Short-Term (next 3 to six months)

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3 Review: Income Portfolio For a brief discussion of the portfolio s past annual performance visit the Performance Summary section. For the quarter ending June 30, 2012, the balanced portfolio generated a positive investment return of 2.37% - its eighth straight positive quarterly investment return. Fortunately, the balanced portfolio is managed and measured to it s own benchmark see the Annual Projections section. The positive quarterly returns have helped the portfolio to exceed the goals set for it total market value. Note: According to Morningstar.ca, the Morningstar Canadian Equity and Canadian Focused Equity fund indices lost 5.4% and 5.3%, respectively, for the quarter, despite solid showings in June. And according to Morneau Shepell, the S&P/TSX Composite (Total Return) lost 5.7%. Portfolio Thoughts: Within the portfolio, we continue to monitor the overall exposure to risk. With reference to the bonds held, we are closely watching the market values for the General Electric Capital Canada and the Bank of Nova Scotia bonds for any indication that investors are becoming more risk adverse and shifting out of corporate bonds and into government bonds. At present, this has not occurred. We continue to believe Canadian interest rates will remain at current levels and possibly move lower in the foreseeable future, so rising interest rates are not viewed as an immediate risk for the bonds and preferred shares held in the portfolio. In the quarter, the income portfolio's value increased as a result of gains in the bonds, preferred shares, inverse ETF holdings and the receipt of earned interest and dividend income. Thoughts and Concerns: Short-Term (next 3 to six months) European Financial Crisis is an immediate concern because of Its global impact. Its impact on financial markets, global manufacturing and trade and the uncertainty it presents for investors and consumers. A sense no one really knows how serious the problems are. A sense that the crisis can easily spread to other regions and markets. A lack of answers for solving Europe s problems. The turmoil and its negative impact upon consumer, business and investor sentiments. The distortions in capital markets, commodity markets, etc. that results from unprecedented, and often surprise, government intervention.

4 Slowing Economies: At present the majority of the world s economies are experiencing a manufacturing slowdown as evidenced by the most recent Purchasing Managers Indices (PMI), rising unemployment, lower shipping volumes, declining commodity prices and declining GDP numbers. Commodity Prices are much more sensitive to liquidity injections by Central Banks than they are to supply and demand fundamentals. It appears that commodity prices regain their pricing strength only when there is talk of further government intervention Quantitative Easing, Operation Twist, Operation LRTO, ESM Funds, etc. Without government intervention commodity prices would be lower. Central Bank Actions: Central Banks around the world have provided so much liquidity and created so many bailout vehicles we doubt any of it can be reverse. All of the liquidity and new financing structures are becoming permanent in the minds of investors, politicians and Wall/Bay Street. This is important because investing in this new environment is different than it was in the past. The resulting distortions in capital markets have shifted from a short-term deviation to long-term, structural changes. Natural Money Flows: This issue is still specific to European banks/countries, but its support of the ongoing financial crisis is critical. There continues to be a steady flow of savings transferred out of weak banks/countries and into strong banks/countries. As depositors move their savings out of Greek, Spanish, Italian and Portuguese banks and into German, Swiss, French, American and British banks the crisis is exacerbated. The banks that lose deposits become starved for capital and then require bailout funds to survive day by day. The latest evidence of this is the recently announced 100 billion Euro Spanish bank bailout. These bailout funds are simply trying to replace the savings transferred out of the country by its citizens. (See The natural flow of money: don't be fooled.) New CMHC Mortgage Rules: Ultimately, the most recent rule changes will have a dampening impact upon Canadian finance. Slowing growth in loans will add downward pressure to the Real Estate market, consumer spending, manufacturing and ultimately the economy as a whole. These changes will have a negative impact on the loan/revenue/profit growth for lenders. Longer-Term Credit Contraction: We continue to view the current investing environment as one within a continuing credit contraction cycle and, as such, it will be difficult for most corporations and governments to return the grow rates experienced prior to 2008.

5 Headwinds for Corporate Profits: The follow are a few of the longer-term head winds that corporations and their profits face. Growing Pension Expense: As company pension funding deficits remain high and more boomers retire, corporations will be required to make larger and larger funding contributions to their pension plans. Their pension contributions come directly out of their profits, making profit growth difficult. Income Tax Trend: The long-term income tax trends (corporate and personal) have shifted. Governments around the world are finding it increasingly difficult to implement lower income tax rates and some have actually begun to raise rates. Prior to 2008, the developed world chanted for lower and lower income tax rates and governments willingly obliged. This enabled corporations to increase their net profits with very little effort on their part. This trend has changed. Rising Unemployment: As unemployment continues to rise, in most of the world, economies and corporate revenues are feeling the negative impact from declining consumption. Global Economic Slowdown: Economies, China, Asia, Europe and the United States, are all contracting as indicated by the most recent Markit Purchasing Manager s Indices and announced GDP numbers. Such an overwhelming slowdown has not occurred since the financial crisis of What is more discouraging is the current global slowdown is occurring after governments have pumped trillions into banks, individual financial systems and newly created bailout funds. Even Central Bank coordinated policy initiatives seem powerless to reverse the slowdown. Disinflation/Deflation: Bond yields continue to decline, with the exception of those issuers faced with credit issues corporate and sovereign. We continue to believe bond market yields, especially those represented by the yield curve, continue to be good indicators for future inflation expectations. With this in mind, bond markets continue to indicate inflation is not a concern. We think it could be successfully argued current bond yields continue to worry about deflation, especially when one considers the zero-interest rate policies and trillions pumped into the financial systems by the Central banks. We continue to believe that the trillions injected has artificially supported commodity prices and without these injections commodity prices would be lower and the official inflation data would display deflationary signs. Individual Investors: One of the most worrisome trends continues be the exit of individual investors from stock markets. This exodus is confirmed by fund flow reports that show individual investors selling stocks, buying bonds and simply increasing their cash asset allocations. Trading volume on North American and European stock exchanges continues to decline at

6 a frightening pace. For example, in the U.S. the daily trading volume has declined 44% since 2008, despite the indices being up more than 100%. The financial crisis, the uncertainty surrounding financial markets, unprecedented government actions, regulatory changes, the seemingly never ending scandals and overall stock market volatility continue to raise investor skepticism causing many to swear off stock market investments altogether. This reversal of the decades old love affair with stocks is creating a long-term trend that is a negative for stock market investments. Central Bank Intervention: As mentioned above, Central Bank and Government intervention has permanently altered the investing landscape. Initially, the trillions injected into financial systems and bailout funds were slated to be temporary. No longer. Governments will be hard pressed to reverse any of their initiatives. We find government intervention in capital markets, financial systems, regulatory systems, etc. fraught with irony. Free market proponents and capitalists constantly preach how governments need to leave them all alone. Government regulation is bad. Governments have no place in the free-market economy. Etc. etc. But yet when they blow themselves up to whom do they turn for aid? Maybe, it is not irony. Maybe, it is hypocrisy. In any event, investors will have a difficult time understanding the new investing landscape and what to base their investment decisions upon until the government intervention has solved all of the problems or it has been exhausted. Until then the landscape will continue to shift. Each week we seem to read about some new crisis and some new cure. Investors should remain cautious when it comes to investing their savings. All of the short and long-term concerns outlined above are important in their own individual right, but collectively they create an environment that is hostile for investors. In the 1980s, 1990s and up until 2008, all were trending in a direction supportive of investors and, in particular, stock market investments. Investment Actions: No changes were made to the sample portfolio during the quarter. At present, we continue to watch the developments out of Europe and the progressive economic slowdown with a defensive view. We continue to be comfortable with the portfolio's current investments. At present no changes are contemplated.