Hardwoods Distribution Income Fund Announces 2007 Third Quarter Results and Increases Monthly Cash Distributions by 5%



    TRADING SYMBOL: Toronto Stock Exchange - HWD.UN

    Hardwoods Distribution Income Fund will hold a conference call and
    webcast to discuss third quarter and nine-month financial results on
    Friday, November 2, 2007 at 8:00 a.m. Pacific Time (11:00 a.m. Eastern).
    The call can be accessed by dialing: 1-866-249-5221 or 416-644-3418.

    A replay will be available through November 16, 2007 at: 1-877-289-8252
    or 416-640-1917 Passcode 21249809 followed by the number sign.

    The live and archived webcast can be accessed at
    http://www.vcall.com/IC/CEPage.asp?ID=122053 or on the Fund's
    website at http://www.hardwoods-inc.com

    LANGLEY, BC, Nov. 1 /CNW/ - Hardwoods Distribution Income Fund (the
"Fund") today reported financial results for the third quarter and first nine
months of 2007 and announced a 5% increase in monthly cash distributions to
public unitholders. The increase will take effect with the October 2007
distribution to be paid on November 30, 2007 to unitholders of record as at
November 20, 2007.
    The Fund owns an 80% interest in Hardwoods Specialty Products LP and US
LP ("Hardwoods")-one of North America's largest wholesale distributors of
hardwood lumber and related sheet good products. Hardwoods serves over 2,500
industrial customers through a network of 36 distribution centres in the US
and Canada.

    
    Third Quarter 2007 Highlights

    -   Gross margin percentage increased to 20.0% in the third quarter and
        19.1% in the first nine months of 2007, compared to 18.9% and 18.2%
        in the respective periods in 2006.

    -   EBITDA increased by 2.3% in the first nine months of 2007, compared
        to the same period in 2006.

    -   Net earnings increased by 54.7% in the third quarter and 26.1% in the
        first nine months of 2007, compared to the same periods in 2006.

    -   Distributable Cash increased by 5.9% in the third quarter and 8.0% in
        the first nine months of 2007, compared to the respective periods in
        2006.

    -   The Fund achieved a conservative payout ratio of 59.2% for the third
        quarter of 2007 and 64.7% for the first nine months of 2007, even
        after increasing monthly cash distributions by 5% effective in
        April 2007.

    -   Bank indebtedness (net of cash) was reduced by $6.0 million in the
        first nine months of 2007, and leverage, as measured by net debt-to-
        EBITDA ratio, fell to 1.46 at the end of the third quarter compared
        to 1.77 at December 31, 2006.

    -   The Fund announced another 5% distribution increase to public
        unitholders, bringing monthly distributions to $0.075 per month or
        $0.90 per unit on an annualized basis, effective in October 2007.
    

    "Our stable business model and sharp focus on cost control and margin
performance delivered benefits again this quarter," said Maurice Paquette,
Hardwoods' President and CEO. "This is the third consecutive quarter in which
we have improved our bottom-line performance. Compared to the third quarter of
2006, we significantly increased our gross profit margin and net earnings,
generated more Distributable Cash and reduced our payout ratio. We also
continued to reduce our bank indebtedness and our leverage. This strong
performance supports our decision to increase distributions by 5% effective in
October 2007. We are confident we can make this increase even while market
conditions remain very challenging."
    "During the third quarter, US housing starts fell to their lowest level
in 14 years, contributing to general weakness in the US economy. We faced the
added challenge of a stronger Canadian dollar as the loonie reached parity
with the US dollar for the first time since 1976. In addition, the price
advantage of some of our import products was partially eroded due to the
appreciation in the value of the Chinese Yuan and the elimination of some
export incentives previously available to our Chinese mill suppliers," said
Paquette.
    "Hardwoods wasn't immune to these influences - our underlying sales were
down 5.6% in the third quarter and EBITDA declined by 4.7%. However,
positioned against a 31% drop in the seasonally adjusted annual rate of US
housing starts between September 2007 and 2006, we view these impacts as
modest. As we anticipated, our strong product, customer and geographic
diversification, together with growth in our import program, deflected the
worst of the market conditions. Our results also benefited from exceptionally
strong margin performance of 20%."
    "Going forward we expect that market conditions will continue to be
difficult. While this could put continued pressure on our sales, and increase
customer credit risk, we have demonstrated our ability to provide solid
bottom-line performance in challenging markets. Our conservative payout ratio
and improving balance sheet only strengthen our position. We believe we are
well positioned to weather this market downturn while supporting a higher
level of distributions for our unitholders," said Paquette.

    
    Summary of Results
    Selected Unaudited Consolidated Financial Information
    (in thousands of Canadian dollars except where noted)

                              For the      For the      For the      For the
                         Three Months Three Months  Nine Months  Nine Months
                                Ended        Ended        Ended        Ended
                            September    September    September    September
                             30, 2007     30, 2006     30, 2007     30, 2006
                            ----------   ----------   ----------   ----------
    Total sales           $    81,878  $    90,974  $   262,998  $   279,408
      Sales in the US (US$)    53,247       57,714      164,142      172,007
      Sales in Canada          26,251       26,213       81,506       84,558
    Gross profit               16,387       17,158       50,249       50,926
      Gross profit %            20.0%        18.9%        19.1%        18.2%
    Selling and
     administrative
     expenses                 (10,517)     (10,790)     (33,336)     (34,205)
    Realized gain on
     foreign currency
     contracts                    541          359        1,235        1,012
    -------------------------------------------------------------------------
    Earnings before
     interest, taxes,
     depreciation and
     amortization and
     non-controlling
     interest ("EBITDA")        6,411        6,727       18,148       17,733
      Add (deduct):
        Amortization             (462)        (525)      (1,429)      (1,573)
        Interest                 (581)        (932)      (1,915)      (2,463)
        Mark-to-market gain
         on unrealized
         foreign currency
         contracts                504         (368)       1,275          (68)
        Non-controlling
         interest              (1,175)        (981)      (3,216)      (2,726)
        Income taxes             (587)      (1,265)      (2,189)      (2,440)
    -------------------------------------------------------------------------
    Net earnings for
     the period           $     4,110  $     2,656  $    10,674  $     8,463
    -------------------------------------------------------------------------
    Basic and fully
     diluted earnings
     per Class A Unit     $     0.285  $     0.184  $     0.741  $     0.587
    Average Canadian
     dollar/US dollar
     exchange rate             1.0461       1.1216       1.1057       1.1328
    -------------------------------------------------------------------------



    Distributable Cash and Cash Distributions

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


                  For the three  For the three   For the nine   For the nine
                   months ended   months ended   months ended   months ended
                   September 30,  September 30,  September 30,  September 30,
                           2007           2006           2007           2006
                  -------------- -------------- -------------- --------------
    Net cash
     provided by
     operating
     activities     $     3,861    $     7,539    $    10,115    $     8,026
    Increase
     (decrease)
     in non-cash
     operating
     working capital      1,453         (2,572)         4,514          5,813
                    ------------   ------------   ------------   ------------
    Cash flow from
     operations
     before changes
     in non-cash
     operating
     working capital      5,314          4,967         14,629         13,839
    Capital
     expenditures          (103)           (46)          (553)          (805)
                    ------------   ------------   ------------   ------------
    Distributable
     Cash           $     5,211    $     4,921    $    14,076    $    13,034
                    ------------   ------------   ------------   ------------
                    ------------   ------------   ------------   ------------

    Distributions
     relating to the
     period:
      Class A Units $     3,086(1) $     2,940    $     9,112(2) $    10,325
      Class B Units           -(3)           -              -(3)           -
                    ------------   ------------   ------------   ------------
      Total Units   $     3,086    $     2,940    $     9,112    $    10,325
                    ------------   ------------   ------------   ------------
                    ------------   ------------   ------------   ------------

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

    Outstanding units
     and per unit
     amounts:
      Class A Units
       outstanding   14,410,000     14,410,000     14,410,000     14,410,000
      Class B Units
       outstanding    3,602,500      3,602,500      3,602,500      3,602,500
                    ------------   ------------   ------------   ------------
      Total Units
       outstanding   18,012,500     18,012,500     18,012,500     18,012,500
                    ------------   ------------   ------------   ------------
                    ------------   ------------   ------------   ------------

    Distributable
     Cash per Total
     Units          $     0.289    $     0.273    $     0.781    $     0.724

    Distributions
     relating to the
     period:
      Class A Units $     0.214(1) $     0.204    $     0.632(2) $     0.717
      Class B Units $         -(3) $         -(3) $         -(3) $         -
      Total Units   $     0.171    $     0.163    $     0.506    $     0.573

    Payout ratio(4)       59.2%          59.7%          64.7%          79.2%
    -------------------------------------------------------------------------


                       March 23,
                        2004 to
                   September 30,
                           2007
                   -------------
    Cumulative
     since
     inception:
      Distributable
       Cash              67,444
      Distributions
       relating to
       the period        55,946
      Payout ratio(4)     83.0%
    -------------------------------------------------------------------------

    (1) Includes the cash distributions of $0.0714 per Class A Unit per month
        which relate to the operations of the Fund for July, August, and
        September 2007.
    (2) Includes the cash distributions of $0.068 per Class A Unit per month
        which relate to the operations of the Fund for January, February, and
        March 2007, and $0.0714 per Class A Unit per month which relate to
        the operations of the Fund for April through September 2007
        inclusive.
    (3) On January 10, 2006, Hardwoods Specialty Products LP and Hardwoods
        Specialty Products US LP, limited partnerships in each of which the
        Fund owns an 80% interest, announced that quarterly distributions
        were suspended on the Class B LP and Class B US LP units. The
        Class B LP units and Class B US LP units represent a 20% interest in
        Hardwoods Specialty Products LP and Hardwoods Specialty Products US
        LP, respectively. No distributions are to be paid on the Class B LP
        units and Class B US LP units unless distributions in stipulated
        minimum amounts are paid on the units in the limited partnerships
        held by the Fund, and in certain other circumstances. Accordingly, no
        distributions have been declared since the third quarter of 2005 to
        the non-controlling interests. No liability for distributions payable
        to the non-controlling interests is reflected in the September 30,
        2007 balance sheet.
    (4) Payout ratio measures the ratio of distributions by the Fund relating
        to the period to Distributable Cash for the period.
    

    Results from Operations - Three Months Ended September 30, 2007

    For the three months ended September 30, 2007, the Fund and its
subsidiaries generated total Distributable Cash of $5.2 million, or $0.289 per
unit. Distributions of $3.1 million, or $0.214 per unit, were declared to the
public unitholders (Class A Units) and no distributions were paid to the
Class B Units, resulting in a payout ratio of 59.2% for the third quarter. By
comparison, the Fund generated total Distributable Cash of $4.9 million or
$0.273 per unit in the third quarter of 2006. Distributions of $2.9 million,
or $0.204 per unit were declared to the Class A Units and no distributions
were paid to the Class B Units, for a payout ratio of 59.7% in the prior-year
period.
    Total third quarter sales declined by 10% to $81.9 million, from the
$91.0 million reported in 2006. The change in sales revenue reflects a 5.6%
decrease in underlying sales activity and a 4.4% decrease in sales due to the
impact of a stronger Canadian dollar. Sales in the United States, as measured
in US dollars, decreased by 7.7% to $53.2 million, compared to $57.7 million
during the third quarter of 2006. Weaker residential construction markets were
the primary factor in this decline with the most significant impact felt in
Hardwoods' California divisions and to a lesser extent, in the Rocky Mountain
division. The declines were partially offset by sales growth in the Texas and
Mid West divisions. Sales in Canada, as measured in Canadian dollars, were
substantially unchanged year-over-year at $26.3 million.
    Third quarter gross profit declined to $16.4 million, from $17.2 million
in Q3 2006 as a result of the lower sales revenue. However, as a percentage of
sales, gross profit increased to 20.0%, from 18.9% in 2006. This result is
considered exceptionally strong for Hardwoods' business, and reflects the
discontinuation of some lower-margin business, growth in sales of
higher-margin import products and advantageous purchase opportunities that
were acted upon during the period. As an average, Hardwoods seeks to achieve a
gross margin percentage of 18.5% or better.
    Selling and administrative (S&A) expenses also improved during the
period, falling to $10.5 million, from $10.8 million in the third quarter of
2006. The benefit of the stronger Canadian dollar when converting costs at
Hardwoods' US operations into Canadian dollars was the key factor in this
improvement.
    EBITDA for the period was lower at $6.4 million, compared to $6.7 million
in Q3 2006. The change in EBITDA reflects lower gross profits, partially
offset by reduced S&A expenses. Net earnings increased, however, rising 54.7%
to $4.1 million, from $2.7 million in the third quarter of 2006. The increase
in net earnings reflects a $0.3 million reduction in interest costs resulting
from lower bank indebtedness during the quarter, a $0.9 million increase in
mark-to-market adjustment gains on foreign currency contracts, a $0.2 million
increase in non-controlling interest as a result of higher profits in the
third quarter, and a $0.7 million decrease in income taxes.

    Results from Operations - Nine Months ended September 30, 2007

    For the nine months ended September 30, 2007, the Fund and its
subsidiaries generated total Distributable Cash of $14.1 million, or $0.781
per unit. Distributions of $9.1 million, or $0.632 per unit, were declared to
the public unitholders (Class A Units) and no distributions were paid to the
Class B Units, resulting in a year-to-date payout ratio of 64.7%. By
comparison, the Fund generated total Distributable Cash of $13.0 million or
$0.724 per unit in the first nine months of 2006. Distributions of
$10.3 million, or $0.717 per unit were declared to the Class A Units and no
distributions were paid to the Class B Units, for a payout ratio of 79.2% in
the prior year period.
    Total sales in the first nine months declined by 5.9% to $263.0 million,
from $279.4 million in 2006, reflecting the more challenging market
conditions. Sales at Hardwoods' US operations, as measured in US dollars, were
down 4.6%, with the most significant impact felt in the company's California
divisions. Sales in Canada, as measured in Canadian dollars, were down by 3.6%
year-over-year, primarily reflecting the closure of the Windsor, Ontario
distribution centre in the fourth quarter of 2006.
    Year-to-date gross profit of $50.2 million declined slightly from the
$50.9 million reported in the first nine months of 2006. The relative
stability in gross profit despite the lower sales revenues reflects Hardwoods'
success in increasing its gross margin percentage to 19.1% of sales, from
18.2% during the first nine months of 2006. At the same time, the company
decreased its selling and administrative expenses to $33.3 million, from $34.2
million, largely because non-recurring expenses that added $0.5 million to
2006 expenses were not present in 2007.
    The combination of lower S&A expense with a higher gross margin
percentage contributed to improved EBITDA results. EBITDA for the first nine
months of 2007 increased 2.3% to $18.1 million, from $17.7 million in 2006.
Net earnings also improved, increasing 26.1% to $10.5 million, from
$8.5 million in the first nine months of 2006. The earnings improvement
primarily reflects the increase in EBITDA, a $0.6 million reduction in
interest costs due to reduced bank indebtedness, and a $1.4 million increase
in mark-to-market adjustment gains on foreign currency contracts. These gains
were partially offset by a $0.5 million increase in non-controlling interest
as a result of the higher profit in the first half of 2007, compared to 2006.

    Outlook

    Hardwoods anticipates that sales will continue to come under pressure
from slowing housing starts and general weakness in the US economy through the
balance of 2007 and into 2008. The fourth quarter is also a seasonally slower
period for Hardwoods' business. In this environment, maintaining tight control
of S&A expenses and holding margins in the target 18.5% or better range will
remain key priorities.
    While the company's import program is expected to remain a profitable and
growing part of Hardwoods' business, products sourced in China continue to
become more expensive. In response to US trade pressure, the Chinese
government is reducing export incentives and allowing some appreciation of the
Chinese currency, which in turn, is contributing to higher product prices.
Hardwood is responding by diversifying its import program with a broader range
of finished and semi-finished products and exploring opportunities to expand
sourcing beyond China.
    With approximately 70% of its operations in the United States, Hardwoods'
sales results are influenced by changes in the value of the Canadian dollar
relative to the US dollar. Distributable Cash results are less affected,
however, as the Fund currently has currency hedges in place that fix the
exchange rate on a portion of its Distributable Cash generated in the United
States at $1.30 Canadian. These hedges will remain in effect until April 2008,
after which the Fund has additional foreign exchange contracts that extend
further to September 2009, but are at less favourable exchange rates and do
not afford the same degree of exchange rate protection as the contracts being
realized by the Fund in the current year.
    Hardwoods will continue to monitor and plan for the impact of the federal
government's decision to tax income trusts. The government's legislation was
substantively enacted on June 12, 2007, and these changes will begin to take
effect in 2011. Overall, it is anticipated that the proposed trust tax will
have substantially less impact on Hardwoods Distribution Income Fund than on
other trusts that operate principally or exclusively in Canada. The 70% of
Hardwoods' business that is conducted in the U.S. is already subject to US
taxation. The Fund believes that it will be able to re-organize its tax
structure prior to 2011 such that it will not expose its US-sourced income to
additional taxes associated with the proposed new Canadian trust tax. The
remaining 30% of earnings that are generated in Canada are expected to be
subject to tax at a rate of 31.5%. The Fund will continue to monitor this tax
and take appropriate action as required.
    Overall, while challenges are anticipated through the balance of 2007 and
into 2008, the Fund is confident of its ability to support the distribution
increase announced today, while maintaining a prudent annual payout ratio.

    Non-GAAP Measures - EBITDA and Distributable Cash

    References to "EBITDA" are to earnings before interest, income taxes,
depreciation and amortization, mark-to-market adjustments on foreign currency
contracts, goodwill and other intangible assets impairments, and the
non-controlling interest in earnings. In addition to net income or loss,
EBITDA is a useful supplemental measure of performance and cash available for
distribution prior to debt service, changes in working capital, capital
expenditures and income taxes.
    References to "Distributable Cash" is to net cash provided by operating
activities, before changes in non-cash operating working capital, less capital
expenditures and contributions to any reserves that the Boards of Directors of
our operating entities determine to be reasonable and necessary for the
operation of the businesses owned by these entities.
    We believe that, in addition to net income or loss, EBITDA and
Distributable Cash are each a useful supplemental measures of operating
performance that may assist investors in assessing their investment in units
of the Fund. Neither EBITDA nor Distributable Cash are earnings measure
recognized by GAAP and they do not have a standardized meaning prescribed by
GAAP. Investors are cautioned that EBITDA should not replace net income or
loss (as determined in accordance with GAAP) as an indicator of our
performance, nor should Distributable Cash replace cash flows from operating,
investing and financing activities or as a measure of liquidity and cash
flows. The Fund's method of calculating EBITDA and Distributable Cash may
differ from the methods used by other issuers. Therefore, the Fund's EBITDA
and Distributable Cash may not be comparable to similar measures presented by
other issuers. For reconciliation between EBITDA and net income or loss as
determined in accordance with GAAP, and for reconciliation between
Distributable Cash and net cash provided by operating activities as determined
in accordance with GAAP, please refer to the Fund's third quarter 2007
Management Discussion and Analysis ("MD&A"), which is available at
www.sedar.com.
    Additional guidance regarding disclosure of distributable cash and cash
distributions was recently issued in an interpretative release by the Canadian
Institute of Chartered Accountants (the "CICA") in respect of "Standardized
Distributable Cash in Income Trusts and other Flow Through Entities" and
National Policy 41-201 of the Canadian Securities Administrators "Income
Trusts and other Indirect Offerings" (collectively, the "Interpretative
Guidance"). Disclosure and discussion of the Fund's Standardized Distributable
Cash in accordance with the Interpretive Guidance is included in the Fund's
third quarter 2007 MD&A, which is available at www.sedar.com.

    About the Fund

    Hardwoods Distribution Income Fund is an unincorporated, open-ended,
limited purpose trust established to hold, indirectly, the securities of
Hardwoods Specialty Products LP and Hardwoods Specialty Products USLP
(collectively, "Hardwoods"). The Fund was launched on March 23, 2004, with the
completion of an initial public offering of 14,410,000 shares at $10.00 per
unit.

    About Hardwoods

    Hardwoods is one of North America's largest distributors of high-grade
hardwood lumber and sheet goods to the cabinet, moulding, millwork, furniture
and specialty wood products industries. The company currently operates a
network of 36 distribution centres comprising 1.3 million square feet of
warehouse and distribution space in the U.S. and Canada.

    Forward-Looking Statements

    This press release may contain forward-looking statements, which reflect
management's expectations regarding the future growth, results of operations,
performance and business prospects, and opportunities of the Fund.
Forward-looking statements contain such words as "anticipate", "believe",
"continue", "could", "expects", "intend", "may", "plans" or similar
expressions suggesting future conditions or events. Such forward-looking
statements reflect current beliefs and are based on currently available
information. Forward-looking statements involve significant risks and
uncertainties. A number of factors could cause actual results to differ
materially from results discussed in the forward-looking statements, including
the effects, as well as changes in: national and local business conditions;
political or economic instability in local markets; competition; consumer
preferences, spending patterns and demographic trends; legislation and
governmental regulation. Although the forward-looking statements contained in
this press release are based on what management believes to be reasonable
assumptions, management cannot assure readers that actual results will be
consistent with these forward-looking statements.


    
    HARDWOODS DISTRIBUTION INCOME FUND
    Consolidated Balance Sheets
    (Expressed in thousands of Canadian dollars)

    -------------------------------------------------------------------------
                                                      September     December
                                                       30, 2007     31, 2006
    -------------------------------------------------------------------------
                                                     (unaudited)
    Assets
    Current assets:
      Cash and cash equivalents                     $       192  $       594
      Accounts receivable                                43,784       43,767
      Income tax recoverable                                400          596
      Inventory                                          39,880       44,584
      Prepaid expenses                                    1,381        1,098
      Foreign currency contracts (note 4)                 1,866        1,129
      -----------------------------------------------------------------------
                                                         87,503       91,768

    Long-term receivables                                 2,235        3,236

    Property, plant and equipment                         2,655        3,219

    Deferred financing costs                                 24           32

    Foreign currency contracts (note 4)                     782          385

    Other intangible assets                               9,234       10,878

    Goodwill                                             80,921       88,886
    -------------------------------------------------------------------------
                                                    $   183,354  $   198,404
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Liabilities and Unitholders' Equity

    Current liabilities:
      Bank indebtedness (note 6)                    $    32,711  $    39,152
      Accounts payable and accrued liabilities            8,324        7,590
      Distribution payable to Unitholders                 1,029          980
      -----------------------------------------------------------------------
                                                         42,064       47,722

    Foreign currency contracts (note 4)                       -          141

    Deferred gain on sale - leaseback of land
     and building                                           559          719

    Future income taxes (note 5)                          3,209        2,653

    Non-controlling interests (note 7)                   33,219       33,859

    Unitholders' equity:
      Fund Units                                        133,454      133,454
      Deficit                                            (7,597)      (8,973)
      Accumulated other comprehensive loss              (21,554)     (11,171)
      -----------------------------------------------------------------------
                                                        104,303      113,310
    Contingencies (note 13)

    -------------------------------------------------------------------------
                                                    $   183,354  $   198,404
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    See accompanying notes to consolidated financial statements.



    HARDWOODS DISTRIBUTION INCOME FUND
    Consolidated Statement of Earnings and Retained Earnings (Deficit)
    (Unaudited)
    (Expressed in thousands of dollars)

    -------------------------------------------------------------------------
                                Three        Three         Nine         Nine
                               months       months       months       months
                                ended        ended        ended        ended
                            September    September    September    September
                             30, 2007     30, 2006     30, 2007     30, 2006
    -------------------------------------------------------------------------

    Sales                 $    81,878  $    90,974  $   262,998  $   279,408
    Cost of sales              65,491       73,816      212,749      228,482
    -------------------------------------------------------------------------

    Gross profit               16,387       17,158       50,249       50,926

    Expenses:
      Selling and
       administrative          10,517       10,790       33,336       34,205
      Amortization:
        Plant and equipment       271          308          838          916
        Deferred financing
         costs                      2           15            8           46
        Other intangible
         assets                   208          223          644          674
        Deferred gain on
         sale - leaseback of
         land and building        (19)         (21)         (61)         (63)
      Interest                    581          932        1,915        2,463
      Foreign currency
       contracts               (1,045)           9       (2,510)        (944)
      -----------------------------------------------------------------------
                               10,515       12,256       34,170       37,297
    -------------------------------------------------------------------------

    Earnings before
     non-controlling
     interests
     and income taxes           5,872        4,902       16,079       13,629

    Non-controlling
     interests (note 7)         1,175          981        3,216        2,726
    -------------------------------------------------------------------------

    Earnings before income
     taxes                      4,697        3,921       12,863       10,903

    Income taxes:
      Current                     265          825        1,058        1,351
      Future (note 5)             322          440        1,131        1,089
      -----------------------------------------------------------------------
                                  587        1,265        2,189        2,440
    -------------------------------------------------------------------------

    Net earnings for the
     period                     4,110        2,656       10,674        8,463

    Retained earnings
     (deficit), beginning
     of period (note 3)        (8,621)         307       (9,159)       1,886

    Distributions declared
     to Unitholders            (3,086)      (4,170)      (9,112)     (11,556)

    -------------------------------------------------------------------------
    Retained deficit,
     end of period        $    (7,597) $    (1,207) $    (7,597) $    (1,207)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Basic and diluted
     earnings per Unit    $      0.29  $      0.18  $      0.74  $      0.59
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Weighted average
     number of Units
     outstanding           14,410,000   14,410,000   14,410,000   14,410,000
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    See accompanying notes to consolidated financial statements.



    HARDWOODS DISTRIBUTION INCOME FUND
    Consolidated Statement of Comprehensive Income (Loss)
    (Unaudited)
    (Expressed in thousands of Canadian dollars)

    -------------------------------------------------------------------------
                                Three        Three         Nine         Nine
                               months       months       months       months
                                ended        ended        ended        ended
                            September    September    September    September
                             30, 2007     30, 2006     30, 2007     30, 2006
    -------------------------------------------------------------------------

    Net earnings for the
     period               $     4,110  $     2,656  $    10,674  $     8,463

    Other comprehensive
     income:
      Unrealized losses
       on translation of
       self-sustaining
       foreign operations      (4,325)        (261)     (10,374)      (3,163)
      -----------------------------------------------------------------------
      Other comprehensive
       loss                    (4,325)        (261)     (10,374)      (3,163)

    -------------------------------------------------------------------------
    Comprehensive income
     (loss)               $      (215) $     2,395  $       300  $     5,300
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    Consolidated Statement of Accumulated Other Comprehensive Loss
    (Unaudited)
    (Expressed in thousands of Canadian dollars)

    -------------------------------------------------------------------------
                                Three        Three         Nine         Nine
                               months       months       months       months
                                ended        ended        ended        ended
                            September    September    September    September
                             30, 2007     30, 2006     30, 2007     30, 2006
    -------------------------------------------------------------------------

    Accumulated other
     comprehensive loss,
     beginning of period
     (note 3)             $   (17,229) $   (13,944) $   (11,180) $   (11,042)

    Other comprehensive
     loss                      (4,325)        (261)     (10,374)      (3,163)

    -------------------------------------------------------------------------
    Accumulated other
     comprehensive loss,
     end of period        $   (21,554) $   (14,205) $   (21,554) $   (14,205)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    See accompanying notes to consolidated financial statements.



    HARDWOODS DISTRIBUTION INCOME FUND
    Consolidated Statements of Cash Flows
    (Unaudited)
    (Expressed in thousands of Canadian dollars)

    -------------------------------------------------------------------------
                                Three        Three         Nine         Nine
                               months       months       months       months
                                ended        ended        ended        ended
                            September    September    September    September
                             30, 2007     30, 2006     30, 2007     30, 2006
    -------------------------------------------------------------------------

    Cash flows provided
     by (used in)
     operating activities:
      Net earnings for
       the period         $     4,110  $     2,656  $    10,674  $     8,463
      Items not involving
       cash:
        Amortization              462          525        1,429        1,573
        Imputed interest
         income on
         employee loans           (30)           -          (46)           -
        Gain on sale of
         property, plant
         and equipment             (5)          (5)         (24)         (16)
        Mark-to-market
         adjustment on
         unrealized foreign
         currency contracts      (504)         368       (1,275)          68
        Non-controlling
         interests              1,175          981        3,216        2,726
        Future income taxes       106          442          655        1,025
      -----------------------------------------------------------------------
                                5,314        4,967       14,629       13,839

      Change in non-cash
       operating working
       capital (note 8)        (1,453)       2,572       (4,514)      (5,813)
      -----------------------------------------------------------------------
      Net cash provided by
       operating activities     3,861        7,539       10,115        8,026

    Cash flows provided by
     (used in) financing
     activities:
      Increase (decrease) in
       bank indebtedness       (1,241)      (3,235)      (2,429)         781
      Distributions paid to
       Unitholders             (3,087)      (3,190)      (9,064)     (10,576)
      -----------------------------------------------------------------------
      Net cash used in
       financing activities    (4,328)      (6,425)     (11,493)      (9,795)

    Cash flows provided by
     (used in) investing
     activities:
      Additions to property,
       plant and equipment       (103)         (46)        (553)        (805)
      Proceeds on disposal
       of property, plant
       and equipment                5            4           26           17
      Decrease in long-term
       receivables, net           360           13        1,503        1,569
      -----------------------------------------------------------------------
      Net cash provided by
       (used in) investing
       activities                 262          (29)         976          781

    -------------------------------------------------------------------------
    Increase (decrease) in
     cash                        (205)       1,085         (402)        (988)

    Cash, beginning of
     period                       397          130          594        2,203

    -------------------------------------------------------------------------
    Cash, end of period   $       192  $     1,215 $        192  $     1,215
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Supplementary
     information
     (cash amounts):
      Interest paid       $       581  $       932  $     1,915  $     2,463
      Income taxes paid            89            8          890          706
      Transfer of
       accounts receivable
       to long-term
       customer notes
       receivable, being a
       non-cash transaction         -          319        1,106          579
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    See accompanying notes to consolidated financial statements.



    HARDWOODS DISTRIBUTION INCOME FUND
    Notes to Consolidated Financial Statements
    (Unaudited)
    (Tabular amounts expressed in thousands of Canadian dollars)

    Periods ended September 30, 2007 and 2006
    ------------------------------------------------------------------------

    1.  Nature of operations:

        Hardwoods Distribution Income Fund (the "Fund") is an unincorporated,
        open ended, limited purpose trust established under the laws of the
        Province of British Columbia on January 30, 2004 by a Declaration of
        Trust. The Fund commenced operations on March 23, 2004 when it
        completed an initial public offering of Units and acquired an 80%
        interest in a hardwood lumber and sheet goods distribution business
        in North America (the "Business") from affiliates of Sauder
        Industries Limited ("SIL"). The Fund holds, indirectly, 80% of the
        outstanding limited partnership units of Hardwoods Specialty Products
        LP ("Hardwoods LP") and Hardwoods Specialty Products US LP
        ("Hardwoods USLP"), limited partnerships established under the laws
        of the Province of Manitoba and the state of Delaware, respectively.

    2.  Basis of presentation:

        The Fund prepares its consolidated interim financial statements in
        accordance with Canadian generally accepted accounting principles on
        a basis consistent with those used and described in the annual
        consolidated financial statements for the year ended December 31,
        2006 except as discussed in note 3. The disclosures contained in
        these consolidated interim financial statements do not include all
        the requirements of Canadian generally accepted accounting principles
        for annual financial statements, and accordingly, these consolidated
        interim financial statements should be read in conjunction with the
        annual consolidated financial statements for the period ended
        December 31, 2006. Certain comparative figures have been restated to
        conform to the current period's financial statement presentation.

    3.  Adoption of changes in accounting policies:

        Effective January 1, 2007, the Fund adopted five new Canadian
        Institute of Chartered Accountants ("CICA") accounting standards:
        (a) Handbook Section 1530, Comprehensive Income; (b) Handbook Section
        3855, Financial Instruments - Recognition and Measurement;
        (c) Handbook Section 3861 Financial Instruments - Disclosure and
        Presentation; (d) Handbook Section 3865, Hedges; and (e) Handbook
        Section 1506, Accounting Changes. The main requirements of these new
        standards and the resulting financial statement impact are described
        below.

        Consistent with the requirements of the new accounting standards, the
        Fund has not restated any prior period amounts as a result of
        adopting the accounting changes, other than to classify unrealized
        foreign currency translation gain or losses on net investments in
        self-sustaining foreign operations in accumulated other
        comprehensive loss within Unitholders' Equity. As required under the
        transition rules the opening deficit has been adjusted to reflect the
        cumulative impact of adopting the changes in accounting policies
        described below.

        The effect of the adoption of these standards is summarized in the
        following table:

        ---------------------------------------------------------------------
                                         Reclassi-
                                       fication to   Adjustment
                               As at   accumulated  on adoption        As at
                         December 31, other compre-      of new    January 1,
                                2006  hensive loss    standards         2007
        ---------------------------------------------------------------------
        Long-term
         receivables      $     3,236  $         -  $      (365) $     2,871
        Non-controlling
         interests             33,859            -          (71)      33,788
        Future income
         taxes                  2,653            -          (99)       2,554
        Unitholders'
         equity:
          Cumulative
           translation
           adjustment         (11,171)      11,171            -            -
          Accumulated other
           comprehensive
           loss                     -      (11,171)          (9)     (11,180)
           Deficit        $    (8,973) $         -  $      (186) $    (9,159)
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        (a)   Comprehensive Income (Section 1530):

              CICA Section 1530 introduces the term Comprehensive Income,
              which consists of net earnings and other comprehensive income
              ("OCI"). OCI represents changes in Unitholders' equity during
              the period arising from transactions and other events with non-
              owner sources and in the case of the Fund includes unrealized
              foreign currency translation gains or losses arising from self-
              sustaining foreign operations. As a result of adopting this
              standard, a new Statement of Comprehensive Income now forms
              part of the Fund's consolidated financial statements which
              includes the current period net earnings and OCI. Cumulative
              changes in OCI are included in Accumulated Other Comprehensive
              Income, which is presented as a new category of Unitholders'
              Equity in the balance sheet. The Fund's accumulated other
              comprehensive income balance at September 30, 2007 and
              December 31, 2006 is comprised entirely of cumulative foreign
              currency translation adjustments arising on translation of the
              Fund's United States operations to Canadian dollars.

        (b)   Financial Instruments - Recognition and Measurement (Section
              3855):

              CICA Section 3855 sets out criteria for the recognition
              and measurement of financial instruments for fiscal years
              beginning on or after October 1, 2006. This standard requires
              all financial instruments within its scope, including
              derivatives, to be included on the balance sheet and measured
              either at fair value or, in certain circumstances when fair
              value may not be considered most relevant, at cost or amortized
              cost. Changes in fair value are to be recognized in either the
              Statements of Earnings or the Statement of Comprehensive
              Income.

              All financial assets and liabilities are recognized
              when the entity becomes a party to the contract creating the
              item. As such, any of the Fund's outstanding financial assets
              and liabilities at the effective date of adoption are
              recognized and measured in accordance with the new requirements
              as if these requirements had always been in effect. Any changes
              to the fair values of assets and liabilities prior to
              January 1, 2007 are recognized by adjusting opening deficit or
              opening accumulated other comprehensive income.

              All financial instruments are classified into one of the
              following five categories: held-for-trading, held to maturity,
              loans and receivables, available for sale financial assets, or
              other financial liabilities. Initial and subsequent measurement
              and recognition of changes in the value of financial
              instruments depends on their initial classification:

              (i)   Held to maturity investments, loans and receivables, and
                    other financial liabilities are initially measured at
                    fair value and subsequently measured at amortized cost.
                    Amortization of premiums or discounts and losses due to
                    impairment are included in current period net earnings
                    using the effective interest method.

              (ii)  Available for sale financial assets are measured at fair
                    value, with unrealized gains and losses recorded in other
                    comprehensive income until the asset is realized, at
                    which time they will be recorded in net earnings.

              (iii) Held for trading financial instruments are measured at
                    fair value. All gains and losses resulting from changes
                    in their fair value are included in net earnings in the
                    period in which they arise.

              (iv)  All derivative financial instruments are classified as
                    held for trading financial instruments and are measured
                    at fair value, even when they are part of a hedging
                    relationship. All gains and losses resulting from changes
                    in their fair value are included in net earnings in the
                    period in which they arise.

                    Upon adoption of these new standards, the Fund has
                    classified its financial instruments as follows:

              (v)   Accounts receivable and long term receivables are
                    classified as loans and receivables, which are initially
                    measured at fair value and subsequently measured at
                    amortized cost. Housing loans provided to employees by
                    the Fund to assist in their relocation to new operating
                    locations were identified to be loans with a non-market
                    rate of interest, requiring an adjustment based on the
                    fair market value of the loans at their inception,
                    adjusted for the accretion of the fair market value
                    discount in the period from inception to the adoption of
                    the new accounting standard. This change in accounting
                    standard resulted in a decrease in the carrying value of
                    employee housing loans receivable of $365,000, a decrease
                    in non-controlling interests of $71,000 and future income
                    taxes of $99,000, and an increase in deficit of $186,000
                    on the balance sheet at January 1, 2007.

              (vi)  The Fund's foreign currency contracts are a derivative
                    financial instrument and as such are classified as held
                    for trading, with all gains and losses included in net
                    earnings in the period in which they arise. This is
                    consistent with the Fund's historic accounting treatment
                    of the foreign currency contracts and thus there was no
                    change in accounting on adoption.

        (c)   Financial Instruments - Disclosure and Presentation
              (Section 3861):

              CICA Section 3861 sets out standards which address the
              presentation of financial instruments and non-financial
              derivates, and identifies the related information that should
              be disclosed. These standards also revise the requirements for
              entities to provide accounting policy disclosures, including
              disclosure of the criteria for designating as held-for-trading
              those financial assets or liabilities that are not required to
              be classified as held-for-trading; whether categories of normal
              purchases and sales of financial assets are accounted for at
              trade date or settlement date; the accounting policy for
              transaction costs on financial assets and financial liabilities
              classified as other than held-for-trading; and provide several
              new requirements for disclosure about fair value.

        (d)   Hedging (Section 3865):

              CICA Section 3865 specifies the circumstances under which hedge
              accounting is permissible and how hedge accounting may be
              performed. The Fund currently does not hold any financial
              instruments designated for hedge accounting.

        (e)   Accounting Changes (Section 1506):

              CICA Section 1506 revised the standards on changes in
              accounting policy, estimates or errors to require a change in
              accounting policy to be applied retrospectively (unless doing
              so is impracticable), changes in estimates to be recorded
              prospectively, and prior period errors to be corrected
              retrospectively. Voluntary changes in accounting policy are
              allowed only when they result in financial statements that
              provide reliable and more relevant information. In addition,
              these revised standards call for enhanced disclosures about the
              effects of changes in accounting policies, estimates and errors
              on the financial statements. The impact of this new standard
              cannot be determined until such time as the Fund makes a change
              in accounting policy, other than the changes resulting from the
              implementation of the new CICA Handbook standards discussed in
              this note.

        (f)   Cash Flow Statements (Section 1540):

              Amendments to CICA 1540, Cash Flow Statements, require entities
              to disclose total cash distributions on financial instruments
              classified as equity in accordance with a contractual agreement
              and the extent to which total cash distributions are non-
              discretionary. This disclosure requirement is effective for
              interim and annual financial statements for fiscal periods
              ending on or after March 31, 2007. The Fund has no contractual
              requirement to pay cash distributions to Unitholders' of the
              Fund. During the three month period ended September 30, 2007
              $3.1 million (2006 - $3.2 million) in discretionary cash
              distributions were paid to Unitholders. During the Nine month
              period ended September 30, 2007 $9.1 million (2006 -
              $10.6 million) in discretionary cash distributions were paid to
              Unitholders.

    4.  Foreign currency contracts:

        The Fund utilizes foreign currency contracts in order to assist in
        managing the Fund's exposure to exchange rate fluctuations on United
        States dollar denominated distributable cash. The foreign currency
        contracts are recognized in the balance sheet and measured at their
        fair value, with changes in fair value recognized currently in the
        statement of operations.

        At September 30, 2007 a subsidiary of the Fund held foreign currency
        contacts covering the period 24 months into the future with terms as
        follows:

                                                 Contract          Receive
                              Sell US            exchange rate     Canadian
        Month                 dollars            ($C/$US)          dollars
        ---------------------------------------------------------------------
        October 2007          US$675,000         1.3001            C$877,568
        November 2007         US$675,000         1.3001            C$877,568
        December 2007         US$675,000         1.3001            C$877,568
        January 2008          US$675,000         1.3001            C$877,568
        February 2008         US$675,000         1.3001            C$877,568
        March 2008            US$675,000         1.3001            C$877,568
        April 2008            US$675,000         1.3001            C$877,568
        May 2008              US$675,000         1.1255            C$759,712
        June 2008             US$675,000         1.1255            C$759,712
        July 2008             US$675,000         1.1255            C$759,712
        August 2008           US$675,000         1.1255            C$759,712
        September 2008        US$675,000         1.1255            C$759,712
        October 2008          US$675,000         1.1255            C$759,712
        November 2008         US$675,000         1.1255            C$759,712
        December 2008         US$675,000         1.1255            C$759,712
        January 2009          US$675,000         1.1255            C$759,712
        February 2009         US$675,000         1.1255            C$759,712
        March 2009            US$675,000         1.1255            C$759,712
        April 2009            US$675,000         1.1255            C$759,712
        May 2009              US$675,000         1.0882            C$734,535
        June 2009             US$675,000         1.0595            C$715,162
        July 2009             US$675,000         1.0625            C$717,187
        August 2009           US$675,000         1.0560            C$712,800
        September 2009        US$675,000         1.0010            C$675,675


        The fair value of the 24 monthly currency contracts covering the
        period October 2007 to September 2009 have been reflected in the
        financial statements and represent a current asset of $1,866,000 and
        a long-term asset of $782,000 at September 30, 2007. The fair values
        were determined based on valuations obtained from the counter-party.

    5.  Future income taxes:

        On June 12, 2007, the Canadian federal government's legislation to
        tax publicly traded income trusts passed third reading in the House
        of Commons and thus the associated income tax became substantively
        enacted for accounting purposes. The legislation imposes a tax of
        31.5% on distributions from Canadian public income trusts. The new
        tax is not expected to apply to the Fund until January 1, 2011 as a
        transition period applies to publicly traded trusts that existed
        prior to November 1, 2006. Historically the Fund had been exempt from
        recognizing future income tax assets and liabilities associated with
        temporary differences arising in the Fund and its subsidiary
        Hardwoods LP.

        As a result of the substantive enactment of the new tax legislation,
        the Fund has recognized future income tax assets and liabilities that
        are expected to reverse subsequent to January 1, 2011. The impact on
        the Fund's consolidated financial statements was recorded in the
        quarter ended June 30, 2007 and the effect was an increase in the
        future income tax liability by $115,000 and an increase in future
        income tax expense of $115,000.

    6.  Bank indebtedness:

        ---------------------------------------------------------------------
                                                  September 30,  December 31,
                                                          2007          2006
        ---------------------------------------------------------------------
        Checks issued in excess of funds on deposit  $   1,959     $     797
        Credit facility, Hardwoods LP                    8,831        10,788
        Credit facility, Hardwoods USLP
         (September 30, 2007 - US$22,036;
         December 31, 2006 - US$23,655)                 21,921        27,567
        ---------------------------------------------------------------------
                                                     $  32,711     $  39,152
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

    7.  Non-controlling interests:

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

        Balance, January 1, 2007 (note 3)                          $  33,788
        Interest in earnings for the period                            3,216
        Foreign currency translation adjustment of
         non-controlling interest in Hardwoods USLP                   (3,785)

        ---------------------------------------------------------------------
        Balance, end of period                                     $  33,219
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        The previous owners of the Business (note 1) have retained a 20%
        interest in Hardwoods LP and Hardwoods USLP through ownership of
        Class B Hardwoods LP units ("Class B LP Units") and Class B Hardwoods
        USLP units ("Class B USLP Units"), respectively. The Fund owns an
        indirect 80% interest in Hardwoods LP and Hardwoods USLP through
        ownership of all Class A Hardwoods LP units ("Class A LP Units") and
        Class A Hardwoods USLP units ("Class A USLP Units"), respectively.

        The Class A LP Units and Class B LP Units and the Class A USLP Units
        and Class B USLP Units, respectively, have economic and voting rights
        that are equivalent in all material respects except distributions on
        the Class B LP Units and Class B USLP Units are subject to the
        subordination arrangements described below until the date (the
        "Subordination End Date") on which:

        (a) the consolidated Adjusted EBITDA, as defined in the Subordination
            Agreement dated March 23, 2004, of the Fund for the 12 month
            period ending on the last day of the month immediately preceding
            such date is at least $21,300,000; and

        (b) cash distributions of at least $29,540,000 ($2.05 per Unit) have
            been paid on the Units and a combined amount of cash advances or
            distributions of at least $7,385,000 has been paid on the Class B
            LP Units and Class B USLP Units, being $2.05 per combined Class B
            LP and Class B USLP Units (as adjusted for issuances, redemptions
            and repurchases of Units, LP Units and USLP Units subsequently
            and by converting the cash distributions or advances by Hardwoods
            USLP on the USLP Units at the rate of exchange used by the Fund
            to convert funds received by it in US dollars into Canadian
            dollars) for the 24 month period ending on the last day of the
            month immediately preceding such date.

        The Subordinated End Date had not occurred at September 30, 2007.

        Prior to the Subordination End Date, advances and distributions on
        the LP Units and the USLP Units will be made in the following order
        of priority:

        (a) At the end of each month, cash advances or distributions will be
            made to the holders of Class A LP Units and Class A USLP Units in
            a combined amount that is sufficient to provide available cash to
            the Fund to enable the Fund to make cash distributions upon the
            Units for such month at least equal to $0.08542 per Unit or, if
            there is insufficient available cash to make distributions or
            advances in such amount, such lesser amount as is available as
            determined by the board of directors of the general partners;

        (b) At the end of each fiscal quarter of Hardwoods LP and Hardwoods
            USLP, including the fiscal quarter ending on the fiscal year end,
            available cash of Hardwoods LP and Hardwoods USLP will be
            advanced or distributed in the following order of priority:

            (i)   First, in payment of the monthly cash advance or
                  distribution to the holders of Class A LP Units and Class A
                  USLP Units as described above, for the month then ended;

            (ii)  Second, to the holders of Class A LP Units and Class A USLP
                  Units, to the extent that the combined monthly cash
                  advances or distributions in respect of the 12 month period
                  then ended (and not, for greater certainty, in any previous
                  12 month period) on Class A LP Units and Class A USLP Units
                  were not made or were made in amounts less than a combined
                  amount at least equal to $1.025 per Unit, the amount of any
                  such deficiency. As of September 30, 2007, the amount of
                  such deficiency was $2.8 million;

            (iii) Third, to the holders of Class B LP Units and Class B USLP
                  Units in a combined amount for one Class B LP Unit and one
                  Class B USLP Unit equal, on a pro-rated basis, to the
                  combined amount advanced or distributed on one Class A LP
                  Unit and one Class A USLP Unit during such fiscal quarter
                  or, if there is insufficient available cash to make
                  advances or distributions in such amount, such lesser
                  amount as is available;

            (iv)  Fourth, to the holders of Class B LP Units and Class B USLP
                  Units, to the extent only that combined advances or
                  distributions in respect of any fiscal quarter(s) during
                  the 12 month period then ended (and not, for greater
                  certainty, in any previous 12 month period) on one Class B
                  LP Unit and one Class B USLP Unit were not made, or were
                  made in amounts less, on a pro-rated basis, that the
                  combined amount advanced or distributed on one Class A LP
                  Unit and one Class A USLP Unit during such 12 month period,
                  the amount of such deficiency. As of September 30, 2007,
                  the amount of such deficiency was $3.0 million;

            (v)   Fifth, to the extent of any excess, to the holders of the
                  Class A LP Units and Class B LP Units and Class A USLP
                  Units and Class B USLP Units, respectively, so that the
                  combined advances or distributions on one Class A LP Unit
                  and one Class A USLP Unit are the same as the combined
                  advances or distribution on one Class B LP Unit and one
                  Class B USLP Unit in respect of the 12 month period then
                  ended (and not, for greater certainty, any previous
                  12 month period).

        After the Subordination End Date, the holders of the Class B LP Units
        and Class B USLP Units will generally be entitled to effectively
        exchange all or a portion of their Class B LP Units and Class B USLP
        Units together for up to 3,602,500 Units of the Fund, representing
        20% of the issued and outstanding Units of the Fund on a fully
        diluted basis. In the event the Fund enters into an agreement in
        respect of an acquisition or a take-over bid of the Fund, the holders
        of the Class B LP Units and Class B USLP Units will be entitled to
        exchange such units for Units of the Fund.

    8.  Changes in non-cash operating working capital:

        ---------------------------------------------------------------------
                      Three months  Three months   Nine months   Nine months
                             ended         ended         ended         ended
        Source (use)  September 30, September 30, September 30, September 30,
         of funds             2007          2006          2007          2006
        ---------------------------------------------------------------------

        Accounts
         receivable     $      497      $  1,567      $ (6,155)     $ (6,019)
        Income taxes
         recoverable           194           816           196           538
        Inventory           (2,399)          706           267         1,467
        Prepaid expenses      (211)          117          (409)         (324)
        Accounts payable
         and accrued
         liabilities           466          (634)        1,587        (1,475)
        ---------------------------------------------------------------------
                        $   (1,453)     $  2,572      $ (4,514)     $ (5,813)
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

    9.  Segment disclosure:

        Information about geographic areas is as follows:

        ---------------------------------------------------------------------
                      Three months  Three months   Nine months   Nine months
                             ended         ended         ended         ended
                      September 30, September 30, September 30, September 30,
                              2007          2006          2007          2006
        ---------------------------------------------------------------------

        Sales to external
         customers:
          Canada        $   26,251    $   26,213    $   81,506    $   84,558
          United States     55,627        64,761       181,492       194,850
        ---------------------------------------------------------------------
                        $   81,878    $   90,974    $  262,998    $  279,408
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------


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

        Property, plant and equipment:
          Canada                                    $    1,119    $    1,156
          United States                                  1,536         2,063
        ---------------------------------------------------------------------
                                                    $    2,655    $    3,219
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        Goodwill
          Canada                                    $   34,477    $   34,477
          United States                                 46,444        54,409
        ---------------------------------------------------------------------
                                                    $   80,921    $   88,886
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

    10. Pensions:

        Hardwoods USLP maintains a defined contribution 401 (k) retirement
        savings plan (the "USLP Plan"). The assets of the USLP Plan are held
        and related investment transactions are executed by the Plan's
        Trustee, ING National Trust, and, accordingly, are not reflected in
        these consolidated financial statements. During the three months
        ended September 30, 2007, Hardwoods USLP contributed and expensed
        $92,279 (US$88,212) (three months ended September 30, 2006 - $91,916
        (US$81,309)) in relation to the USLP Plan. During the nine months
        ended September 30, 2007, Hardwoods USLP contributed and expensed
        $331,986 (US$300,249) (nine months ended September 30, 2006 -
        $311,189 (US$274,708)) in relation to the USLP Plan.

        Hardwoods LP does not maintain a pension plan. Hardwoods LP does,
        however, administer a group registered retirement savings plan ("LP
        Plan") that has a matching component whereby Hardwoods LP makes
        contributions to the LP Plan which match contributions made by
        employees up to a certain level. The assets of the LP Plan are held
        and related investment transactions are executed by LP Plan's
        Trustee, Sun Life Financial Trust Inc., and, accordingly, are not
        reflected in these consolidated financial statements. During the
        three months ended September 30, 2007, Hardwoods LP contributed and
        expensed $53,262 (three months ended September 30, 2006 - $53,996) in
        relation to the LP Plan. During the nine months ended September 30,
        2007, Hardwoods LP contributed and expensed $196,767 (nine months
        ended September 30, 2006 - $216,746) in relation to the LP Plan.

    11. Related party transactions:

        For the three months ended September 30, 2007, sales of $200,004
        (three months ended September 30, 2006 - $281,660) were made to
        affiliates of SIL, and the Fund made purchases of $13,045 (three
        months ended September 30, 2006 - $10,655) from affiliates of SIL.
        For the nine months ended September 30, 2007, sales of $574,132 (nine
        months ended September 30, 2006 - $927,420) were made to affiliates
        of SIL, and the Fund made purchases of $169,913 (nine months ended
        September 30, 2006 - $77,880) from affiliates of SIL. All these sales
        and purchases took place at prevailing market prices.

        During the three months ended September 30, 2007, the Fund paid
        $27,000 (three months ended September 30, 2006 - $27,000) to
        affiliates of SIL under the terms of an agreement to provide
        transitional services for management information systems. During the
        nine months ended September 30, 2007, the Fund paid $81,000 (nine
        months ended September 30, 2006 - $81,000) to affiliates of SIL under
        the terms of an agreement to provide transitional services for
        management information systems. This cost is included in the selling
        and administrative expense in the statement of earnings.

    12. Seasonality:

        The Fund is subject to seasonal influences. Historically the first
        and fourth quarters are seasonally slower periods for construction
        activity and therefore demand for hardwood products; sales are
        generally lower in these quarters.

    13. Contingencies:

        The Fund and its subsidiaries are subject to legal proceedings that
        arise in the ordinary course of its business. Management is of the
        opinion, based upon information presently available, that it is
        unlikely that any liability, to the extent not provided for through
        insurance or otherwise, would be material in relation to the Fund's
        consolidated financial statements.
    

    %SEDAR: 00020372E




For further information:

For further information: Rob Brown, Chief Financial Officer, Phone:
(604) 881-1990, Fax: (604) 881-1995, Email: robbrown@hardwoods-inc.com

Organization Profile

HARDWOODS DISTRIBUTION INCOME FUND

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