Hardwoods Distribution Income Fund Announces 2008 Second Quarter Results and Reduction to Distributions



    TRADING SYMBOL: Toronto Stock Exchange - HWD.UN

    Hardwoods Distribution Income Fund will hold a conference call and
    webcast to discuss second quarter financial results on August 1, 2008 at
    8:00 a.m. Pacific Time (11:00 a.m. Eastern). The call can be accessed by
    dialing: 1-800-732-1073 or 416-644-3420. A replay will be available until
    August 15, 2008 at: 1-877-289-8525 or 416-640-1917 (Passcode 21279237
    followed by the number sign).

    The live and archived webcast can be accessed at
    http://www.investorcalendar.com/IC/CEPage.asp?ID=128341 or on
    the Fund's website at www.hardwoods-inc.com.

    LANGLEY, BC, July 31 /CNW/ - Hardwoods Distribution Income Fund (the
"Fund") today released results for the second quarter and first half of 2008.

    
    Second Quarter 2008 Overview

    -   Second quarter revenue declined 25.6% from Q2 2007

    -   Second quarter gross profit percentage was 18.0%, compared to 19.0%
        in the second quarter of 2007

    -   Second quarter selling and administrative expenses decreased by
        $1.9 million to $9.2 million, from $11.1 million in Q2 2007

    -   Second quarter EBITDA was $3.1 million, compared to $6.4 million in
        Q2 2007

    -   The Fund reported a second quarter distribution payout ratio of
        133.6%, compared to 63.4% in Q2 2007
    

    The Fund's results are based on the performance of Hardwoods Specialty
Products LP and Hardwoods Specialty Products USLP (collectively "Hardwoods") -
one of North America's largest wholesale distributors of hardwood lumber and
related sheet good products. Based on deteriorating market conditions, which
are having a negative impact on Hardwoods' financial results, the Fund today
announced that monthly cash distributions to unitholders will be reduced by
67% to $0.025 per unit effective with the July 2008 distribution. The
distribution will be paid on August 29, 2008, to unitholders of record as at
August 20, 2008.
    "We have made the difficult decision to reduce cash distributions to a
more sustainable level as we work through the current market downturn," said
Maurice Paquette, Hardwoods' President and CEO. "Market conditions remained
extremely challenging through the second quarter, with US housing starts
falling to a 17-year low and the broader North American economy continuing to
deteriorate. Demand for hardwood lumber, which traditionally increases in the
second quarter, declined both year-over-year and sequentially compared to the
first quarter of 2008 as a number of our furniture, cabinet, and millwork
manufacturing customers reduced production. Prices for hardwood lumber also
declined, adding to the negative sales impact.
    "At the same time, we experienced downward pressure on our gross margins
as a result of higher freight costs and increased market competition as
distributors lowered prices to shore up declining sales," added Paquette.
"While our margins remained within our target range of 18.5% or better for the
first half of 2008, second quarter margins fell to 18.0%, from 19.0% in the
same period in 2007."
    "As a result of the downturn in sales and margins, and our expectation of
no near-term rebound in demand, we tested the carrying value of our goodwill
and intangible assets at the end of the second quarter and recorded a
significant write down. While this resulted in a large second quarter net
loss, the writedowns are non-cash items and do not impact the Fund's
Distributable Cash," said Paquette.
    "Overall, we are responding to these difficult times with a disciplined
approach. In addition to the distribution reduction, we have reduced our North
American employee base by 9% over the past 12 months, closed two distribution
centres, eliminated excess trucking capacity and sublet under-utilized
warehouse space. We expect to close another two satellite distribution centres
in the third quarter with corresponding personnel reductions. In addition, we
have significantly reduced our inventory levels to $30.1 million, from
$39.4 million a year ago, maintaining our inventory turnover at a relatively
constant 7.0 times annually."
    "Looking ahead, we anticipate that this will be a lengthy downturn, but
we are confident we have the size, the strength and the stability to emerge in
good condition. Our intention is to continue to take appropriate steps to
mitigate the negative impacts of the market downturn, while ensuring we retain
the strength and the market presence to participate in and benefit from a
market recovery when it occurs," said Paquette.

    
    Summary of Results

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

                             3 months     3 months     6 months     6 months
                                ended        ended        ended        ended
                              June 30,     June 30,     June 30,     June 30,
                                 2008         2007         2008         2007
                                 ----         ----         ----         ----
    Total sales           $    66,488  $    89,400  $   137,536  $   181,120
      Sales in the US (US$)    42,584       55,596       88,776      110,895
      Sales in Canada          23,464       28,329       48,103       55,255
    Gross profit               11,962       16,994       25,598       33,862
      Gross profit %            18.0%        19.0%        18.6%        18.7%
    Selling and
     administrative
     expenses                  (9,225)     (11,069)     (20,543)     (22,819)
    Realized gain on
     foreign currency
     contracts                    354          425          949          694
    -------------------------------------------------------------------------
    Earnings before
     interest, taxes,
     depreciation and
     amortization and
     non-controlling
     interest ("EBITDA")        3,091        6,350        6,004       11,737
      Add (deduct):
        Amortization             (422)        (475)        (847)        (967)
        Interest                 (310)        (625)        (698)      (1,334)
        Mark-to-market
         gain on unrealized
         foreign currency
         contracts               (108)         940       (1,309)         771
        Intangibles
         impairment            (5,468)           -       (5,468)           -
        Goodwill impairment   (64,606)           -      (64,606)           -
        Non-controlling
         interest              14,182         (499)      14,590          201
        Income recovery
         (expense)             19,925         (891)      28,147       (1,602)
    -------------------------------------------------------------------------
    Net earnings (loss)
     for the period       $   (33,716) $     4,800  $   (24,187) $     8,806
    -------------------------------------------------------------------------
    Basic and fully
     diluted earnings
     (loss) per Class A
     Unit                 $    (2.340) $     0.333  $    (1.678) $     0.611
    Average US$ exchange
     rate to C$                1.0101       1.0986       1.0074        1.135
    -------------------------------------------------------------------------



    Distributable Cash and Cash Distributions
    Selected Unaudited Consolidated Financial Information
    (in thousands of dollars except per unit amounts)

                             3 months     3 months     6 months     6 months
                                ended        ended        ended        ended
                              June 30,     June 30,     June 30,     June 30,
                                 2008         2007         2008         2007
                                 ----         ----         ----         ----
    Net cash provided
     by operating
     activities           $     7,663  $     5,380  $    10,260  $     6,254

    Increase (decrease)
     in non-cash
     operating working
     capital                   (5,011)        (298)      (4,264)       3,061
                          ------------ ------------ ------------ ------------
    Cash flow from
     operations before
     changes in non-cash
     operating working
     capital                    2,652        5,082        5,996        9,315
    Capital expenditures         (225)        (214)        (298)        (450)
                          ------------ ------------ ------------ ------------
    Distributable Cash    $     2,427  $     4,868  $     5,698  $     8,865
                          ------------ ------------ ------------ ------------
                          ------------ ------------ ------------ ------------

    Distributions relating
     to the period:
      Class A Units       $   3,242(1) $     3,086  $   6,484(2) $     6,026
      Class B Units(3)              -            -            -            -
                          ------------ ------------ ------------ ------------
      Total Units         $     3,242  $     3,086  $     6,484  $     6,026
                          ------------ ------------ ------------ ------------
                          ------------ ------------ ------------ ------------

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

    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      $     0.135  $     0.270  $     0.316  $     0.492

    Distributions relating
     to the period:
      Class A Units       $   0.225(1) $     0.214  $   0.450(2) $     0.418
      Class B Units(3)    $         -  $         -  $         -  $         -
      Total Units         $     0.180  $     0.171  $     0.360  $     0.335

    Payout ratio(4)            133.6%        63.4%       113.8%        68.0%
    -------------------------------------------------------------------------

                       March 23, 2004
                           to June 30,
                                 2008
                                 ----
    Cumulative since
     inception:
      Distributable Cash       76,347
      Distributions
       relating to
       the period              65,673
      Payout ratio(4)           86.0%
    -------------------------------------------------------------------------
    (1) Includes the cash distributions of $0.075 per Class A Unit per month
        which relate to the operations of the Fund for April, May and June
        2008.
    (2) Includes the cash distributions of $0.075 per Class A Unit per month
        which relate to the operations of the Fund for January to June 2008.
    (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 June 30, 2008
        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 June 30, 2008

    For the three months ended June 30, 2008, the Fund and its subsidiaries
generated total distributable cash available to Class A and Class B
Unitholders of $2.4 million, or $0.135 per unit. Second quarter distributions
paid to public unitholders (Class A Units) were $3.2 million, or $0.225 per
unit. No distributions were made to the Class B Units. These distributions
represent an overall payout ratio of 133.6% for the second quarter of 2008,
compared to 63.4% in the second quarter of 2007.
    For the three months ended June 30, 2008, sales were $66.5 million, down
25.6% from $89.4 million in 2007. The change in sales reflects a 21.4%
decrease in underlying sales activity and the 4.2% negative impact of a
stronger Canadian dollar. Sales in the United States, as measured in US
dollars, decreased 23.4% to $42.6 million, compared to $55.6 million during
the second quarter of 2007. This decline reflects the extremely challenging
conditions in all five of Hardwood's US geographic regions, including a weak
residential construction market and a wide-spread slowing of the US economy.
Sales in Canada, as measured in Canadian dollars, decreased by 17.2%,
reflecting reduced demand in all regions, the cross-border impact of weakness
in the US market and the negative impact of a stronger Canadian dollar.
    Second quarter gross profit was $12.0 million, compared to $17.0 million
in Q2 2007. The change in gross profit reflects lower sales and a decrease in
gross profit percentage to 18.0%, from 19.0%. Second quarter gross profit
percentage came under pressure from product price reductions in response to
increased competition and higher delivery charges from trucking carriers due
to much higher fuel costs. Some quarter-to-quarter variation in gross profit
percentage is considered normal with 18% to 19% representing a typical range.
Hardwoods' goal is to obtain a gross profit margin of 18.5% or better over a
business cycle.
    Selling and administrative expenses decreased by $1.9 million to
$9.2 million, from $11.1 million in Q2 2007. This improvement reflects the
$0.5 million benefit of a stronger Canadian dollar on the conversion of S&A
expenses at Hardwoods' US operations, as well as a reduction in personnel
costs.
    Second quarter EBITDA was $3.1 million, compared to $6.4 million in
Q2 2007. The decrease in EBITDA primarily reflects the $5.0 million decrease
in gross profit, partially offset by the $1.9 million reduction in S&A
expenses.
    The Fund recorded a second quarter net loss of $33.7 million, compared to
net earnings of $4.8 million in the comparable period in 2007. The
$38.5 million decrease in earnings primarily reflects a $70.1 million non-cash
writedown of goodwill and intangible assets as a result of reduced sales and
EBITDA expectations. These writedowns were partly offset by a $14.7 million
increase in recovery from the non-controlling interest and a $20.8 million
increase in income tax recovery that arose from recording the goodwill and
intangibles impairment. In addition to these items, the change in net earnings
also reflects the $3.3 million decrease in EBITDA, the $1.0 million decrease
in mark-to-market adjustment gains on foreign currency contracts, and the
$0.3 million reduction in interest expense.

    Results from Operations - Six Months Ended June 30, 2008

    For the six months ended June 30, 2008, the Fund and its subsidiaries
generated total distributable cash of $5.7 million, or $0.316 per unit.
Distributions of $6.5 million, or $0.450 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 113.8%. By comparison, the
Fund generated total distributable cash of $8.9 million or $0.492 per unit in
the first half of 2007 and declared distributions of $6.0 million, or
$0.418 per unit to the Class A Units, for a payout ratio of 68.0%. No
distributions were paid to the Class B Units.
    First-half 2008 sales declined by 24.1% to $137.5 million, from
$181.1 million in 2007 as a result of this year's more challenging market
conditions. The decline in total sales reflects a 17.8% decrease in underlying
sales activity and a 6.3% decrease in sales due to the negative impact of a
stronger Canadian dollar. Sales at Hardwoods' US operations, as measured in US
dollars, decreased by 19.9%, and sales in Canada, as measured in Canadian
dollars, were down by 12.9% year-over-year.
    First-half gross profit was $25.6 million, down from $33.9 million in
2007. The reduction in gross profit primarily reflects lower sales. As a
percentage of sales, gross profit was relatively steady at 18.6% in the first
half of 2008, compared to 18.7% during the same period in 2007. Hardwoods was
also successful in decreasing selling and administrative expenses to
$20.5 million, from $22.8 million in the first half of 2007. The improvement
in S&A expense primarily reflects a reduction in employee and bonus expenses,
along with the benefit of the stronger Canadian dollar on translation of costs
at Hardwoods' US operations.
    First-half EBITDA was $6.0 million, compared to $11.7 million in the same
period in 2008. The decrease in EBITDA reflects the lower gross profit,
partially offset by improved S&A costs and a $0.2 million increase in realized
gains on foreign currency contracts. The Fund recorded a net loss of
$24.2 million, compared to net earnings of $8.8 million in the first six
months of 2007. The $33.0 million decrease in net earnings primarily reflects
the $5.7 million decrease in EBITDA, the $2.1 million decrease in
mark-to-market adjustment gains on foreign currency contracts, and the
combined $70.1 million in writedowns to goodwill and intangibles. Partially
offsetting these negative earnings impacts were a $0.6 million decrease in
interest expense, a $14.4 million increase in recovery from non-controlling
interest, and a $29.7 million decrease in income tax expense.

    Outlook

    Hardwoods anticipates a continuation of challenging market conditions
over the next 12 months, with depressed housing starts and general economic
weakness reducing demand for furniture, cabinets, recreational vehicles and
other products that utilize hardwood lumber and sheet goods. Prices for
hardwood lumber are also expected to remain low, despite production
curtailments by many lumber mills.
    The Fund's import program, which is a key contributor of higher margin
sales, is expected to feel continued pressure from reduced North American
demand and from higher prices in the Chinese wood market. The Fund's
year-to-date import volumes are down by 33%. The price inflation is related to
the rising value of the Yuan and increased costs for raw material, labour and
transportation in China. While these factors are expected to put pressure on
gross margin percentage as the year progresses, overall, imports are expected
to remain an important and high-margin segment of Hardwoods' business. The
company has had good initial success with its new Echo Wood(TM) line of veneer
products and expects to continue growing this product line in 2008.
    Since inception, the Fund has maintained a hedging program designed to
assist in forward planning for currency fluctuations that arise related to
conversion of that portion of the Distributable Cash it generates in the
United States in US dollars. In anticipation of significantly reduced US cash
flow through the balance of 2008 and 2009, the Fund plans to discontinue this
program. It is expected that existing contracts, currently valued at
approximately $0.7 million, will be realized during the third quarter. The
Fund will review its hedging strategy regularly and will reinstate currency
hedges if and when appropriate.
    With the expectation of more challenges ahead, Hardwoods' focus will
remain on tight management of the business. Management will maintain a sharp
focus on margin performance and work to ensure expenditures are matched as
appropriately as possible to sales levels. Inventory levels and working
capital will also continue to be managed closely and the Fund will work to
minimize customer credit risk, which typically becomes elevated in a weak
economy. These initiatives, together with the reduction in monthly cash
distributions, are expected to help the Fund sustain a strong balance sheet
and emerge in stable condition from the current business cycle.

    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 Management Discussion and
Analysis ("MD&A") included in the Fund's 2008 Second Quarter Report to
Unitholders, which will be filed at www.sedar.com.
    Additional guidance regarding disclosure of distributable cash and cash
distributions was issued in 2007 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"). For disclosure and discussion of the Fund's Standardized
Distributable Cash in accordance with the Interpretive Guidance, please refer
to the MD&A included in the Fund's 2008 Second Quarter Report to Unitholders,
which will be filed 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.

    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 34 distribution centres comprising 1.3 million square feet of
warehouse and distribution space in the U.S. and Canada.

    Forward-Looking Information

    Certain statements in this press release contain forward-looking
information within the meaning of applicable securities laws in Canada
("forward-looking information"). The words "anticipates", "believes",
"budgets", "could", "estimates", "expects", "forecasts", "intends", "may",
"might", "plans", "projects", "schedule", "should", "will", "would" and
similar expressions are often intended to identify forward-looking
information, although not all forward-looking information contains these
identifying words.
    The forward-looking information in this press release includes, but is
not limited to: we expect to close another two satellite distribution centres
in the third quarter with corresponding personnel reductions; we anticipate
that this will be a lengthy market downturn; Hardwoods anticipates a
continuation of challenging market conditions over the next 12 months, with
depressed housing starts and general economic weakness reducing demand for
furniture, cabinets, recreational vehicles and other products that utilize
hardwood lumber and sheet goods; prices for hardwood lumber are also expected
to remain low, despite production curtailments by many lumber mills; the
Fund's import program, which is a key contributor of higher margin sales, is
expected to feel continued pressure from reduced North American demand and
from higher prices in the Chinese wood market; imports are expected to remain
an important and high-margin segment of Hardwoods' business; The Fund expects
to continue growing its Echo Wood(TM) line of veneer products this product
line in 2008; in anticipation of significantly reduced US cash flow through
the balance of 2008 and 2009, the Fund plans to discontinue its hedging
program, and it is expected that existing hedge contracts, currently valued at
approximately $0.7 million, will be realized during the third quarter;
management will maintain a sharp focus on margin performance and work to
ensure expenditures are matched as appropriately as possible to sales levels;
inventory levels and working capital will also continue to be managed closely
and the Fund will work to minimize customer credit risk, which typically
becomes elevated in a weak economy; these initiatives, together with the
reduction in monthly cash distributions, are expected to help the Fund sustain
a strong balance sheet and emerge in stable condition from the current
business cycle.
    The forecasts and projections that make up the forward-looking
information are based on assumptions which include, but are not limited to:
there are no material exchange rate fluctuations between the Canadian and US
dollar that affect the amount of cash Hardwoods has available to distribute to
unitholders in Canadian dollars; Hardwoods does not lose any key personnel;
there are no decreases in the supply of, demand for, or market values of
hardwood lumber or sheet goods that harm the business; Hardwoods does not
incur material losses related to credit provided to customers; products are
not subjected to negative trade outcomes; Hardwoods is able to sustain its
level of sales and EBITDA margins; Hardwoods is able to grow its business and
to manage growth; there is no new market competition that leads to reduced
revenues and profitability; Hardwoods does not become subject to more
stringent regulations; importation of products manufactured with hardwood
lumber or sheet goods does not increase and replace products manufactured in
North America; the downturn in the general state of the economy does not
worsen and impact Hardwoods' results; the company's management information
systems are not impaired; Hardwoods' insurance is sufficient to cover losses
that may occur as a result of its operations; and, the financial condition and
results of operations of the business is not impaired.
    The forward-looking information is subject to risks, uncertainties and
other factors that could cause actual results to differ materially from
historical results or results anticipated by the forward-looking information.
The factors which could cause results to differ from current expectations
include, but are not limited to: exchange rate fluctuations between the
Canadian and US dollar could affect the amount of cash available to distribute
to unitholders in Canadian dollars; Hardwoods depends on key personnel, the
loss of which could harm the business; decreases in the supply of, demand for,
or market values of hardwood lumber or sheet goods could harm the business;
Hardwoods may incur losses related to credit provided to customers; Hardwoods'
products may be subject to negative trade outcomes; the company may not be
able to sustain its level of sales or EBITDA margins; Hardwoods may be unable
to grow the business or to manage any growth; market competition may lead to
reduced revenues and profitability; Hardwoods may become subject to more
stringent regulations; importation of products manufactured with hardwood
lumber or sheet goods may increase, and replace products manufactured in North
America; Hardwoods' results are dependent upon the general state of the
economy; the company is dependent upon its management information systems;
Hardwoods' insurance may be insufficient to cover losses that may occur as a
result of its operations; Hardwoods' credit facilities contain restrictions on
its ability to borrow funds and restrictions on distributions that can be
made; there are tax risks associated with an investment in the Fund's units;
the Fund's future growth may be restricted by the payout of substantially all
of its operating cash flow; and, other risks described in the Fund's Annual
Information Form and other continuous disclosure documents.
    All forward-looking information in this press release is qualified in its
entirety by this cautionary statement and, except as may be required by law,
the Fund undertakes no obligation to revise or update any forward-looking
information as a result of new information, future events or otherwise after
the date hereof.


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

    -------------------------------------------------------------------------
                                                     June 30,    December 31,
                                                        2008            2007
    -------------------------------------------------------------------------
                                                  (unaudited)
    Assets

    Current assets:
      Cash and cash equivalents                    $   1,234       $     295
      Accounts receivable (note 6(c))                 38,195          36,474
      Income tax recoverable                           1,902           1,041
      Inventory (note 5)                              30,080          38,400
      Prepaid expenses                                 1,405           1,060
      Foreign currency contracts (note 7)                706           1,533
      -----------------------------------------------------------------------
                                                      73,522          78,803

    Long-term receivables (note 6(c))                  3,989           2,191

    Property, plant and equipment                      2,276           2,413

    Deferred financing costs                              16              21

    Foreign currency contracts (note 7)                  136             528

    Future income taxes                               23,892               -

    Intangible assets (note 8)                         3,297           9,013

    Goodwill (note 8)                                 17,477          80,758

    -------------------------------------------------------------------------
                                                   $ 124,605       $ 173,727
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Liabilities and Unitholders' Equity

    Current liabilities:
      Bank indebtedness (note 9)                   $  23,620       $  25,515
      Accounts payable and accrued liabilities         6,461           6,950
      Distribution payable to Unitholders              1,081           1,081
      -----------------------------------------------------------------------
                                                      31,162          33,546

    Foreign currency contracts (note 7)                  136              47

    Deferred gain on sale - leaseback of land
     and building                                        516             538

    Non-controlling interests (note 10)               16,065          30,068

    Future income taxes                                    -           3,534

    Unitholders' equity:
      Fund Units                                     133,454         133,454
      Deficit                                        (36,821)         (5,895)
      Accumulated other comprehensive loss           (19,907)        (21,565)
      -----------------------------------------------------------------------
                                                      76,726         105,994
    Subsequent event (note 4)
    Contingencies (note 17)

    -------------------------------------------------------------------------
                                                   $ 124,605       $ 173,727
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    See accompanying notes to consolidated financial statements.



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

    -------------------------------------------------------------------------
                                Three        Three          Six          Six
                               months       months       months       months
                                ended        ended        ended        ended
                              June 30,     June 30,     June 30,     June 30,
                                 2008         2007         2008         2007
    -------------------------------------------------------------------------
                                         (Restated                 (Restated
                                          - note 9)                 - note 9)

    Sales                 $    66,488  $    89,400  $   137,536  $   181,120
    Cost of sales              54,526       72,406      111,938      147,258
    -------------------------------------------------------------------------

    Gross profit               11,962       16,994       25,598       33,862

    Expenses:
      Selling and
       administrative           9,225       11,069       20,543       22,819
      Amortization:
        Plant and equipment       235          279          474          567
        Deferred financing
         costs                      3            3            5            6
        Other intangible assets   203          213          405          436
        Deferred gain on
         sale - leaseback of
         land and building        (18)         (20)         (37)         (42)
      Interest                    310          625          698        1,334
      Foreign currency
       contracts                 (247)      (1,365)         360       (1,465)
      Intangibles impairment
       (note 8)                 5,468            -        5,468            -
      Goodwill impairment
       (note 8)                64,606            -       64,606            -
      -----------------------------------------------------------------------
                               79,785       10,804       92,522       23,655
    -------------------------------------------------------------------------

    Earnings (loss) before
     non-controlling
     interests and
     income taxes             (67,823)       6,190      (66,924)      10,207

    Non-controlling
     interests (note 10)       14,182         (499)      14,590          201
    -------------------------------------------------------------------------

    Earnings (loss) before
     income taxes             (53,641)       5,691      (52,334)      10,408

    Income tax expense
     (recovery) (note 15):
      Current                      39          388         (752)         793
      Future                  (19,964)         503      (27,395)         809
      -----------------------------------------------------------------------
                              (19,925)         891      (28,147)       1,602
    -------------------------------------------------------------------------

    Net earnings (loss)
     for the period           (33,716)       4,800      (24,187)       8,806

    Retained earnings
     (deficit), beginning
     of period (note 3(b))        137       (8,093)      (6,150)      (9,159)

    Distributions declared
     to Unitholders            (3,242)      (3,086)      (6,484)      (6,026)

    -------------------------------------------------------------------------
    Deficit, end of
     period               $   (36,821) $    (6,379) $   (36,821) $    (6,379)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Basic and diluted
     earnings (loss)
     per Unit             $     (2.34) $      0.33  $     (1.68) $      0.61
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    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          Six          Six
                               months       months       months       months
                                ended        ended        ended        ended
                              June 30,     June 30,     June 30,     June 30,
                                 2008         2007         2008         2007
    -------------------------------------------------------------------------
                                         (Restated                 (Restated
                                          - note 9)                 - note 9)

    Net earnings (loss)
     for the period       $   (33,716) $     4,800  $   (24,187) $     8,806
    Other comprehensive
     income:
      Unrealized gain
       (loss) on
       translation of
       self-sustaining
       foreign operations        (411)      (5,403)       1,658       (6,049)
      -----------------------------------------------------------------------
      Other comprehensive
       income (loss)             (411)      (5,403)       1,658       (6,049)

    -------------------------------------------------------------------------
    Comprehensive income
     (loss)               $   (34,127) $      (603) $   (22,529) $     2,757
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



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

    -------------------------------------------------------------------------
                                Three        Three          Six          Six
                               months       months       months       months
                                ended        ended        ended        ended
                              June 30,     June 30,     June 30,     June 30,
                                 2008         2007         2008         2007
    -------------------------------------------------------------------------
                                         (Restated                 (Restated
                                          - note 9)                 - note 9)

    Accumulated other
     comprehensive loss,
     beginning of period  $   (19,496) $   (11,826) $   (21,565) $   (11,180)

    Other comprehensive
     income (loss)               (411)      (5,403)       1,658       (6,049)

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

    Accumulated other
     comprehensive loss,
     end of period        $   (19,907) $   (17,229) $   (19,907) $   (17,229)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



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

    -------------------------------------------------------------------------
                                Three        Three          Six          Six
                               months       months       months       months
                                ended        ended        ended        ended
                              June 30,     June 30,     June 30,     June 30,
                                 2008         2007         2008         2007
    -------------------------------------------------------------------------
                                         (Restated                 (Restated
                                          - note 9)                 - note 9)

    Cash flows provided
     by (used in) operating
     activities:
      Net earnings for
       the period         $   (33,716) $     4,800 $    (24,187) $     8,806
      Items not involving
       cash:
        Amortization              422          475          847          967
        Imputed interest
         income in employee
         loans                    (17)         (16)         (31)         (16)
        Gain on sale of
         property, plant
         and equipment              -           (9)           -          (19)
        Mark-to-market
         adjustment on
         unrealized foreign
         currency contracts       108         (940)       1,309         (771)
        Non-controlling
         interests            (14,182)         499      (14,590)        (201)
        Future income taxes   (20,037)         273      (27,426)         549
        Intangibles
         impairment             5,468            -        5,468            -
        Goodwill impairment    64,606            -       64,606            -
      -----------------------------------------------------------------------
                                2,652        5,082        5,996        9,315
      Change in non-cash
       operating working
       capital (note 11)        5,011          298        4,264       (3,061)
      -----------------------------------------------------------------------
      Net cash provided by
       operating activities     7,663        5,380       10,260        6,254

    Cash flows provided by
     (used in) investing
     activities:
      Additions to property,
       plant and equipment       (225)        (214)        (298)        (450)
      Proceeds on disposal of
       property, plant and
       equipment                    -           10            -           21
      Increase (decrease) in
       long-term receivables,
       net                       (303)         818         (116)       1,143
      -----------------------------------------------------------------------
      Net cash provided by
       (used in) investing
       activities                (528)         614         (414)         714

    Cash flows provided by
     (used in) financing
     activities:
      Decrease in bank
       indebtedness            (3,012)      (4,730)      (2,423)      (1,188)
      Distributions paid
       to Unitholders          (3,242)      (3,037)      (6,484)      (5,977)
      -----------------------------------------------------------------------
      Net cash used in
       financing
       activities              (6,254)      (7,767)      (8,907)      (7,165)
    -------------------------------------------------------------------------

    Increase (decrease)
     in cash                      881       (1,773)         939         (197)

    Cash, beginning of
     period                       353        2,170          295          594

    -------------------------------------------------------------------------
    Cash, end of period   $     1,234  $       397  $     1,234  $       397
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Supplementary
     information
     (cash amounts):
      Interest paid       $       310  $       625  $       698  $     1,334
      Income taxes paid            43          785          752          791
      Transfer of accounts
       receivable to
       long-term customer
       notes receivable,
       net of write offs,
       being a non-cash
       transaction                 35        1,135        2,270        1,135

    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)

    For the periods ended June 30, 2008 and 2007
    -------------------------------------------------------------------------

    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,
        2007 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, 2007. Certain comparative figures have been restated to
        conform to the current period's financial statement presentation.

    3.  Adoption of changes in accounting polices:

        Effective January 1, 2008, the Fund adopted four new Canadian
        Institute of Chartered Accountants ("CICA") accounting standards:
        (a) Handbook Section 1535, Capital Disclosures; (b) Handbook Section
        3031, Inventories; (c) Handbook Section 3862, Financial Instruments -
        Disclosures; and Handbook Section 3863, Financial Instruments -
        Presentation. The main requirements of these new standards and the
        resulting financial statement impact are described below.

        (a) Capital Disclosures (Section 1535):

            CICA Section 1535 requires disclosure of: (i) an entity's
            objectives, policies and process for managing capital; (ii)
            quantitative data about what the entity considers as capital;
            (iii) whether the entity has complied with any capital
            requirements and, if it has not complied, the consequences of
            such non-compliance. Refer to note 4 for additional disclosures.

        (b) Inventories (Section 3031):

            CICA Section 3031 provides significantly more guidance on the
            measurement of inventories, with an expanded definition of cost
            and the requirement that inventory must be measured at the lower
            of cost and net realizable value. In addition the section has
            additional disclosure requirements, including accounting
            policies, carrying values, and the amount of any inventory write-
            downs. Refer to note 5 for additional disclosures.

            Consistent with the transitional rules for Section 3031, the Fund
            has not restated any prior period amounts as a result of adopting
            the accounting changes. As allowed under the transition rules,
            the opening deficit has been adjusted to reflect the cumulative
            impact of adopting the changes in accounting policy related to
            inventory. The adoption of this new standard resulted in a
            decrease in the carrying value of opening inventory of $317,000,
            a decrease in non-controlling interests of $62,000, and an
            increase in deficit of $255,000 on the balance sheet at
            January 1, 2008, to reflect trade discounts from suppliers for
            inventory purchases that previously had been recognized in
            earnings when received.

            The effect of the adoption of Section 3031 is summarized in the
            following table:

            -----------------------------------------------------------------
                                                     Adjustment
                                             As at  on adoption        As at
                                       December 31,      of new    January 1,
                                              2007    standards         2008
            -----------------------------------------------------------------
            Inventory                   $   38,400   $     (317)  $   38,083
            Non-controlling
             interests                      30,068          (62)      30,006
            Unitholders equity:
              Deficit                   $   (5,895)  $     (255)  $   (6,150)
            -----------------------------------------------------------------
            -----------------------------------------------------------------


        (c) Financial Instruments - Disclosures (Section 3862) and Financial
            Instruments - Presentation (Section 3863):

            CICA Section 3032 and 3063 replaces CICA Handbook Section 3861,
            Financial Instruments - Disclosures and Presentation, revising
            and enhancing disclosure requirements to provide additional
            information on the nature and extent of risks arising from
            financial instruments to which the entity is exposed and how it
            manages those risks. Refer to note 6 for additional disclosures.

    4.  Capital disclosures:

        The Fund's policy is to maintain a strong capital base so as to
        maintain investor, creditor and market confidence and to sustain
        future development of the business. The Fund considers its capital to
        be bank indebtedness (net of cash) plus Unitholders' equity. The
        Fund's capitalization is as follows:

        ---------------------------------------------------------------------
                                                        June 30, December 31,
                                                           2008         2007
        ---------------------------------------------------------------------
        Cash and cash equivalents                    $   (1,234)  $     (295)
        Bank indebtedness                                23,620       25,515
        ---------------------------------------------------------------------
        Net debt                                         22,386       25,220
        Unitholders' equity                              76,726      105,994
        ---------------------------------------------------------------------
        Total capitalization                         $   99,112   $  131,214
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        The Fund monitors on a monthly basis the ratio of net debt to
        earnings before interest, income taxes, depreciation and amortization
        ("EBITDA"). Net debt to EBITDA serves as an indicator of the Fund's
        financial leverage. The maximum ratio of net debt to EBITDA allowed
        under our Canadian credit facility is 2.50 times. The maximum ratio
        of net debt to EBITDA allowed under our US credit facility is
        3.0 times for the period April 1, 2008 to September 29, 2008, and
        2.85 times thereafter. Refer to note 9 for additional disclosures.

        The terms of the agreements with the Fund's lenders provide that
        distributions cannot be made to its unitholders in the event that its
        subsidiaries did not meet the foregoing leverage as well as certain
        additional credit ratios. After negotiating a temporary adjustment to
        the US bank covenant (see note 9), our operating subsidiaries were
        fully compliant with all required credit ratios as at June, 30, 2008,
        and accordingly there were no restrictions on distributions arising
        from compliance with financial covenants.

        Distributions are one of the ways the Fund manages its capital.
        Distributions of the Fund's available cash are made to the maximum
        extent possible, subject to reasonable reserves established by the
        Trustees of the Fund. Distributions are made by the Fund having given
        consideration to a variety of factors including the outlook for the
        business, financial leverage, and the ratio of distributions to
        available cash of the Fund. There were no changes in the Fund's
        approach to capital management during the three and six month periods
        ended June 30, 2008. On July 31, 2008 the Trustees of the Fund
        approved a new monthly distribution rate of $0.025 per Fund Unit,
        effective with the July 2008 distribution.

    5.  Inventory:

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

        Lumber                                       $   12,649   $   15,077
        Sheet Goods                                      12,864       17,884
        Specialty                                         2,976        3,067
        Goods in-transit                                  1,591        2,372

        ---------------------------------------------------------------------
                                                     $   30,080   $   38,400
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        Inventory is valued at lower of cost and net realizable value. Cost
        is determined using the weighted average cost method and includes
        invoice cost, duties, freight, and other directly attributable costs
        of acquiring the inventory.

        Volume rebates and other supplier discounts are included in income
        when earned. Volume discounts and supplier trade discounts are
        accounted for as a reduction of the cost of the related inventory and
        are earned when inventory is sold.

        During the three months ended June 30, 2008 inventory write-downs
        totaling $0.7 million (six months ended June 30, 2008- $1.3 million)
        were recorded to reduce certain inventory items to their net
        realizable value.

        Cost of sales for the three months ended June 30, 2008 were
        $54.5 million (six months ended June 30, 2008 - $111.9 million),
        which included $52.5 million (six months ended June 30, 2008 -
        $108.5 million) of costs associated with inventory. The other
        $2.0 million (six months ended June 30, 2008 - $3.4 million) related
        principally to freight and other related selling expenses.

    6.  Financial instruments:

        Financial instrument assets include cash and cash equivalents, which
        are designated as held-for-trading and measured at fair value, and
        current and long-term receivables which are designated as loans and
        receivables and measured at amortized cost. Financial instrument
        liabilities include bank indebtedness, accounts payable, accrued
        liabilities and distributions payable. All financial liabilities are
        designated as other liabilities and are measured at amortized cost.
        There are no financial instruments classified as available-for-sale
        or held-to-maturity. Financial instruments of the Fund also include
        foreign currency contracts which are derivative financial instruments
        (note 6(b)) and measured at fair value.

        (a) Fair values of financial instruments:

            The carrying values of cash and cash equivalents, accounts
            receivable, income tax recoverable, accounts payable and accrued
            liabilities and distributions payable approximate their fair
            values due to the relatively short period to maturity of the
            instruments. The fair value of long-term receivables is not
            expected to differ materially from the carrying value. The
            carrying values of the credit facilities approximate their fair
            values due to the existence of floating market based interest
            rates. The foreign currency contracts are carried at market
            values as disclosed in note 7.

        (b) Derivative financial instruments:

            The Fund uses foreign currency contracts to assist in forward
            planning for the business as it relates to managing its exposure
            to fluctuations in exchange rates between the Canadian dollar and
            the US dollar. 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 earnings.

            The foreign currency contracts have maturities of less than two
            years. The counterparty to these contracts is a major US
            financial institution and the Fund does not anticipate non-
            performance by the counterparty. Refer to note 7 for additional
            disclosure.

        (c) Financial risk management:

            Trustees of the Fund and the Board of Directors of the Fund's
            subsidiaries have the overall responsibility for the
            establishment and oversight of the Fund's risk management
            framework. The Fund's risk management policies are established to
            identify and analyze the risks faced by the Fund, to set
            appropriate risk limits and controls, and to monitor risks and
            adherence to limits. Risk management policies and systems are
            reviewed regularly to reflect changes in market conditions and in
            response to the Fund's activities. Through its standards and
            procedures management has developed a disciplined and
            constructive control environment in which all employees
            understand their roles and obligations. Management regularly
            monitors compliance with the Fund's risk management policies and
            procedures and reviews the adequacy of the risk management
            framework in relation to the risks faced by the Fund.

            The Fund has exposure to credit, liquidity and market risks from
            its use of financial instruments.

           (i) Credit risk:

               Credit risk is the risk of financial loss to the Fund if a
               customer or counterparty to a financial instrument fails to
               meet its contractual obligations, and arises principally from
               the Fund's receivables from customers. Employee housing loans,
               customer notes and security deposits also present credit risk
               to the Fund. The credit risk associated with foreign currency
               contracts is addressed in note 6(b).

               The following is a breakdown of the Fund's current and long-
               term receivables and represents the Fund's exposure to credit
               risk related to its financial assets:

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

               Trade accounts receivable - Canada    $   12,322   $   11,086
               Trade accounts receivable -
                United States                            26,484       25,131
               Sundry receivable                            428          645
               Current portion of long-term
                receivables                               1,309          658
               --------------------------------------------------------------
                                                         40,543       37,520

               Less: allowance for doubtful accounts      2,348        1,046
               --------------------------------------------------------------
                                                     $   38,195   $   36,474
               --------------------------------------------------------------
               --------------------------------------------------------------


               --------------------------------------------------------------
                                                        June 30, December 31,
               Long-term receivables                       2008         2007
               --------------------------------------------------------------
               Employee housing loans                $    1,451   $    1,130
               Customer notes                             3,261        1,166
               Security deposits                            587          553
               --------------------------------------------------------------
                                                          5,299        2,849
               Less: current portion, included in
                accounts receivable                       1,309          658
               --------------------------------------------------------------
                                                     $    3,990   $    2,191
               --------------------------------------------------------------
               --------------------------------------------------------------

               Trade accounts receivable:

               The Fund's exposure to credit risk is influenced mainly by
               individual characteristics of each customer. The Fund is
               exposed to credit risk in the event it is unable to collect in
               full amounts receivable from its customers. The Fund employs
               established credit approval practices and engages credit
               attorneys when appropriate to mitigate the credit risk. It is
               the Fund's policy to secure credit advanced to customers
               whenever possible by registering security interests in the
               assets of the customer and by obtaining personal guarantees.
               Credit limits are established for each customer and are
               regularly reviewed. In some instances the Fund may choose to
               transact with a customer on a cash-on-delivery basis. Our
               largest individual customer balance amounted to 5.5% of trade
               accounts receivable and customer notes receivable at June 30,
               2008.

               The aging of trade receivables was:

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

               Current                               $   22,958   $   20,245
               Past due 31-60 days                        7,545        8,345
               Past due 61-90 days                        3,064        3,453
               Past due 90+ days                          5,239        4,174

               --------------------------------------------------------------
                                                     $   38,806   $   36,217
               --------------------------------------------------------------
               --------------------------------------------------------------

               The Fund determines its allowance for doubtful accounts based
               on its best estimate of the net recoverable amount by customer
               account. Accounts that are considered uncollectable are
               written off. The total allowance at June 30, 2008 was
               $2.3 million (December 31, 2007 - $1.0 million). The amount of
               the allowance is considered sufficient based on the past
               experience of the business, the security the Fund has in place
               for past due accounts and management's regular review and
               assessment of customer accounts and credit risk.

               Bad debt expense for the three months ended June 30, 2008 was
               $0.5 million which equates to 0.8% of sales. For the six
               months ended June 30, 2008 bad debt expense was $1.0 million
               which equates to 0.7% of sales. Historically bad debt as a
               percentage of sales has averaged approximately 0.5%.

               Employee housing loans:

               Employee loans are non-interest bearing and are granted to
               employees who are relocated. Employee loans are secured by a
               deed of trust or mortgage depending upon the jurisdiction.
               Employees are required to make an annual payment from their
               profit share. These loans are measured at their fair market
               value upon granting the loan and subsequently measured at
               amortized cost.

               Customer notes:

               Customer notes are issued to certain customers to provide
               fixed repayment schedules for amounts owing that have been
               agreed will be repaid over longer periods of time. The terms
               of each note are negotiated with the customer. For notes
               issued the Fund requires a fixed payment amount, personal
               guarantees, general security agreements, and in some cases
               security over specific property or assets. Customer notes bear
               market interest rates ranging from 8%-18%.

               Security deposits:

               Security deposits are recoverable on leased premises at the
               end of the lease terms with which it relates to. The Fund does
               not believe there is any material credit risk associated with
               its security deposits.

          (ii) Liquidity risk:

               Liquidity risk is the risk that the Fund will not be able to
               meet its financial obligations as they fall due. The Fund's
               approach to managing liquidity is to ensure that it will have
               sufficient cash available to meet its liabilities when due,
               under both normal and stressed conditions, without incurring
               unacceptable losses or risking damage to the Fund's
               reputation. In Canada, a subsidiary of the Fund has a
               revolving credit facility of up to an aggregate amount of
               $22.0 million. In the US, a subsidiary of the Fund has a
               revolving credit facility of up to an aggregate amount of
               $35.9 million (US$35.0 million) less the net exposure under
               the foreign currency contracts facility as described in
               note 7. These credit facilities can be drawn down to meet
               short-term financing requirements, including fluctuations in
               non-cash working capital. The amount made available under the
               revolving credit facilities from time to time is limited to
               the extent of the value of certain accounts receivable and
               inventories held by subsidiaries of the Fund. At June 30, 2008
               the Canadian and US credit facilities have $10.5 million and
               $7.4 million (US$7.3 million), respectively of available
               borrowing capacity. Refer to note 9 for additional disclosure.

         (iii) Market risk:

               Market risk is the risk that changes in market prices, such as
               interest rates, foreign exchange rates, and commodity prices
               will affect the Fund's net earnings or value of its holdings
               of financial instruments.

               Interest rate risk:

               The Fund is exposed to interest rate risk on its credit
               facilities which bear interest at floating market rates.

               Based upon June 30, 2008 bank indebtedness balance of
               $23.6 million, a 1% increase or decrease in the interest rates
               charged will result in decrease or increase to annual net
               earnings by $0.2 million.

               Currency risk:

               As the Fund conducts business in both Canada and the United
               States it is exposed to currency risk. Most of the hardwood
               lumber sold by the Fund in Canada is purchased in US dollars
               from suppliers in the United States. Although the Fund reports
               its financial results in Canadian dollars, approximately two-
               thirds of its sales are generated in the United States.
               Changes in the currency exchange rates of the Canadian dollar
               against the US dollar will affect the results presented in the
               Fund's financial statements and cause its earnings to
               fluctuate. In addition, while changes in the costs of hardwood
               lumber purchased by the Fund in the United States as a result
               of the appreciation of the Canadian dollar against the US
               dollar are usually absorbed by the Canadian market, when the
               hardwood lumber is resold in Canada it is generally sold at a
               lower Canadian dollar equivalent selling price, and
               accordingly revenues in Canada are effectively reduced.
               Increases in the value of the Canadian dollar against the US
               dollar will affect the amount of cash available to the Fund
               for distribution to its Unitholders.

               The Fund maintains foreign currency contracts to mitigate the
               potential impact of foreign exchange on Canadian dollar
               distributions to be made by it. These contracts do not
               eliminate the Fund's exposure to fluctuations in the exchange
               rate between the Canadian dollar and the US dollar.

               The foreign currency contracts allow the Fund to determine in
               advance, for the period and amount covered by the contracts,
               the rates of exchange that will be realize when translating
               into Canadian dollars that portion distributable cash
               contributed by our United States operation.

               At June 30, 2008 the Fund's Canadian subsidiaries exposure to
               foreign denominated working capital financial instruments was
               in relation to bank indebtedness (US$ nil), accounts
               receivable from US customers (US$0.2 million), income taxes
               recoverable (US$1.9 million), and accounts payable to US
               suppliers ($0.3 million). A subsidiary of the Fund is also
               exposed to foreign currency risk in relation to the
               outstanding foreign currency contracts described in note 7.

               Based on the Fund's exposure to foreign denominated financial
               instruments, the Fund estimates a $0.05 strengthening in the
               Canadian dollar as compared to the US dollar would have
               increased net earnings for the quarter ended June 30, 2008 by
               approximately $0.4 million. A $0.05 weakening of the Canadian
               dollar as compared to the US dollar would have had the equal
               but opposite effect.

               This foreign currency sensitivity is focused solely on the
               currency risk associated with Fund's Canadian subsidiaries
               exposure to foreign denominated financial instruments as at
               June 30, 2008 and does not take into account the effect of a
               change in currency rates will have on the translation of the
               balance sheet and operations of the Fund's US subsidiaries nor
               is it intended to estimate the potential impact changes in
               currency rates would have on the Fund's sales and purchases.

               Commodity price risk:

               The Fund does not enter in to any commodity contracts.
               Inventory purchases are transacted at current market rates
               based on expected usage and sale requirements and increases or
               decreases in prices are reflected the Fund's selling prices to
               customers.

    7.  Foreign currency contracts:

        At June 30, 2008 a subsidiary of the Fund held foreign currency
        contracts covering the period 24 months into the future with terms as
        follows:

        ---------------------------------------------------------------------
                                                  Contract           Receive
                                   Sell      exchange rate          Canadian
        Month                US dollars          ($Cdn/$US)          dollars
        ---------------------------------------------------------------------

        2008
        July                 US$675,000             1.1255       Cdn$759,712
        August               US$675,000             1.1255       Cdn$759,712
        September            US$675,000             1.1255       Cdn$759,712
        October              US$675,000             1.1255       Cdn$759,712
        November             US$675,000             1.1255       Cdn$759,712
        December             US$675,000             1.1255       Cdn$759,712

        2009
        January              US$675,000             1.1255       Cdn$759,712
        February             US$675,000             1.1255       Cdn$759,712
        March                US$675,000             1.1255       Cdn$759,712
        April                US$675,000             1.1255       Cdn$759,712
        May                  US$675,000             1.0882       Cdn$734,535
        June                 US$675,000             1.0595       Cdn$715,162
        July                 US$675,000             1.0625       Cdn$717,187
        August               US$675,000             1.0560       Cdn$712,800
        September            US$675,000             1.0010       Cdn$675,675
        October              US$675,000             0.9315       Cdn$628,762
        November             US$675,000             0.9901       Cdn$668,317
        December             US$675,000             1.0119       Cdn$683,032

        2010
        January              US$675,000             1.0450       Cdn$705,375
        February             US$675,000             1.0272       Cdn$693,360
        March                US$675,000             1.0190       Cdn$687,825
        April                US$675,000             1.0110       Cdn$682,425
        May                  US$675,000             0.9875       Cdn$666,563
        June                 US$675,000             1.0119       Cdn$683,033

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

        The fair value of the 24 monthly currency contracts covering the
        period July 2008 to June 2010 have been reflected in the financial
        statements and represent a current asset of $706,000, a long-term
        asset of $136,000 and a long-term liability of $136,000 at June 30,
        2008. The fair values were determined based on valuations obtained
        from the counter-party.

    8.  Intangible assets and goodwill

        Long lived assets, including intangible assets, are reviewed for
        impairment whenever events or changes in circumstances indicate that
        the carrying amount of an asset may not be recoverable.
        Recoverability of intangible assets is measured by a comparison of
        the carrying amount of an asset to estimated undiscounted future cash
        flows expected to be generated by the asset. If the carrying amount
        for the intangibles exceeds its estimated future cash flows, an
        impairment charge is recognized by the amount that the carrying
        amount for the asset exceeds its fair value. Other intangible assets
        represent customer relationships acquired by the Fund at the time of
        the business combination described in note 1.

        The carrying value of goodwill is tested for impairment annually or
        more frequently if events or changes in circumstances indicate that
        the asset may be impaired. Any excess of carrying value over fair
        value is charged to income in the period in which the impairment is
        determined. The fair value of the goodwill was determined with
        reference to the present value of future cash flows.

        In the first six months of 2008, the Business experienced a
        significant change in circumstances in the form of reduced sales
        demand for its products, and a resulting decline in its net earnings.
        This change of circumstance caused management to reduce its
        expectations for future cash flows from the Fund's US and Canadian
        subsidiary operations. Consequently, during the quarter ended
        June 30, 2008, management reviewed for impairment the carrying value
        of intangible assets and the carrying value of goodwill. Results of
        testing indicated impairment in the carrying value of intangible
        assets in the Fund's US reporting unit of $5.5 million
        (US$5.4 million). Testing also indicated impairment in the carrying
        value of goodwill in the Fund's US reporting unit of $47.6 million
        (US$46.7 million), and in the Fund's Canadian reporting unit of
        $17.0 million.

    9.  Bank indebtedness:

        ---------------------------------------------------------------------
                                                        June 30, December 31,
                                                           2008         2007
        ---------------------------------------------------------------------
        Checks issued in excess of funds on deposit  $      810   $    1,034
        Credit facility, Hardwoods LP                     5,184        5,538
        Credit facility, Hardwoods USLP
         (June 30, 2008 - US$17,286;
         December 31, 2007 - US$19,109)                  17,626       18,943

        ---------------------------------------------------------------------
                                                     $   23,620   $   25,515
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        During the quarter ended June 30, 2008, the Fund negotiated an
        amendment to the financial covenants governing the bank indebtedness
        of a US operating facility of the Fund. The amendment, which was
        effective April 1, 2008, temporarily reduced the minimum fixed charge
        coverage ratio and increased the maximum funded debt coverage ratio
        permitted under the terms of the US subsidiary's loan agreement. The
        amendment is effective until September 29, 2008, at which time the
        financial covenants revert back to their original amounts. Absent of
        this amendment, the Fund's US subsidiary would have been in violation
        of its fixed charge coverage ratio at June 30, 2008.

        The Fund is currently negotiating with its US bank to make changes to
        its US revolving credit facility, as without modifications it is
        likely that the Fund's US subsidiary will not be in compliance with
        its covenants at its next financial reporting date of September 30,
        2008. Under the terms of the US subsidiary's loan agreement, non-
        compliance with a covenant may result in the bank demanding immediate
        repayment of all indebtedness under the revolving credit facility.

    10. Non-controlling interests:

        ---------------------------------------------------------------------
        Balance, January 1, 2008 (note 3(b))                    $     30,006
        Interest in earnings:
          Interest in earnings before taxes                          (13,385)
          Adjustment to non-controlling interest from
           subordination of Class B Unit Holders                      (1,205)
          -------------------------------------------------------------------
                                                                     (14,590)
        Foreign currency translation adjustment of
         non-controlling interest in Hardwoods USLP                      649

        ---------------------------------------------------------------------
        Balance, end of period                                  $     16,065
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        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:

        -  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

        -  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 June 30, 2008.

        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:

        -  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;

        -  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:

           -  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;

           -  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
              June 30, 2008, the amount of such deficiency was $2.0 million;

           -  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;

           -  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 June 30, 2008, the amount of such deficiency was
              $3.2 million.

           -  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.

        The cumulative deficiency prior to June 30, 2007, which is no longer
        recoverable by the Class B LP Unitholders and the Class B USLP
        Unitholders, has been recorded as an adjustment to the non-
        controlling interest's share of earnings in the amount of
        $0.6 million for the three-month period, and $1.2 million for the
        six month period, ended June 30, 2008. This adjustment was first
        recorded during the fourth quarter of 2007, resulting in a reduction
        of the non-controlling interest's share of earnings of $3.4 million
        for the year ended December 31, 2007. Of the amount recorded in 2007,
        $1.5 million should have been recorded in the first quarter of 2007
        and $0.7 million should have been recorded in the second quarter of
        2007 and as such the comparative amounts presented in the statements
        of earnings and retained earnings (deficit) and comprehensive income
        have been restated accordingly, resulting in an increase in net
        earnings and comprehensive income from the amounts previously
        reported.

    11. Changes in non-cash operating working capital and additional cash
        flow disclosures:

        ---------------------------------------------------------------------
                         Three months Three months   Six months   Six months
                                ended        ended        ended        ended
                              June 30,     June 30,     June 30,     June 30,
                                 2008         2007         2008         2007
        ---------------------------------------------------------------------

        Accounts
         receivable        $      927   $   (2,162)  $   (2,577)  $   (6,652)
        Income taxes
        recoverable/payable        (1)        (491)        (858)           2
        Inventory               5,395        1,211        8,638        2,666
        Prepaid expenses         (585)        (279)        (327)        (198)
        Accounts payable
         and accrued
         liabilities             (725)       2,019         (612)       1,121

        ---------------------------------------------------------------------
                           $    5,011   $      298   $    4,264   $   (3,061)
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        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. The Fund has no contractual
        requirement to pay cash distributions to Unitholders' of the Fund.
        During the three month period ended June 30, 2008 $3.2 million
        (2007 - $3.0 million) in discretionary cash distributions were paid
        to Unitholders. During the six month period ended June 30, 2008
        $6.5 million (2007 - $6.0 million) in discretionary cash
        distributions were paid to Unitholders.

    12. Segment disclosure:

        Information about geographic areas is as follows:

        ---------------------------------------------------------------------
                         Three months Three months   Six months   Six months
                                ended        ended        ended        ended
                              June 30,     June 30,     June 30,     June 30,
                                 2008         2007         2008         2007
        ---------------------------------------------------------------------

        Revenue from external
         customers:
          Canada           $   23,464   $   28,329   $   48,103   $   55,255
          United States        43,024       61,071       89,433      125,865

        ---------------------------------------------------------------------
                           $   66,488   $   89,400   $   137,536  $  181,120
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------


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

        Property, plant and equipment:
          Canada                                     $      883   $    1,003
          United States                                   1,393        1,410

        ---------------------------------------------------------------------
                                                     $    2,276   $    2,413
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        Goodwill
          Canada                                     $   17,477   $   34,477
          United States                                       -       46,281

        ---------------------------------------------------------------------
                                                     $   17,477   $   80,758
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------


    13. 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 June 30, 2008, Hardwoods USLP contributed and expensed $72,545
        (US$72,012) (three months ended June 30, 2007 - $84,376 (US$76,803))
        in relation to the USLP Plan. During the six months ended June 30,
        2008, Hardwoods USLP contributed and expensed $216,923 (US$215,330)
        (six months ended June 30, 2007 - $240,663 (US$212,037)) 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 June 30, 2008, Hardwoods LP contributed and
        expensed $60,775 (three months ended June 30, 2007 - $52,629) in
        relation to the LP Plan. During the six months ended June 30, 2008,
        Hardwoods LP contributed and expensed $176,969 (six months ended
        June 30, 2007 - $143,504) in relation to the LP Plan.

    14. Related party transactions:

        For the three months ended June 30, 2008, sales of $108,048
        (three months ended June 30, 2007 - $153,459) were made to affiliates
        of SIL, and the Fund made purchases of $24,143 (three months ended
        June 30, 2007 - $39,669) from affiliates of SIL. For the six months
        ended June 30, 2008, sales of $235,123 (six months ended June 30,
        2007 - $374,128) were made to affiliates of SIL, and the Fund made
        purchases of $40,628 (six months ended June 30, 2007 - $160,261) from
        affiliates of SIL. All these sales and purchases took place at
        prevailing market prices.

        During the three months ended June 30, 2008, the Fund paid $27,000
        (three months ended June 30, 2007 - $27,000) to affiliates of SIL
        under the terms of an agreement to provide services for management
        information systems. During the six months ended June 30, 2009, the
        Fund paid $54,000 (six months ended June 30, 2007 - $54,000) 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.

    15. Income taxes:

        Effective, March 31, 2008 the Fund completed an internal
        reorganization that involved the refinancing of inter-corporate debt
        in the form of notes issued and held by subsidiaries of the Fund. The
        reorganization does not have any effect upon the management or
        business activities of the Fund's operating subsidiaries. As a result
        of the internal re-organization, income tax losses arose of
        approximately, US$10.3 million which are available to reduce US
        taxable income. Based on statutory income tax rates in effect for the
        Fund's US subsidiary, this amounts to an estimated $3.6 million tax
        benefit available to subsidiaries of the Fund. This $3.6 million
        benefit was recorded at March 31, 2008 and is comprised of an
        estimated $0.8 million current income tax recovery and $2.8 million
        future income tax recovery.

        In addition, during the quarter ending March 31, 2008, tax pools
        consisting principally of Canadian tax loss carry forward, of
        approximately $16.0 million have been recorded by a subsidiary of the
        Fund as a result of the Fund's re-organization plan. The tax loss
        carry forwards will result in a reduction of tax otherwise payable
        under the Canadian federal government's tax on publicly traded income
        trusts. Based on tax rates expected to apply at the date such tax
        pools will be utilized, and additional $4.2 million of future income
        tax benefit was recorded by the Fund at March 31, 2008.

        During the quarter ended June 30, 2008, the Company recorded a future
        tax asset of approximately $20.1 million as a result of the write-
        down of the goodwill and intangible assets. Goodwill and intangible
        assets remain deductible for Canadian and U.S. tax purposes.

    16. 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.

    17. 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.

    18. Future Accounting Changes

        (a) International Financial Reporting Standards

            The CICA will transition Canadian generally accepted accounting
            principles ("GAAP") for publicly accountable entities to
            International Financial Reporting Standards ("IFRS"). The Fund's
            consolidated financial statements are to be prepared in
            accordance with IFRS for the fiscal year commencing January 1,
            2011. The impact of the transition to IFRS on the Fund's
            consolidated financial statements has not been determined.

        (b) Goodwill and Intangible Assets

            Effective January 1, 2009, the Fund will adopt new CICA Handbook
            Section 3064, Goodwill and Intangible Assets. This section
            replaces CICA Handbook Section 3062, Goodwill and Intangible
            Assets, and establishes revised standards for the recognition,
            measurement, presentation and disclosure of goodwill and
            intangible assets. The Fund is still evaluating the impact of
            this standard on its consolidated financial statements.
    





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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