subject to government regulation. However, there is no certainty that regulation will not be introduced as governments in these countries adjust their policies and practices in the health care industry.

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 in 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.

Timing of Revenue Collection Related to Fixed-Price Contract with Predetermined Threshold

The Fund recognizes certain revenues related to the EAP services that arise when clients' usage exceeds predetermined thresholds. Frequently, these revenues cannot be billed and collected until the anniversary date of the agreement. The time delay between earning this revenue and collecting it potentially increases the risk of not collecting on these unbilled receivables, which may negatively affect the ability of the Fund to make distribution 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.

Confidentiality of Client Information

Morneau Sobeco depends to a large extent on its relationships with its customers and its ability to properly maintain confidential client information. The failure of Morneau Sobeco to maintain client confidentiality could, depending on the magnitude of the problem, result in a loss of future business and/or potential claims against Morneau Sobeco 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.

Foreign Exchange Risk

A portion of Morneau Sobeco's sales are in U.S. dollars and thus Morneau Sobeco is exposed to fluctuations in the value of the U.S. dollar relative to the Canadian dollar. The firm is not currently engaged in currency hedging activities. The net revenue exposure after accounting for related expenses denominated in U.S. dollars was approximately US$1.5 million and US$2.7 million, respectively for the three and six months ended June 30, 2008. An increase in foreign revenues would expose the Fund to fluctuations in exchange rates which 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.

Interest Rate Fluctuations

Morneau Sobeco may be exposed to fluctuations in interest rates under its borrowings. 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. 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 intellectual property 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's 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 (" the SIFT Rules") 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 relating to the intangible and capital assets. The Fund will be liable for income tax at a rate of 29.5% on its taxable income earned in 2011 and 28.0% thereafter.

This legislation is effective for the 2007 taxation year with respect to trusts which commenced public trading after October 31, 2006, but the application of the rules will be delayed to the 2011 taxation year with respect to trusts which were publicly traded prior to November 1, 2006.

On December 15, 2006, the Department of Finance (Canada) released guidance for income trusts and other flow-through entities that qualify for the four-year transitional relief. The guidance establishes objective tests with respect to how much an income trust is permitted to grow without jeopardizing its transitional relief. In general, the Fund will be permitted to issue new equity over the next four years equal to its market capitalization as of the end of trading on October 31, 2006 (subject to certain annual limits). Market capitalization, for these purposes, is to be measured in terms of the value of the Fund's issued and outstanding publicly traded Units. If these limits are exceeded, the Fund may lose its transitional relief and thereby become immediately subject to the proposed SIFT Rules.

On December 20, 2007, the Department of Finance (Canada) announced proposed technical amendments to clarify certain aspects of the new rules (which, as discussed above, will be effective on January 1, 2011, subject to compliance with the normal growth guidelines). One of the proposed amendments is intended to exempt from the new rules a subsidiary partnership that (i) is not publicly traded, and (ii) is wholly-owned by a publicly traded trust or partnership, a taxable Canadian corporation or a combination of these entities. Although the MS Group LP is not publicly traded, the proposed amendments do not appear to exempt a partnership with individual partners. Draft legislation implementing these amendments has been released on July 14, 2008. However, the Fund believes that the MS Group LP will not be subject to tax under the new rules prior to January 2011, assuming that the Fund complies with the normal growth guidelines.

This legislation may adversely affect the marketability of the Fund's Units and the ability of the Fund to undertake financings and acquisitions, and, at such time as the SIFT Rules apply to the Fund, the distributable cash of the Fund may be materially reduced.

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 HRCO Inc. (formerly Morneau Sobeco Corporation) or its subsidiaries. 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 interest, 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.

The advance of the new credit facilities at the closing of the Shepell-fgi acquisition has significantly increased the amount of Morneau Sobeco's debt compared to historical levels. The new credit facilities contain numerous restrictive covenants that limit the discretion of Management with respect to certain business matters. These covenants place significant restrictions on, among other things, the ability of Morneau Sobeco to create liens or other encumbrances, to pay distributions or make certain other payments, investments, loans and guarantees and to sell or otherwise dispose of assets and merge or consolidated with another entity. In addition, the new credit facilities contain a number of financial covenants that require Morneau Sobeco to meet certain financial ratios and financial condition tests. A failure to comply with the obligations in Morneau Sobeco's credit facilities could result in a default which, if not cured or waived, could result in a reduction or termination of distributions by Morneau Sobeco and permit acceleration of the relevant indebtedness. If the indebtedness under the new credit facilities were to be accelerated, there can be no assurance that the assets of Morneau Sobeco would be sufficient to repay in full that indebtedness. In addition, the new credit facilities mature on June 1, 2012.

There can be no assurance that future borrowings or equity financing will be available to the Fund or Morneau Sobeco, or available on acceptable terms, in an amount sufficient to fund the Fund's or Morneau Sobeco's needs.

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 (i.e., 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), 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's 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 13.9% 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's 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 bases). 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.

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)

Quarter June March December September June March
ended 30 31 31 30 30 31
2008 2008 2007 2007 2007 2007

Revenue $52,363 $39,134 $36,707 $37,231 $37,057 $36,091
Net income 2,456 2,780 4,489 2,907 1,680 3,045
EBITDA(1) 10,486 8,389 7,391 7,481 8,106 7,865
EBITDA
margin 20.0% 21.4% 20.1% 20.1% 21.9% 21.8%
Standardized
Distributable
Cash(2) 10,035 (258) 7,812 8,097 5,835 (927)
Adjusted
Consolidated
Distributable
Cash 9,730 7,700 7,025 6,515 7,223 7,439
Distributions
declared 7,296 6,132 6,131 6,131 6,131 5,865
Net income
per Unit
(basic)1) $0.093 $0.125 $0.203 $0.132 $0.076 $0.138
Net income
per Unit
(diluted)1) $0.091 $0.125 $0.203 $0.132 $0.076 $0.138
EBITDA per
Unit
(basis) $0.329 $0.302 $0.266 $0.269 $0.292 $0.283
Standardized
Distributable
Cash per
Unit
(basic) $0.310 $(0.012) $0.352 $0.366 $0.264 $(0.042)
Adjusted
Consolidated
Distributable
Cash per
Unit
(basic) $0.305 $0.277 $0.253 $0.234 $0.260 $0.268
Distributions
declared
per Unit
(basic) $0.226 $0.221 $0.221 $0.221 $0.221 $0.211
Standardized
Distributable
Cash
Payout
Ratio-basic(3) 73.9% NM 62.6% 60.2% 83.4% NM
Adjusted
Consolidated
Distributable
Cash
Payout
Ratio 75.0% 79.6% 87.3% 94.1% 84.9% 78.8%
Twelve-month
rolling
Standardized
Distributable
Cash 87.0% 90.8% 92.7% 95.0% 90.6% 83.5%
Payout
Ratio
Twelve-month
rolling
Adjusted
Consolidated
Distributable 82.9% 86.2% 86.0% 85.9% 84.3% 83.3%
Cash Payout
Ratio

Total
assets $688,804 $328,665 $334,428 $337,391 $342,569 $338,530

Total
long-term
debt $135,162 $34,926 $34,913 $34,901 $34,888 $34,876



Quarter ended December 31 September 30
2006 2006

Revenue $34,079 $33,037
Net income 3,010 2,482

EBITDA(1) 7,890 7,053
EBITDA margin 23.2% 21.3%
Standardized Distributable Cash(2) 7,210 8,725
Adjusted Consolidated Distributable Cash 6,977 6,736
Distributions declared 6,050 5,731
Net income per Unit (basic)1) $0.136 $0.112
Net income per Unit (diluted)1) $0.136 $0.112
EBITDA per Unit (basis) $0.284 $0.254
Standardized Distributable Cash per Unit (basic) $0.327 $0.396
Adjusted Consolidated Distributable Cash
per Unit (basic) $0.251 $0.243
Distributions declared per Unit (basic) $0.218 $0.206
Standardized Distributable Cash Payout
Ratio-basic(3) 66.6% 52.1%
Adjusted Consolidated Distributable
Cash Payout Ratio 86.7% 84.9%
Twelve-month rolling Standardized
Distributable Cash 77.9% 85.2%
Payout Ratio
Twelve-month rolling Adjusted
Consolidated Distributable 85.3% 85.3%
Cash Payout Ratio

Total assets $345,872 $345,398
Total long-term debt $35,000 $35,000

(1) 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 bases 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.

(2) The Standardized Distributable Cash for the three months ended March
31, 2008 and 2007 are significantly lower than the distributions
declared, as the Fund pays its employees their annual bonuses in the
first quarter of each year.

(3) This ratio is not presented for the quarter ended March 31, 2008 since
it is not a meaningful % when the Standard Distributable Cash per unit
is a negative figure.


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, 2008.

Internal Control over Financial Reporting

Management is responsible for designing internal controls over financial reporting, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.

No changes were made in the Fund's internal controls over financial reporting during the six months ended June 30, 2008, that have materially affected, or are reasonably likely to materially affect, the Fund's internal controls over financial reporting, with the exception of internal controls related to the Shepell-fgi business.

The Fund acquired the Shepell-fgi business on June 2, 2008. The Fund is continuing the documentation and integration of internal controls over financial reporting for that business and will finalize the review during 2009.

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 13, 2008.

Renseignements

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