TERRAVEST INCOME FUND
TSX : TI.UN

TERRAVEST INCOME FUND

March 30, 2006 07:00 ET

TerraVest Income Fund Releases 2005 Q4 and Year End Financial Results

VEGREVILLE, ALBERTA--(CCNMatthews - March 30, 2006) - TerraVest Income Fund (TSX:TI.UN) today released its financial results for the 2005 fourth quarter and year-end results for the 12-month period to December 31, 2005.

The Fund's highlights for the 2005 fourth quarter were:

- Per unit earnings of $0.25, up from $0.09 for the 2004 fourth quarter;

- Distributable Cash of $5.6 million ($0.42 per Unit), up from $1.6 million ($0.22 per Unit) in 2004 fourth quarter; and

- Unitholder distributions of $4.3 million ($0.34 per Unit), up from $2.1 million ($0.26) in the 2004 fourth quarter period.

During the 2005 fourth quarter, the Fund:

- Acquired in October an 87.1% interest in Diamond Energy Services Inc., an oil and natural gas serving company headquartered in Swift Current, Saskatchewan, for $33.7 million;

- Completed in December the acquisition for $33.6 million of an 80% interest in Montreal-based Beco Industries Inc., the largest Canadian designer, manufacturer and importer of home textile products;

- Announced two increases totaling $0.10 in the annual distribution, effective November 15, ($0.05 annual increase) and January 16, 2006 ($0.05 annual increase); and

- Expanded its credit facility to a total of $110 million with a syndicate of three Canadian chartered banks.

For the 2005 fourth quarter, the Fund reported revenue of $63.7 million and net earnings of $3.2 million or $0.25 per Unit. For the 2004 fourth quarter, TerraVest reported revenue of $16.5 million and restated net earnings of $665,000 or $0.09 per Unit. Distributions declared during the 2005 fourth quarter represented 77% of Distributable Cash.

Additional highlights for the full year for the Fund in 2005 include:

- Paid cash distributions to Unitholders of $14.7 million (up from $3.8 million paid in 2004), representing 73% of Distributable Cash (93% fully diluted);

- Made three increases to the annual distribution rate to Unitholders, and announced a fourth effective January 2006. The annual distribution rate of $1.38 is now more than 30% higher than the $1.06 when the Fund began operations in July 2004;

- Significantly increased the scale of operations, with consolidated net earnings increasing to $10.1 million ($0.88 per Unit) on revenue of $198.1 million, compared with a restated consolidated net earnings of $1.2 million ($0.17 per Unit) on revenue of $25.8 million for the 2004 period (from July 9 to December 31);

- Acquired an 80% interest in Don Park Inc., one of Canada's largest suppliers of heating and air conditioning equipment, for $30.2 million; and

- Raised $35.1 in gross proceeds by issuing 2.6 million Units from treasury at $13.75 per Unit in July 2005. The funds were used to reduce debt. The Fund has raised approximately $93 million in new equity raised since beginning operations in 2004.

The Fund also made important progress during 2005 in implementing its strategic plan by:

- Increasing the stability of its Distributable Cash with the addition of three new businesses, bringing to six the number of portfolio companies;

- Reducing to 56% the proportion of the Fund's Distributable Cash provided by RJV; and

- Enhancing the stability of Unitholder distributions by structuring investments in four portfolio companies (Stylus, Don Park, Diamond and Beco) to provide a priority return of cash to the Fund. Approximately 48% of the Fund's pro-forma Distributable Cash in 2005 was funded through priority returns during 2005.

Highlights from the Fund's fourth quarter and its 2005 reporting period are as follows:



thousands of dollars Three Months ended Twelve Months ended
December 31 December 31
2005 2004 Change 2005 2004(i) Change
Revenues
RJV 17,814 14,039 64,302 47,172
Stylus 11,535 1,175 40,016 1,175
Don Park 24,005 - 70,135 -
Diamond 6,638 - 6,638 -
Beco 1,779 - 1,779 -
Ezee-On 1,972 1,319 15,272 13,074
------ ------ ------- ------
Total revenues 63,743 16,533 286% 198,142 61,421 223%

Net earnings
for the period 3,210 665 383% 10,091 1,237 716%
Per Unit 0.25 0.09 0.88 0.17

Cash flow from
operations
before working
capital changes 6,135 1,831 235% 22,047 3,521 526%
Less: Maintenance
capital
expenditures (279) (223) (1,936) (274)
Less: Retractable
non-controlling
interest (224) - (224) 43

Distributable
cash 5,632 1,608 250% 19,887 3,290 504%
Per Unit 0.42 0.22 1.73 0.46
Distributions
declared 4,311 2,136 102% 14,663 3,805 285%
Per Unit 0.34 0.26 1.27 0.50
Payout ratio (1) 77% 133% 73% 109%


(i) The 2004 results of the Fund are for the period from July 9, when it commenced operations, to December 31.

(1) Undiluted

"The Fund performance met Management's overall expectations for 2005," said Dale Laniuk, President and Chief Executive Officer. "With the acquisitions made during the past year, revenues on a proforma basis for TerraVest's portfolio, assuming ownership for all of 2005, would have been approximately $280 million.

"The Fund is enhancing its internal capabilities to monitor its investments and maintain strong financial controls throughout the group. As well, Management continues to pursue several investment opportunities in order to increase the size of its portfolio, diversify its sources of Distributable Cash, and grow Unitholder distributions."

The Fund disclosed the breakdown of cash distributions to Canadian Unitholders for income tax purposes. Total distributions during 2005 of $1.26669 per Unit are classified as taxable other income.

As of March 30, 2006, there were 12,804,490 Units issued and outstanding and 1,494,032 Exchangeable Shares - Series 1 and 1,403,545 Exchangeable Shares - Series 2 issued and outstanding. The Series 2 shares are held by Fund Management and are not listed and are not traded on an exchange. Neither the Series 1 nor Series 2 exchangeable shares trade on a public exchange.

The Fund's audited financial statements, as well as its MD&A and Annual Information Form. are available on SEDAR at www.sedar.com and on the Fund's website at www.terravestindustries.com.

The Fund will hold a conference call on that date at 10:00 a.m. E.S.T. The details are as follows:



Date: Thursday, March 30, 2006
Time: 10:00 a.m. E.S.T.
Participants: Dale Laniuk, President and CEO
Tom Kileen, Chief Financial Officer
Tom Zosel, Senior Vice President
Access Number: Toronto: (416) 695-9747
Toll-Free Access: 1 (877) 888-4483


A replay of the conference call will available at (416) 695-5275 (Toll-Free Access: 1 (888) 509-0081) for seven days after the conference call. A transcript can be viewed (within 48 hours) by visiting the Fund's website and clicking to corporate presentations.

About TerraVest Income Fund

The Fund has invested in six companies:

- RJV is one of the largest providers of wellhead processing equipment for the natural gas industry in western Canada.

- Stylus is one of Canada's leading made-to-order upholstered furniture manufacturers and an importer of leather furniture.

- Don Park is one of Canada's leading manufacturers and suppliers for the heating, ventilation and air conditioning market and primarily has sales in Canada and the United States.

- Diamond Energy Services is a market leader in providing well servicing to the oil and natural gas sector in south-western Saskatchewan, with a growing presence in Alberta.

- Beco Industries is the largest Canadian designer, manufacturer and importer of home textile products.

- Ezee-On manufactures heavy-duty equipment for large acreage grain farms and livestock operations.

MANAGEMENT'S DISCUSSION AND ANALYSIS

For the year ended December 31, 2005

Dated: March 29, 2006

Caution Regarding Forward-Looking Statements

The public communications of TerraVest Income Fund (the "Fund") often include written or oral forward-looking statements. Statements of this type are included in this Management's Discussion and Analysis ("MD&A") and may be included in filings with Canadian securities regulators, or in other communications. Forward-looking statements may involve, but are not limited to, comments with respect to our objectives for 2006 and beyond, our strategies or future actions, and our targets or expectations for our financial performance and condition. All statements other than statements of historical fact contained in this MD&A are forward-looking statements, including, without limitation, statements regarding the future financial position, business strategy, proposed acquisitions, budgets, litigation, projected costs and plans and objectives of or involving the Fund. Readers can identify many of these statements by looking for words such as "believe", "expects", "will", "intends", "projects", "anticipates", "estimates", "continues" and similar words or the negative thereof. Although Management believes that the expectations represented in such forward looking statements are reasonable, there can be no assurance that such expectations will prove to be correct.

By their nature, forward-looking statements require us to make assumptions and are subject to inherent risks and uncertainties including those discussed in this MD&A. There is significant risk that predictions and other forward-looking statements will not prove to be accurate. We caution readers of this MD&A not to place undue reliance on our forward-looking statements because a number of factors could cause actual future results, conditions, actions or events to differ materially from the targets, expectations, estimates or intentions expressed in the forward-looking statements.

The future outcomes that relate to forward-looking statements may be influenced by many factors, including but not limited to: pending and proposed legislative or regulatory developments; competition from established competitors and new entrants in the markets served by the businesses of the Fund; technological change; acceptance and demand for new products and services; fluctuations in operating results; future capital and other expenditures; commodity prices, interest rates and currency value fluctuations; the effects of war or terrorist activities; the effects of disease or illness that impact on local, national or international economies; the effects of disruptions to public infrastructure, such as transportation, communications, power or water supply; and industry and worldwide economic and political conditions. We caution that the foregoing list of factors is not exhaustive and that when relying on forward-looking statements to make decisions with respect to the Fund, investors and others should carefully consider these factors, as well as other uncertainties and potential events, and the inherent uncertainty of forward-looking statements. The Fund does not undertake to update any forward-looking statement, whether written or oral, that it may make or that may be made, from time to time, on its behalf.

The information contained in this MD&A, including the information set forth under "Risk Factors" herein, identifies additional factors that could affect the operating results and performance of the Fund and its subsidiaries. The forward-looking statements contained herein are expressly qualified in their entirety by this cautionary statement. The forward-looking statements included in this MD&A are made as of the date of this MD&A.

Assumptions about the performance of the Fund's businesses are considered in setting the business plan for the Fund and in setting financial targets. Key assumptions include that the demand for products and services of the Fund's business will remain stable and that the Canadian and other markets in which the Fund's businesses are active (and in particular, the Canadian oil and natural gas industry in western Canada and the market for household goods) will remain stable. It is also assumed that the current Canadian income tax regime with respect to income trusts will not change.

(NOTE: All numbers in this MD&A are in thousands except Units and per Unit amounts, shares and per share amounts, and well completions)

ABOUT TERRAVEST

TerraVest Income Fund (the "Fund") is an unincorporated, open-ended, limited purpose trust established to invest in a diversified group of income producing businesses with the intent of producing stable and growing distributions for its investors. The Fund's approach is to partner with existing management teams by investing in, and supporting, their visions. The Fund purchases a controlling interest in each company it partners with. Where possible, investments are structured to provide a preferred return to the Fund. This structure allows the underlying business to operate for the long-term, without duly exposing investors to the performance of a single company.

The Fund's initial investment was the acquisition of 100% of the issued and outstanding securities of Laniuk Industries Inc. ("Laniuk") and its wholly owned subsidiary corporations. Currently, the Fund has six portfolio companies, RJV Gas Field Services ("RJV"), Ezee-On Manufacturing ("Ezee-On"), Stylus Made to Order Sofas ("Stylus"), Don Park and Don Park (USA) (collectively "Don Park"), Diamond Energy Services ("Diamond"), and Beco Industries ("Beco") .

RJV is one of Canada's largest providers of wellhead processing equipment for natural gas wells in the Western Canadian Sedimentary Basin. Ezee-on manufactures short-line, heavy-duty equipment for large acreage grain farms and livestock operations and primarily has sales in North America, Eastern Europe and Australia. Stylus is one of Canada's leading manufacturers of made-to-order upholstered furniture and is an importer of leather furniture. Stylus' sales efforts are focused on small format furniture retailers. Don Park is one of Canada's leading manufacturers and suppliers of sheet metal product for the heating, ventilation and air conditioning market and primarily has sales in Canada and the United States. Diamond operates oil and natural gas well service rigs and coiled tubing and swabbing units in southwestern Saskatchewan and in Alberta. Beco is the largest Canadian designer, manufacturer and importer of home textile products with sales in Canada and the United States.

In four of the investments, Stylus, Don Park, Diamond and Beco, the Fund is entitled to preferred returns of annual distributable cash. In each case, this preference entitles the Fund to receive its proportionate share of all cash available for distribution up to a pre-established threshold, before any distributions of cash are available to the retractable non-controlling interests. After the first pre-established threshold is met by one of these portfolio companies, the retractable non-controlling interest holders receive their proportionate share of distributable cash from that portfolio company to a second higher pre-established thereshold. Once both the thresholds are achieved by one of these portfolio companies, the distributions from that portfolio company are allocated on a predetermined basis in relation to the ownership interests.

Overall Strategy of the Fund

Management believes that the Fund is an attractive investment opportunity due to the quality of the six underlying businesses, the Fund's unique growth strategy, and the structure of those investments. The Fund intends to grow its cash flow both through long-term organic growth of the portfolio companies and through investments in other businesses which fit the acquisition criteria of the Fund.

Management believes that to the vendor of a private middle market business, the Fund is an attractive alternative over other potential buyers due to its: (i) tax efficient structure, which may result in a cost of capital advantage; (ii) ability to utilize publicly-tradeable Units as an acquisition currency; and (iii) ability to provide operating management teams of acquired businesses with a less complex and more conservatively leveraged capital structure than traditional acquirors of private businesses.

Acquisition Criteria

Generally, the Fund intends to make control investments in manufacturing or service oriented businesses that meet its acquisition criteria. Businesses that meet the Fund's acquisition criteria will have:

- annual revenues exceeding $20,000,

- demonstrated track record of generating stable cash flow,

- durable competitive advantage in an attractive industry,

- ongoing participation of key senior personnel post-acquisition,

- opportunities for organic growth under existing business practices, and

- immediate and longer term accretion to distributable cash per Unit.

Implementation of Acquisition Strategy

The Fund's businesses operate autonomously and maintain their individual business identities. The Fund relies on the high quality management teams of its businesses and does not rely on operating synergies to justify investments. The Fund does, however, provide additional managerial support through its Administrator's experience in strategy development, assistance with planning and analysis, industry contacts, and focus on operational and financial discipline.

To further diversify its sources of cash flow, the Fund seeks to invest in businesses that operate in multiple industries. It is Management's intention to continually monitor the Fund's portfolio of businesses, and to undertake future acquisitions and divestitures as deemed beneficial to the Fund.

The Fund continues to actively search for additional investment opportunities that meet its acquisition criteria.

INCEPTION OF THE FUND

On June 29, 2004, the Fund issued a final prospectus for the sale of 2,640,000 Units at a price of $8.15 per Unit. An over allotment option was exercised by the Fund's underwriters effective July 23, 2004, for an additional 190,000 Units at the price of $8.15 per Unit. The aggregate proceeds from the offering were $23,065. Immediately prior to the offering, Laniuk Industries Inc. reorganized, which included a statutory amalgamation with its two wholly owned operating subsidiaries. The amalgamated company continued as Laniuk, which was then acquired by TerraVest AcquisitionCo Inc, a wholly owned subsidiary of the Fund. Consideration for the acquisition consisted of a note payable to the former shareholders of Laniuk in the amount of $33,743 and the issuance of exchangeable shares for $17,946. Upon completion of the acquisition of Laniuk, a further reorganization occurred, which included the statutory amalgamation of certain subsidiaries of the Fund. The amalgamated company continued as TerraVest Industries Inc. The Fund then issued Units of the Fund to the former shareholders of Laniuk to satisfy the note payable created upon the acquisition of Laniuk. Costs related to the acquisition of Laniuk totaled $1,658. Additional costs of $2,632 were incurred by the Fund for the issuance of the Units. The total cost of the transaction and the issuance of the Units was $4,290.

INVESTMENTS IN 2004

On December 17, 2004, the Fund acquired an 80% interest in the assets and shares of Stylus Furniture Ltd. ("Stylus") for $21,816 plus costs of $586 for a total acquisition price of $22,402. The acquisition was funded by a public offering of Units. In total 3,277,500 Units, including 427,500 Units from an over allotment option exercised by the Fund's underwriters were issued at a price of $10.60 per Unit for aggregate proceeds of $34,741. Additional costs of $2,520 were incurred by the Fund for the issuance of Units. The total cost of the transaction and the issuance of the Units was $3,106. The Fund used the excess proceeds from the offering to reduce its operating loan.

INVESTMENTS IN 2005

On April 1, 2005, the Fund acquired an 80% interest in the assets of Don Park Inc. and Don Park (USA) Inc. (collectively "Don Park") for $30,157 plus transaction costs of $1,000 for a total acquisition price of $31,157. The acquisition was funded by debt through an additional draw on the Fund's operating facility of $27,000 and issuance of term debt totaling $5,000. The excess amount drawn of $843 was used to fund working capital requirements. The debt incurred to finance the investment in Don Park was repaid through the issuance, on July 8, 2005, of 2,550,000 Units, including exercised overallottment options for gross proceeds of $35,063. Cost related to this offering were $2,046.

On October 3, 2005, the Fund acquired an 87.1% interest in the assets of Diamond Energy Services Inc. ("Diamond"), a well servicing company providing service to the oil and natural gas industries in southwestern Saskatchewan and Alberta, for $33,735 plus acquisition costs of $1,230. The acquisition was funded by existing credit facilities.

On December 5, 2005, the Fund acquired an 80% interest in the assets of Beco Industries Inc. ("Beco"), Canada's largest manufacturer, importer and distributor of home textile products, for $33,600 plus acquisition costs of $1,373. The acquisition was funded by existing credit facilities.

DISTRIBUTABLE CASH

The Fund has a policy of paying stable monthly distributions to Unitholders from its distributable cash. In accordance with the Declaration of Trust, the independent Trustees determine the amount of distributable cash to be distributed to the Unitholders.

Distributable cash is not a defined term under Canadian generally accepted accounting principles and does not have a standard meaning, but is determined by the Fund to be cash flow from operations before changes in non-cash working capital and less capital expenditures related to maintenance of the portfolio companies' property, plant and equipment and less retractable non-controlling interest charges. Management believes that distributable cash as a liquidity measure is a useful supplemental measure as it provides the Independent Trustees with an indication of the amount of cash available for distribution to the Unitholders. Investors are cautioned, however, that distributable cash should not be construed as an alternative to using net earnings as a measure of profitability, or to using the audited consolidated statement of cash flows. Further, the Fund's method of calculating distributable cash may not be comparable to measures used by other entities.

The Fund receives indirect cash payments of cash from the portfolio companies and from this cash the Fund pays distributions to the Unitholders and costs and expenses of the Fund and any amounts payable by the Fund in connection with any redemption or purchase of Units. Certain of the portfolio companies experience seasonality and as a result, there are timing differences in the generation and distribution of cash in individual months. It is likely that distributable cash generated by the portfolio companies will exceed cash distributed to the Fund in some months but that the Fund will also have months in which cash distributed will exceed distributable cash generated.

Distributable cash generated for the year ended December 31, 2005 was $19,887 as compared to $3,290 in the fiscal period July 9, 2004 to December 31, 2004. The Fund declared distributions to its Unitholders of $14,663 in 2005 as compared to $3,805 in 2004. Growth in distributable cash can be attributed to the acquisition of Don Park, Diamond and Beco in 2005, as well as the inclusion of Stylus for a full fiscal year and strong financial performance by RJV.

The following table shows the calculation of distributable cash for the year:



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2005 2004
Cash flow from operations before
non-cash working capital changes $ 22,047 $ 3,521
Less: maintenance capital expenditures (1,936) (274)
Less: retractable non-controlling interest (224) 43
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Distributable cash $ 19,887 $ 3,290
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Distributions (excluding exchangeable shares)
Distributions declared $ 14,663 $ 3,805
Distributable cash per Unit $ 1.73 $ 0.46
Distributions declared per Unit $ 1.27 $ 0.50
Payout ratio 73% 109%
Distributions (including exchangeable shares)
Distributions declared $ 18,534 $ 4,978
Distributable cash per Unit $ 1.34 $ 0.32
Distributions declared per Unit $ 1.25 $ 0.48
Payout ratio 93% 150%
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The above calculations under "Distributions (including exchangeable shares)" are calculated as though, before commencement of the relevant year, the Exchangeable Shares had been exchanged for Units and where the distributions paid by the Fund in the relevant year had also been paid in respect of such Units. Accordingly, distributions declared, distributable cash per Unit, distributions declared per Unit and payout ratio under "Distributions (including exchangeable shares)" do not reflect distributions paid by the Fund, but, rather, reflect a hypothetical scenario. Management believe that presenting these amounts under this hypothetical scenario provide useful supplemental information which reflects on the performance of the Fund and which provides information that would be relevant should all of the Exchangeable Shares be exchanged for Units.

Holders of Exchangeable Shares do not receive cash distributions from the Fund. Rather, the exchange ratio is adjusted to account for distributions paid to Unitholders as described herein and as more particularly described in the annual information form of the Fund.

Details of the cash distributions declared by the Fund for the year ended December 31, 2005 are as follows:



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Period Record Date Payment Date Per Unit Total
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January January 31 February 15 $ 0.09667 $ 990
February February 28 March 15 0.09667 991
March March 31 April 15 0.09667 991
April April 29 May 16 0.10667 1,094
May May 31 June 15 0.10667 1,094
June June 30 July 15 0.10667 1,094
July July 29 August 15 0.10667 1,365
August August 31 September 15 0.10667 1,366
September September 30 October 17 0.10667 1,367
October October 31 November 15 0.11083 1,419
November November 30 December 15 0.11083 1,420
December December 30 January 16 0.11500 1,472
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Total $ 1.26669 $ 14,663
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As a result of the Fund's acquisitions and financial performance, the Fund has increased its monthly distribution by a total of 30% since commencing operations in July 2004. The current annual distribution per Unit is $1.38.

SELECTED FINANCIAL INFORMATION

Annual Information

As the Fund commenced active operations on July 9, 2004 after the acquisition of Laniuk, there is no comparative annual financial information available for the Fund prior to July 9, 2004. Accordingly, the comparative annual information prior to July 9, 2004, is for Laniuk.



TerraVest TerraVest Laniuk Laniuk
Year Ended July 9, 2004 to Year ended Year ended
December 31, December 31, August 31, August 31,
2005 2004 2003 2002
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Sales $198,142 $25,793 $42,992 $37,383
Net earnings 10,091 1,237 2,761 3,059
Earnings per
Unit/Share
- basic 0.88 0.17 0.07 0.08
Earnings per
Unit/Share
- diluted 0.88 0.17 0.07 0.07
Total assets 286,853 136,852 35,457 43,065
Total long-term
financial
liabilities 27,283 5,544 12,171 11,578
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The Fund has grown significantly since its inception in July 2004, at which time the conversion from Laniuk occurred. Laniuk's larger business, RJV, is today TerraVest's largest portfolio company in terms of distributable cash generated. 2005 marks the third straight year of strengthening results for this business, fueled by high levels of drilling activity in western Canada and strong natural gas pricing. The business experienced record sales in 2005, with $64,302 in annual sales and record net earnings since the inception of the business in 1976. Ezee-On, another Laniuk business, finished the year with $15,272 in sales. Its results reflect strong export activities, offset by weak conditions in Canada's farming operations. The Fund experienced significant additional growth through the successful execution of its investment strategy. The Fund acquired its interest in Stylus in December 2004; the Fund acquired its interest in Don Park in April 2005; the Fund acquired its interest in Diamond in October 2005; and the Fund acquired its interest in Beco in December 2005. On a combined basis, these investments increased the Fund's 2005 sales by $117,393.

Long-term financial liabilities have increased in the current year as the Fund executed its acquisition strategy. As a result, the Fund's debt facility was amended to accommodate further growth. Today, debt requirements are primarily funded by a 364-day operating loan and a 364 day fixed term-loan, both of which are reflected as current liabilities at December 31, 2005. Long-term financial liabilities at December 31, 2005 consisted of capital lease obligations, retractable non-controlling interest in each of Stylus, Don Park, Diamond and Beco, and accrued long-term compensation. In 2004, long-term financial liabilities consisted of capital lease obligations and the retractable non-controlling interest in Stylus.

Quarterly Information

The quarterly financial information presented represents six quarters of TerraVest's operating results from inception on July 9, 2004 to December 2005 and the two immediately preceding quarters of the predecessor company, Laniuk.



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TerraVest Fiscal Year ended December 31
---------------------------------------------------------------------
July 9,
2005 2005 2005 2005 2004 2004 to
Fourth Third Second First Fourth September
Quarter Quarter Quarter Quarter Quarter 30, 2004
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Sales $63,743 $53,462 $48,961 $31,976 $16,533 $9,260
Net earnings $ 3,210 $ 2,357 $ 1,646 $ 2,878 $ 665 $ 572
Earnings per
Unit/Share
- Basic $ 0.25 $ 0.19 $ 0.16 $ 0.28 $ 0.09 $ 0.08
- Diluted $ 0.25 $ 0.19 $ 0.16 $ 0.28 $ 0.09 $ 0.08
Distributable
cash $ 5,632 $ 4,087 $ 3,899 $ 6,269 $ 1,608 $1,682
Distributable
cash per Unit $ 0.42 $ 0.32 $ 0.38 $ 0.61 $ 0.22 $ 0.24

Distributions
declared per Unit $ 0.34 $ 0.32 $ 0.32 $ 0.29 $ 0.26 $ 0.24
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Laniuk Fiscal Year ended August 31
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2004 2004
Third Second
Quarter Quarter
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Sales $16,649 $18,141
Net earnings $ 2,085 $ 2,441
Earnings per Unit/Share
- Basic $ 0.06 $ 0.06
- Diluted $ 0.04 $ 0.05
Distributable cash - -
Distributable cash per Unit - -

Distributions declared per Unit - -
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Sales increased in the fourth quarter of 2005 from the third quarter primarily due to the addition of Diamond on October 3, 2005 and Beco on December 5, 2005, adding $8,417 in the period. The remaining increase was the result of continued strong performance by RJV and Stylus, particularly in sales of its leather furniture. Net earnings for the fourth quarter increased over the previous quarter for similar reasons.

The increase in sales in the third quarter of 2005 relative to the second quarter of 2005 resulted from increased Stylus sales, an increase in sales at Don Park, reflecting seasonal strength in air conditioning products and the bulk sale of Ezee-On (Australia) Pty Ltd's inventory for $2,579. Net earnings increases generally followed the sales increases for the quarter.

The increase in sales in the second quarter over the first quarter of 2005 resulted primarily from the addition of Don Park on April 1, 2005. Net earnings in the quarter were lower than in the first quarter of 2005, reflecting a seasonally slower period for RJV and margin pressure at Don Park, as well as acquisition related amortization charges related to intangible assets in the second quarter.

Increased sales in 2005's first quarter over 2004's fourth quarter resulted from the addition of Stylus on December 17, 2004, and record sales for RJV. Net earnings in the first quarter of 2005 reflected the additional sales. Improved margins reflect pricing adjustments to fully offset the rapidly increasing steel costs for RJV and Ezee-On.

Sales in the fourth quarter 2004, improved over the third quarter, primarily due to seasonally driven stronger results at RJV. Margin pressure, driven by rapid increases in the price of steel, a key input for both RJV and Ezee-On, dampened the net earnings performance.

Prior to its acquisition by the Fund in July 2004, Laniuk had a different year end and quarter ends. The results for Laniuk were driven primarily by RJV, which benefited from strong industry conditions. RJV's results were offset somewhat by Ezee-On's performance, reflecting the weakness prevalent in the Canadian agricultural equipment sector in Laniuk's second and third quarters of 2004.

RESULTS OF OPERATIONS

Because the Fund commenced active operations on July 9, 2004, no figures exist for the twelve-month comparative period for the prior year. The consolidated financial statements of the Fund include the operations of TerraVest Industries Limited Partnership and Stylus Limited Partnership, for the year ended December 31, 2005, Don Park Limited Partnership for the period April 1, 2005 to December 31, 2005, Diamond Energy Services Limited Partnership for the period October 3, 2005 to December 31, 2005, and Beco Industries Limited Partnership for the period December 5, 2005 to December 31, 2005. For the purposes of this Management's Discussion and Analysis, comparative figures include TerraVest's operations from July 9, 2004 to December 31, 2004 and Laniuk Industries (RJV and Ezee-On) for the period January 1, 2004 to July 8, 2004. Portfolio companies acquired by the Fund since its inception are included only for the portions of the relevant periods in which they were owned by the Fund. The results of the Fund reflect a different capital structure, a different management structure and restated asset values from the predecessor company, Laniuk. Certain expenses of the Fund differ from those of the predecessor company.



Sales
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Three Months Three Months Year or fiscal Year or fiscal
Ended ended period ended period ended
December 31, December 31, December 31, December 31,
2005 2004 2005 2004
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RJV $ 17,814 $ 14,039 $ 64,302 $ 47,172
Ezee-On 1,972 1,319 15,272 13,074
Stylus 11,535 1,175 40,016 1,175
Don Park 24,005 - 70,135 -
Diamond 6,638 - 6,638 -
Beco 1,779 - 1,779 -
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$ 63,743 $ 16,533 $ 198,142 $ 61,421
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Consolidated annual sales of the Fund in 2005 were $198,142 as compared to $61,421 in 2004. The increase reflects the inclusion of Stylus for a full fiscal year, the acquisitions of Don Park, Diamond and Beco during 2005, and continued strong performance of RJV.

In 2005, according to published statistics by the Petroleum Services Association of Canada ("PSAC"), there were 15,355 natural gas wells rig-released ("completed"), as compared to a record 15,649 in the previous year. The continued strength in the natural gas sector throughout the year resulted in strong demand for natural gas processing equipment as completed wells were put into production. This resulted in significant pressure in the market for natural gas separation equipment as producers became extremely sensitive to product availability. During the last quarter of 2004, and the first two quarters of 2005, RJV took steps to increase its inventory of raw materials and sub-assemblies to capitalize on the resulting increase in demand. As a result of this decision, RJV was better able to manage the growth it experienced from a strong order book.

The increase in sales at Ezee-On in 2005 compared to 2004 was attributable to the bulk sale of inventory located at Ezee-On (Australia) Pty Ltd. for $2,579 to an independent distributor in Australia, increased sales in the United States as a result of Management's focus in this area, and improved domestic sales. Ezee-on continued to focus on its international market and while total sales to Eastern Europe were less than in 2004, the business developed a larger customer base and increased sales in additional international markets in the fourth quarter as a result.

Sales at Stylus for the year ended December 31, 2005, were $40,016, and reflect a full fiscal year of operations as opposed to 14 days in 2004. During the latter part of 2004, Stylus introduced a line of imported leather furniture that has been well received by its dealer base. As a result of strong marketing efforts, sales of leather goods were strong throughout 2005 and currently make up approximately 33% of Stylus total sales. In order to improve its exposure in the United States, Stylus replaced its San Francisco, California showroom with a new show room in Las Vegas, Nevada at the World Market Center. Stylus anticipates that the new location will increase its profile with US based dealers over time.

Don Park's sales are from the date of acquisition, April 1, 2005 to December 31, 2005. Sales for the nine-month period were disappointing as the company was impacted by several factors. Cooler than expected weather in April and May delayed the start of its summer air conditioning season and delays in issuance of permits for residential new home construction impacted Don Park's sales of its core sheet metal products. The business was further impacted by forward steel contracts entered into in late 2004. These contracts increased Don Park's cost of steel during a period in which spot steel pricing decreased dramatically. In addition, new entrants to the Toronto marketplace put further downward pressure on pricing, which adversely affected Don Park's overall sales.

Diamond was acquired on October 3, 2005, and reported sales are from the date of acquisition to December 31, 2005. Sales at Diamond were $6,638 since acquisition. The continued strength in oil and natural gas prices during the period resulted in strong demand for Diamond's service rigs and coiled tubing units. Utilization rates for Diamond's 17 service rigs and 5 coiled tubing units were 64% and 73%, respectively. In addition to strong utilization rates, Diamond was able to obtain higher average hourly rates for its equipment resulting in increased sales levels.

Beco was acquired on December 5, 2005 and reported sales are from the date of acquisition to December 31, 2005. Beco's sales of $1,779 during the period were negatively impacted by delays in anticipated shipments. The reasons underlying the delays, driven by changes in the buying processes of certain customers, have been addressed in the first quarter. Shipments in subsequent months are expected to increase as a result.

Cost of Sales

Cost of sales for 2005 was $147,836 compared to $42,071 in 2004. The increase is the result of the inclusion of Stylus for a full fiscal year and the cost of sales of Don Park, Diamond and Beco after their acquisition in 2005.

Cost of sales represented 75% of consolidated sales in 2005 as compared to 68% in 2004. The increase, as a percentage of sales, arises from a change in product mix and customer mix as a result of the acquisitions in 2005. In addition, the Fund was further impacted by purchases of high priced steel in late 2004 by Don Park. These purchases increased Don Park's cost of steel during a period in which spot steel pricing decreased dramatically. Don Park's additional purchases in 2005 have resulted in a return to more normal margins for the business.

Gross margin

Gross margins for 2005 were $50,306 as compared to $19,350 in 2004. Gross margins, as a percentage of sales, were 25% in 2005 as compared to 32% in 2004. The change in consolidated gross margins, as a percentage of sales, is the result of changes in the product mix due to the acquisitions in 2005.

Gross margins at RJV improved in the fourth quarter due to improved pricing as a result of the strong demand for its product.

Gross margins at Ezee-On declined in 2005 compared to 2004 primarily as a result of the discounted bulk sale of the consignment inventory of Ezee-On (Australia) Pty Ltd.

Gross margins at Don Park were lower than expected as a result of reduced selling prices due to competitive pressures and higher costs of sales resulting from higher costs of inventoried steel.

Gross margins at Stylus improved throughout the year due to increased volumes and favorable changes in product mix.

Gross margins at Diamond were better than expected as a result of the continued strong demand for service equipment in the oil and gas well servicing sector.

Beco's gross margin, for the period after its acquisition by the Fund, reflects less than a complete month of operation and was lower than the company's historical gross margins.

Administration expenses

Administration expenses for 2005 were $12,356 compared to $3,714 in 2004. The increase was primarily due to the inclusion of Stylus for a full fiscal year and the three acquisitions in 2005. Administration expenses for Stylus and the portfolio companies acquired in 2005 amounted to $6,754. The balance of the increase year over year was due to the pursuit of additional investment opportunities, accounting, legal, due diligence, governance and management costs. The Fund continues to invest to support its continued growth through acquisition strategy.

Selling expenses

Selling expenses for 2005 were $14,534 as compared to $1,630 in 2004. The increase is the result of the inclusion of Stylus for the full fiscal year and the Fund's three acquisitions in 2005. Selling expenses represented approximately 7% of consolidated sales in 2005 compared to 3% in 2004. The increase was the result of acquiring companies that have significant distribution channel related selling expenses.

Amortization expense

The Fund acquired $34,942 in capital assets through the acquisitions of Don Park, Diamond and Beco. During 2005, the Fund's portfolio companies acquired $3,049 in new capital assets. Amortization expense of $2,874 reflects utilization of existing assets during the year.

In addition, the Fund's credit agreement was amended resulting in additional costs of $707 which are amortized over the one year term of the credit facility. Since inception on July 9, 2004, the Fund has incurred $869 in costs related to its debt facility. Amortization of these costs in 2005 was $347.

The Fund acquired certain definite life intangible assets as part of its acquisition of each portfolio company. These intangibles consist of contracted sales order backlogs totaling $3,509, non-competition agreements totaling $7,231, employment agreements totaling $979, and customer relationships totaling $6,789. Amortization of $4,299 during 2005 relates to these assets.

Retractable non-controlling interest

The retractable non-controlling interest represents a specified percentage interest in each of, Don Park, Diamond Energy and Beco held by third parties. The amount recorded of $224 represents the total allocation of income from the respective partnerships to their non-controlling interest holders during the year.

Non-controlling interest

The non-controlling interest on the consolidated balance sheet consists of the fair value of the Exchangeable Shares upon issuance plus the accumulated earnings attributable to the non-controlling interest. The net earnings attributable to the non-controlling interest on the consolidated statement of operations of $3,030 represents the cumulative share of net earnings attributable to the non-controlling interest based on the Units issuable for Exchangeable Shares in proportion to total Units issued and issuable at each month end during the period.

Interest expense

The Fund's affiliates,TerraVest Industries Limited Partnership, Stylus, Don Park, Diamond and Beco as guarantors, and the Fund as covenantor, are party to a credit agreement with a maximum available operating loan of $75,000 and a 364 day term loan totaling $35,000, for total debt capacity of $110,000 at December 31, 2005 as compared to total debt capacity of $20,000 at December 31, 2004. At December 31, 2005, the Fund had drawn $54,921 on its operating loan and $30,000 on its term loan. Interest was charged at prime plus 0.5% on the operating loan and prime plus 0.75% on the term loan. Total interest charged for the year was $1,567 as compared to $260 from the inception of the Fund, July 9, 2004 to December 31, 2004.

TOTAL ASSETS

Total assets at December 31, 2005 were $286,853 compared to $136,852 at December 31, 2004. The increase is primarily the result of the acquisitions of Don Park, Diamond and Beco and the related goodwill and intangible assets.

CONTINGENCIES

The Fund is contingently liable for payment of a maximum of $4,800, as additional consideration, to the vendor of Don Park Inc., if certain targets related to Don Park's earnings before interest, taxes, depreciation and amortization are met during the period April 1, 2005 to March 31, 2006. Additional consideration, if any, will be recorded once the contingency is resolved. Management does not expect to incur any liability for additional consideration.

The Fund is contingently liable for a payment of a maximum of $3,200, as additional consideration, to the vendors of Beco Industries Ltd., if certain targets related to Beco's earnings before interest, taxes, depreciation and amortization are met during the period January 1, 2006 through December 31, 2007. Additional consideration, if any, will be recorded once the contingency is resolved.

LIQUIDITY AND CAPITAL RESOURCES

Consolidated working capital at December 31, 2005 was $9,030 compared to $32,405 as at December 31, 2004. The working capital position has declined relative to 2004 as a result of the Fund's acquisitions of Diamond and Beco, both of which were funded by debt. All of the Fund's debt is on 364 day terms and as such is presented as a current liability.

The Fund's credit facility consists of an authorized operating facility of $75,000, less any outstanding letters of credit, and a term loan of $35,000 for total authorized debt of $110,000.

Short-term borrowings under the operating loan provide flexibility for managing seasonal fluctuations in working capital. The Fund's outstanding debt at December 31, 2005 under the operating facility was $54,921 and under the term loan was $30,000. The credit facility has financial covenants related to: minimum interest coverage; funded debt to earnings before interest, taxes, depreciation and amortization; funded debt to capitalization; and net worth. As at December 31, 2005, the Fund met all of its financial covenants.

In Management's view, the Fund has sufficient resources available to meet liquidity needs for the next twelve months.

The Fund plans to fund future acquisitions with debt and/or equity financing. The Fund provides, in its budget, for capital expenditures required for maintenance and growth of its businesses. In Management's view, the Fund's cash flow, together with its debt facilities and access to additional capital, is sufficient to meet these expenditures.

The Fund's off balance sheet financing arrangements as at December 31, 2005, consist of standby letters of credit totaling $4,919 and documentary letters of credit totaling $2,694 for the purchase of raw materials. The standby letters of credit have been issued as security for an operating loan in the amount of US$350 for Don Park (USA) Limited Partnership and outstanding documentary letters of credit, issued by a major Canadian bank for purchases of raw materials by Beco, and which were assumed on the acquisition of Beco.

Certain risks related to the Fund and its portfolio companies could impact the liquidity of the Fund. Please see the discussion of Risk Factors later in this MD&A.



COMMITMENTS
Contractual obligations consist of the following amounts:
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Total 1 year 2-3 years 4-5 years
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Operating leases $ 21,550 $ 5,595 $ 9,999 $ 5,956
Capital leases 164 40 66 58
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Total $ 21,714 $ 5,635 $ 10,065 $ 6,014
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The Fund had foreign exchange contracts to purchase U.S.$2,000 currency for CA$2,400 at an average rate of 1.20 maturing up to March 31, 2006 with a fair market value of $68.

FOURTH QUARTER

Consolidated sales in the fourth quarter of 2005 increased to $63,743 as compared $16,533 in 2004.

Continued strength in the oil and natural gas sector, driven by high commodity prices, contributed to the increase in RJV's sales as demand for its products continued to be strong. RJV's sales for the fourth quarter of 2005 were $17,814 compared to $14,039 in the fourth quarter of 2004.

Sales at Ezee-On improved in the fourth quarter of 2005 as compared to the fourth quarter of 2004. Sales increased approximately 50% to $1,972 in the quarter as compared to $1,319 in the comparative quarter. The increase is the result of improved sales in the US market as a result of Ezee-On's efforts to increase its exposure and develop a larger dealer base in the United States. In the fourth quarter, management increased its marketing and sales efforts in Canada. As a result, sales in Canada also improved.

Sales at Stylus in the fourth quarter of 2005 were $11,535 as compared to $1,175 from the date of its acquisition, December 17, 2004, to December 31, 2004. Stylus' leather product offering, which continued to be well received, represented a growing proportion of Stylus' total sales during the quarter.

Sales at Don Park in the fourth quarter of 2005 were $24,005. The business was not part of the Fund for the comparative period.

Diamond was acquired on October 3, 2005, and reported sales of $6,638 are from the date of acquisition to December 31, 2005. The continued strength in oil and natural gas prices during the period resulted in strong demand for Diamond's service rigs and coiled tubing units. Utilization rates for Diamond's 17 service rigs and 5 coiled tubing units were 64% and 73%, respectively. In addition, Diamond was able to obtain higher average hourly rates for its equipment resulting in increased sales levels.

Beco was acquired on December 5, 2005 and reported sales are from the date of acquisition to December 31, 2005. Beco's sales of $1,779 during the period were negatively impacted by delays in anticipated shipments. The reasons underlying the delays, driven by changes in the buying processes of certain customers, have been addressed in the first quarter. Shipments in subsequent months are expected to normalize as a result.

UNITS OUTSTANDING

The Fund's Units are listed on the Toronto Stock Exchange under the symbol TI.UN.

The Declaration of Trust of the Fund provides that an unlimited number of Units of the Fund may be issued. Each Unit is transferable and represents an equal undivided interest in any distributions of the Fund and in the net assets of the Fund. All Units have equal rights and privileges. Each Unit entitles the holder thereof to participate equally in allocations and distributions and to one vote at all meetings of Unitholders for each whole Unit held. The Units issued are not subject to future calls or assessments. Units are redeemable at any time at the option of the holder as more fully described in the Fund's annual information form dated March 31, 2006.

As at March 29, 2006, there were 12,804,490 Units issued and outstanding.

The Exchangeable Shares referred to below are not listed, and are not traded on any stock exchange.

Exchangeable Shares - Series 1

The Exchangeable Shares - Series 1 are convertible at the option of the holder into Units at any time.

Exchangeable Shares - Series 2

The Exchangeable Shares - Series 2 are subordinated to both the Units and the Exchangeable Shares - Series 1 and cannot be exchanged for Units until the subordination period ends. The subordination period expires on the earlier of July 9, 2007 and the first date on or after July 9, 2006 that certain conditions related to the distributions and financial results of the Fund are met. Management expects all conditions will be met to allow the subordination period to expire prior to July 9, 2007.

The number of Units issuable upon conversion of the Series 1 and Series 2 Exchangeable Shares is based on the exchange ratio in effect at the conversion date. The exchange ratio, which was originally one to one, is cumulatively adjusted each time a distribution is made to Unitholders. The adjustment to the exchange ratio is based on the cash distributions paid to Unitholders divided by a weighted average Unit price. The exchange ratio as at and giving effect to the December 31, 2005 distribution declared was 1.16561 to 1. The exchange ratio giving effect to the February 28, 2006 distribution declared was 1.18891 to 1.

As at March 29, 2006, there were 1,494,032 Exchangeable Shares - Series 1 and 1,403,545 Exchangeable Shares - Series 2 issued and outstanding.

RISKS RELATING TO THE BUSINESSES

Demand for Product and Services

All of the portfolio companies operate in industries in which the demand for the product or services is sensitive to many factors.

The oil and natural gas industry, in which RJV, through its manufacture and sale of natural gas well-head processing equipment, and Diamond, through its oil and gas well servicing business, participates, is dependent on the perception of future oil and natural gas prices. Oil and natural gas pricing had historically been cyclical and there is no assurance that prices will remain at current levels. The market for RJV's products and Diamond's services is geographically concentrated in the Western Canadian Sedimentary Basin and demand for such products and services may be affected by changes in the level of exploitation of the basin depending on pricing of natural gas. This is particularly so for RJV because most of the well-head processing equipment that RJV manufactures is used on new wells and stays in place through the life of the well, whereas a greater share of Diamond's business relates to the maintenance of existing wells.

The demand for the products manufactured or imported by Stylus and Beco is sensitive to consumer confidence. The home furnishings manufactured or imported by Stylus and the home textile products manufactured or imported by Beco are sold to retailers whose customers are individuals purchasing for their homes. Accordingly, these portfolio companies are dependent on the general economic cycles in Canada and the United States which are affected by interest rates, employment levels and levels of new home ownership. Reduced consumer confidence may result in lower demand for home furnishing and home textile products.

The demand for heating, ventilation and air conditioning equipment manufactured by Don Park is dependent on the rate of construction of new homes and businesses in Ontario and the other markets that it serves. Again, the demand for new homes generally depends on the strength of the economy, interest rates and consumer confidence. If the demand for new homes falls, it is expected that there will be a reduction in the number of homes built, which is expected to result in lower demand for products of Don Park.

The demand for short-line agricultural equipment manufactured by Ezee-On relates generally to agricultural commodity prices for the crops to which Ezee-On's equipment is applicable in Canada, the United States, Australia and other markets in which Ezee-On sells its equipment. Demand is also affected by weather conditions in the major agricultural producing regions and government agricultural policies in Canada, the United States, Australia and other countries in which Ezee-On sells its equipment. Reduced cash flow of farms in these countries will result in lower demand for Ezee-On's equipment.

Lower demand for any of the portfolio companies' products or services may result in lower sales which will have an adverse effect on the results of operations or financial condition of the affected business.

Competition

All the markets in which the portfolio companies operate are highly competitive and competition in the respective markets involves a broad range of competitors, some of whom have better product or service offerings than the portfolio companies. Some of the competitors are divisions of large corporations that have greater financial and other resources. There can be no assurances such competitors will not substantially increase the resources devoted to the development and marketing of products or services that compete with those of the portfolio companies or that new competitors will not enter into the markets served by the portfolio companies. The portfolio companies also compete with smaller manufacturers or service providers in the markets which the portfolio companies serve, some of which have better competitive advantages such as lower overhead costs, stronger customer relationships or specialized regional strength.

The oil and gas sector in the Western Canadian Sedimentary Basin is generally a regional market and, accordingly, RJV and Diamond primarily compete with other companies located in the region, whereas the market for product manufactured or imported by Stylus, Beco and Don Park is generally Canada and the United States but with competition from manufacturers around the world. Ezee-On's agricultural equipment is sold primarily in Canada and the United States, but is also sold in Australia and other parts of the world in competition with agricultural equipment manufactured in North America and other parts of the world.

Limited Customer Bases

Each of the portfolio companies drives a significant portion of its revenues from a limited customer base, particularly, in the case of RJV, Diamond and Beco. If one or more of the significant customers of such portfolio companies were to cease doing business with them, or significantly reduced or delayed its purchase of equipment or services, the financial condition and results of operations of such business could be materially adversely affected.

Input Costs

The manufacturing portfolio companies of RJV, Ezee-On, Stylus, Don Park and Beco all rely heavily on the cost of materials used to manufacture product. While not dependent on a single supplier of materials, these portfolio companies purchase materials that are priced on world markets which may be subject to economic and seasonal fluctuations and for which prices may rise at rapid rates over short periods of time. In some, but not all, cases, the sale price of a product can be raised in order to recover the higher costs of materials used to manufacture the product, but such response will often follow by some time the increase in the price of materials and is very difficult in periods when the prices of materials are more volatile.

Steel is a major component of the products manufactured by Don Park and Ezee-On and, to a lesser extent, RJV and, accordingly, an increase in the price of steel may have a material adverse effect on the financial condition and results of operations of these portfolio companies and the Fund.

The price of raw materials may have a significant effect on the financial condition and results of operations of Beco and Stylus.

Environmental Legislation

Environmental matters are subject to regulation under a variety of federal, provincial, territorial, state and municipal laws relating to health and safety and the environment. Management believes that the portfolio companies are in compliance with applicable environmental legislation; however regulation is subject to change and, accordingly, is impossible to predict the costs of compliance with new laws or the effects that changes would have on the portfolio companies or their future operations.

Among the portfolio companies, Management believes that the risk of non-compliance with environmental regulation is greatest for Diamond, due to the nature of its oil and gas well servicing business.

The trend in environmental regulation has been to impose increasingly stringent restrictions and limitations on activities that may affect the environment. In 1994, the United Nations' Framework Convention on Climate Change came into force and three years later led to the Kyoto Protocol which required nations to reduce their emissions of carbon dioxide and other greenhouse gases. Canada ratified the Kyoto Protocol in December 2002. The implementation of new laws and regulations, such as the Kyoto Protocol, could result in materially greater costs, stricter standards and enforcement, larger fines and liability and increased capital expenditures and operating costs particularly for RJV's or Diamond's customers, which could have a material adverse effect on RJV's or Diamond's business, financial condition, results of operations and cash flows.

Liability and Insurance

Due to the nature of the products and services provided by RJV, Ezee-On, Stylus, Don Park, Diamond and Beco, general liability, product liability and product defect claims may be asserted against these portfolio companies. Although insurance in amounts which are standard in Canada for manufacturing or services portfolio companies, as applicable, is carried, there can be no assurance that the coverage will be of sufficient scope to satisfy any liability claim. There can be no assurance that adequate insurance coverage will be available in the future, either at all, or on commercially acceptable terms or rates or that significant liabilities in excess of policy limits will not be incurred. Any such claims that exceed the scope of coverage or an inability to obtain coverage or adequate coverage could have a material adverse effect on the Fund's financial condition.

Foreign Exchange

A number of the portfolio companies conduct business transactions in US dollars and are therefore subject to foreign exchange risk that may occur between the Canadian and US currencies. These portfolio companies sell products to customers in the US and other markets and also purchase raw materials and other products for resale from jurisdictions outside of Canada, which transactions are denominated in US dollars.

The Administrator manages exposure to exchange rate risk by monitoring purchases and sales in US dollars, recognizing natural hedging inherent in the businesses of the portfolio companies. Imbalances between foreign currency purchases and sales are managed by each of the portfolio companies and, if deemed material, future purchase or sale commitments of US funds are initiated.

Fluctuations in exchange rates between the Canadian dollar and the US dollar could have a material adverse effect on the results of operations of the Fund, if the Administrator does not, or can not, adequately and effectively manage the net foreign exchange exposure.

Obsolescence

The technology used by RJV, Ezee-On, Stylus, Don Park, Diamond and Beco is constantly undergoing development and change. New technologies may be developed, or existing technologies refined, which could render existing equipment or processes technologically or economically obsolete. The development of new technologies or new applications for existing technologies may require existing systems to be adapted or new systems to be acquired in order to successfully compete. Due to cost factors, competitive considerations or other constraints, there can be no assurance that RJV, Ezee-On, Stylus, Don Park, Diamond and Beco will be able to acquire or have access to any new or improved equipment that they may need in order to serve their clients and customers. Any inability of RJV, Ezee-On, Stylus, Don Park, Diamond or Beco to provide state-of-the-art products and technologies may adversely affect their respective portfolio companies and financial condition and results of operations.

There is no proprietary protection for the primary product lines or processes of RJV, Ezee-On, Stylus, Diamond and Beco. There is only limited proprietary protection for the primary product lines and processes of Don Park.

Customers of Stylus and Beco count on these portfolio companies to provide fashionable home furnishing and textile products that appeal to current consumer tastes. Should Stylus or Beco fail to deliver suitable product they may lose business which may have an adverse effect on the financial condition and results of operations.

Labour

The success of the Fund depends on the ability of RJV, Stylus, Ezee-On, Don Park, Diamond and Beco to maintain their productivity and profitability. The productivity and profitability of the portfolio companies may be limited by their ability to employ, train and retain the skilled personnel necessary to meet their respective requirements. None of RJV, Stylus, Ezee-On, Don Park Diamond or Beco can be certain that they will be able to maintain the adequate skilled labour force necessary to operate efficiently and to support their growth strategies. As well, none of RJV, Stylus, Ezee-On, Don Park, Diamond or Beco can be certain that their labour expenses will not increase as a result of a shortage in the supply of these skilled personnel. Labour shortages or increased labour costs could impair the ability of RJV, Stylus, Ezee-On, Don Park, Diamond or Beco to maintain or grow their respective portfolio companies.

Currently the labour market is very tight in Western Canada and, accordingly, the challenge of attracting and retaining suitable personnel is, among the portfolio companies, greatest for RJV and Diamond.

In addition, Stylus is currently negotiating an initial collective agreement with a newly established collective bargaining unit. Failure to negotiate this collective bargaining agreement may result in work stoppages at Stylus. If prolonged, such work stoppages may have a material adverse effect on Stylus' results of operations and financial condition.

Key Personnel

The success of the Fund depends on the skills, experience and effort of its senior management and the senior management of RJV, Ezee-On, Stylus, Don Park, Diamond and Beco. The loss of one or more members of those senior management teams could significantly weaken the performance of the Fund and of the affected operating portfolio companies.

Leverage and Restrictive Covenants

The Fund and certain of its portfolio companies have third party debt service obligations under the Credit Facility, which obligations will rank in priority to obligations under debt securities of the Fund's portfolio companies. In addition, these portfolio companies may borrow additional funds from other third parties, with the approval of the Administrator of the Fund. The degree to which the Fund's portfolio companies are leveraged could significantly affect the amount of income to be generated and, therefore, the funds available to the Fund. The consequences to the Fund and to the holders of the Units arising from borrowing activities of the Fund's portfolio companies include: (a) reduced ability to obtain additional financing for working capital; (b) dedication of cash flow from operations to the payment of the interest on such indebtedness thereby reducing funds available for payment to the Fund; and (C) exposure to the risk of increased interest rates. The ability of the Fund's portfolio companies to make scheduled payments of interest on, or to refinance, its indebtedness will depend on future cash flow, which is subject to the operations of their businesses, prevailing economic conditions, prevailing interest rate levels, and financial, competitive, business and other factors, many of which are beyond their control. These factors might inhibit refinancing of indebtedness on favourable terms, or at all.

The Credit Facility contains restrictive covenants that limit the discretion of the borrower's Management with respect to certain business matters and may, in certain circumstances, restrict the portfolio companies' ability to pay interest or make distributions on equity securities which could adversely impact cash distributions on the Units. These covenants will place restrictions on, among other things, the ability of the borrower to incur additional indebtedness, to create other security interests, to complete mergers, amalgamations and acquisitions, to undertake an unsolicited take-over bid utilizing the Credit Facility, make capital expenditures, to pay dividends or make certain other payments, investments, loans and guarantees, and to sell or otherwise dispose of assets. In addition, the Credit Facility includes covenants restricting a change of control of the borrower (excluding the effect of any sales of securities by Dale H. Laniuk or Lee-Lan Holdings Ltd.). The Credit Facility also contains financial covenants requiring the borrower to satisfy financial ratios and tests. A failure of the borrower to comply with its obligations under the Credit Facility could result in an event of default which, if not cured or waived, could permit the acceleration of the relevant indebtedness. The Credit Facility is secured by customary security for transactions of this type, including first ranking security over all present and future personal property of the borrower and a first ranking pledge of all present and future material portfolio companies of the borrower and an assignment of insurance. In addition, the Fund has provided a limited recourse guarantee secured by a first ranking pledge of all securities of the borrower held by the Fund. If the borrower is not able to meet its debt service obligations, it risks the loss of some or all of its assets to foreclosure or sale. There can be no assurance that, if the payment of the indebtedness under the Credit Facility were to be accelerated, the borrower's assets would be sufficient to repay in full that indebtedness.

The Credit Facility matures on November 27, 2006, with full repayment due at maturity. It is likely that certain of the Fund's subsidiaries will have to refinance their short-term debt on or prior to the date the Credit Facility matures. If the Credit Facility is replaced by new debt that has less favourable terms, or if the Fund's subsidiaries cannot refinance their debt, funds available for distribution to the Fund and cash distributions to Unitholders may be adversely impacted.

Tax Related Risks

The income of the Fund and its portfolio companies must be computed and will be taxed in accordance with Canadian tax laws, all of which may be changed in a manner that could adversely affect the amount of distributable cash. There can be no assurance that Canadian federal income tax laws respecting the treatment of mutual fund trusts will not be changed in a manner which adversely affects the holders of Units. If the Fund ceases to qualify as a "mutual fund trust" under the Income Tax Act (Canada), as amended, including the regulations promulgated thereunder (the "Tax Act"), the income tax considerations integral to the proper valuation of the Units would be materially and adversely different in certain respects. Further, interest on the debt securities of the Fund's portfolio companies accrues at the Fund level for income tax purposes whether or not actually paid. The declaration of trust by which the Fund is constituted provides that an amount equal to the taxable income of the Fund will be distributed each year to Unitholders in order to eliminate the Fund's taxable income and provides that additional Units may be distributed to Unitholders in lieu of cash distributions. In such event, Unitholders will generally be required to include an amount equal to the fair market value of those Units in their taxable income, in circumstances when they do not directly receive a cash distribution.

If the Fund ceases to qualify as a "mutual fund trust" under the Tax Act, the Units will cease to be qualified investments for trusts governed by registered retirement savings plans, registered retirement income funds and deferred profit sharing plans and registered education savings plans, as defined in the Tax Act ("Exempt Plans"). The Fund will endeavor to ensure that the Units continue to be qualified investments for Exempt Plans. The Tax Act imposes penalties for the acquisition or holding of non-qualified investments in such plans and there is no assurance that the conditions prescribed for such qualified investments will be adhered to at any particular time. Finally, if the Fund ceases to qualify as mutual fund trust for purposes of the Tax Act, the Fund may be required to pay tax under Part XII.2 of the Tax Act. The payment of Part XII.2 tax by the Fund will affect the amount of cash available for distribution by the Fund and may have adverse consequences for Unitholders. One of the ways in which the Fund could cease to qualify as a "mutual fund trust" would be if non-residents of Canada (within the meaning of the Tax Act) were to become the beneficial owners of a majority of the Trust Units. There can be no assurance that income tax laws and the treatment of mutual fund trusts will not be changed in a manner which may adversely affect Unitholders. Management believes that non-residents of Canada own fewer than ten percent of the Units and fewer than ten percent of the Units and Exchangeable Shares (assuming exchange for Units of all Exchangeable Shares). The Fund confirms the level of non-resident ownership of its Units with its transfer agent from time to time. The Fund does not actively monitor the level of non-resident ownership of its Units, but will implement an active process to monitor non-residents' ownership of its Units should it become aware that non-residents of Canada own greater than 30% of the Units or greater than 30% of the Units and Exchangeable Shares (assuming exchange for Units of all Exchangeable Shares).

EXCHANGEABLE SHARES

The Series 1 and Series 2 Exchangeable Shares can only be exchanged for Units of the Fund. The holders of Series 1 and Series 2 Exchangeable Shares are not entitled to cash distributions but are entitled to an economic equivalent of a cash distribution through an adjustment in the number of exchangeable shares. Each month an exchange ratio adjustment is determined to reflect the economic equivalent of a cash distribution. During the period, holders of Series 1 Exchangeable Shares exchanged 3,760 originally issued exchangeable shares multiplied by the weighted average exchange ratio of 1.0638 for 4,000 Units. The terms of the Series 1 and Series 2 Exchangeable Shares are summarized in the annual information form of the Fund.

RELATED PARTY TRANSACTIONS

During 2005, the Fund incurred costs related to management of the Fund totaling $749 (2004 - $214). These costs were incurred pursuant to the Management Services Agreement between the Fund and its external manager, TerraVest Management Partnership ("TMP"), which is controlled by significant Unitholders of the Fund, who are also Trustees of the Fund. During the year, TMP became entitled to receive an incentive payment pursuant to the terms of the contract. The incentive payment for the year totaled $314 (see Note 14 of the Fund's consolidated annual financial statements for the year ended December 31, 2005) and is included in contributed surplus (2004 - Nil). The Fund also paid $276 for expenses incurred by TMP in 2005 (2004 - $60). The amounts were recorded at the exchange amount under normal business conditions.

During 2005, the Fund, through Stylus Limited Partnership, paid rent of $460 (2004 - Nil) for the Stylus manufacturing facility, to a company owned by the retractable non-controlling interest holders of Stylus Limited Partnership. The amount paid is pursuant to a lease agreement that expires on July 9, 2009 and is based upon fair market value for a similar facility.

During 2005, the Fund, through Don Park (USA) Limited Partnership, paid rent of $278 (2004 - Nil) for operating facilities to a company owned by the retractable non-controlling interest holders of Don Park (USA) Limited Partnership. The amount paid is pursuant to a lease agreement that expires on April 30, 2009, and is based upon fair market value for a similar facility.

During the 2005, the Fund, through Don Park Limited Partnership, paid rent of $1,384 (2004 - Nil) for several operating facilities to companies owned by the retractable non-controlling interest holders of Don Park Limited Partnership. The amounts paid are pursuant to lease agreements that expire on various dates from November 30, 2008, to November 14, 2014, and are based on fair market values for similar facilities.

OUTLOOK

The outlook for the Fund is positive.

The oil and natural gas sector continues to be strong based on underlying demand for the commodities. While natural gas prices have retreated from their recent highs, they are expected to continue to remain high relative to long-term historical prices. Futures contracts for natural gas on the NYMEX exchange for December 2006 delivery average US$9.73 As a result of high oil and natural gas demand and prices, exploration and production activity in the oil and natural gas sector is expected to remain strong. The latest forecast issued by PSAC estimates in excess of 25,000 wells being completed in 2006 with an emphasis on natural gas.

The strength in the energy sector is driving strong performance for the fund's largest business, RJV. The business continues to respond to customer requests for new equipment for installation at new natural gas wells. Management expects continued strong performance as the business faces a backlog of ordered equipment in 2006 that is larger than at any time in the business's history.

Diamond also benefits from the continued high activity levels in the oil and gas sectors. Utilization and pricing are robust, compared to historical levels, and the outlook for activity in the areas serviced by the business remains very strong. Management is exploring ways to grow the business, including adding equipment to Diamond's fleet to service the increased demand in Saskatchewan and Alberta.

Ezee-On's performance is expected to remain flat year-over-year after discounting the bulk sale of inventory in Australia in 2005. Sales in Canada are expected to be slow as current market conditions are weak due to a poor harvest in the fall of 2005 and low commodity prices. Management expects to continue to focus its efforts in the United States and internationally.

Sales of imported leather sofas and chairs continue to be strong for Stylus. Management expects this to continue throughout 2006. The opening of the show room in Las Vegas, Nevada and attendance at the first Las Vegas Market allowed Stylus to increase its exposure to a large dealer base in the United States. As a result, Management expects improved sales in the United States market across all product lines. Management at Stylus is continuing negotiations with the CAW Union for a collective bargaining agreement. At present it is not clear what impact, if any, such an agreement will have on the operations of Stylus.

Don Park is expected to improve its performance as Management has made several key strategic decisions in order to improve operational efficiencies. While the market is expected to remain extremely competitive from a pricing standpoint, Don Park is focusing its efforts on becoming the lowest cost manufacturer in the industry while continuing to maintain its level of sales.

Beco is expecting strong demand for its products, based on order projections provided by its key customers. The business continues to add value to its customer base by designing innovative products and sourcing across a vast international network. Management continues to focus on ways to grow the business, including adding additional product lines to existing accounts and expanding its base of customers.

ACCOUNTING POLICIES

The Fund prepares its financial statements in accordance with Canadian GAAP. The Fund's accounting policies are disclosed in Note 4 of the audited consolidated financial statements for the period ended December 31, 2005.

The consolidated financial statements of the Fund for the year ended December 31, 2005, include the operations of RJV , Ezee-On and Stylus for the year ended December 31, 2005, Don Park for the fiscal period April 1, 2005 to December 31, 2005, Diamond for the fiscal period October 3, 2005 to December 31, 2005 and Beco for the period December 5, 2005 to December 31, 2005. The comparative numbers in the Fund's consolidated financial statements include the operations of RJV and Ezee-On for the period July 9, 2004 and the operations of Stylus for the period December 17, 2004 to December 31, 2004.

ACCOUNTING POLICY CHANGES

Variable Interest Entities

The Fund has adopted the Canadian Institute of Chartered Accountants' (CICA) Accounting Guideline 15 (AcG-15) on the consolidation of variable interest entities, which is effective for annual and interim periods beginning on or after November 1, 2004. Variable interest entities refer to those entities that are subject to control on a basis other than ownership of voting interests. AcG-15 provides guidance for identifying variable interest entities, and criteria for determining consolidation. The Fund has determined that there is no impact on the financial statements resulting from the adoption of AcG-15.

Financial Instruments - disclosure and presentation

Effective January 1, 2005, the Fund adopted the amended recommendations of CICA Handbook Section 3860, Financial Instruments - Disclosure and Presentation effective for fiscal years beginning on or after November 1, 2004. Section 3860 requires that certain obligations that may be settled at the issuer's option in cash or equivalent value by a variable number of the issuer's own equity instruments be presented as a liability. The Fund has determined that there is no impact on the financial statements resulting from the adoption of the amendments to Section 3860.

Trust Unit Incentive Compensation Plan

The Fund has established a Trust Unit Plan (the "Plan") for independent trustees and key management employees of the Administrator of the Fund. Compensation expense associated with the Plan is granted in the form of Restricted Trust Units ("RTUs") and Performance Trust Units ("PTUs") and is determined based on the intrinsic value of the RTUs and PTUs at each period end. The intrinsic valuation method is used, as participants of the Plan are entitled to a cash payment on a fixed vesting date. This valuation incorporates the period-end Unit price, the current monthly distribution, the number of RTUs and PTUs at each period end and certain Management estimates. As a result, large fluctuations, even recoveries, in compensation expense may occur due to changes in the underlying Unit price. In addition, compensation expense is deferred and recognized in earnings over the vesting period of the Plan with a corresponding increase or decrease in liabilities. Classification between accrued liabilities and other long-term liabilities is dependent on the expected payout date.

The Fund has not incorporated an estimated forfeiture rate for the RTUs and PTUs that will not vest, rather, the Fund accounts for actual forfeitures as they occur.

IMPACT OF NEW ACCOUNTING STANDARDS

Financial Instruments - recognition and measurement

In January 2005, the CICA released new Handbook Section 3855, Financial Instruments - Recognition and Measurement, effective for annual and interim periods beginning on or after October 1, 2006. This new section prescribes when a financial instrument is to be recognized on the balance sheet and at what amount, sometimes using fair value, at other times using cost-based measures. It also specifies how financial instrument gains and losses are to be presented, and defines financial instruments to include accounts receivable and payable, loans, investments in debt and equity securities and derivative contracts. Management has not yet determined the impact of the adoption of this standard on our results from operations or financial position.

Comprehensive Income and Equity

In January 2005, CICA released new Handbook Section 1530, Comprehensive Income, and Section 3251, Equity, effective for annual and interim periods beginning on or after October 1, 2006. Section 1530 establishes standards for reporting and display of comprehensive income. It defines other comprehensive income to include revenues, expenses, gains and losses that, in accordance with primary sources of generally accepted accounting principles, are recognized in comprehensive income, but excluded from net income. The Section does not address issues of recognition or measurement for comprehensive income and its components. Section 3251 establishes standards for the presentation of equity and changes in equity during the reporting period. The requirements in this Section are in addition to Section 1530 and recommends that an enterprise should present separately the following components of equity: retained earnings; accumulated other comprehensive income; contributed surplus; share capital; and reserves. Management has not yet determined the impact of the adoption of this standard on the presentation of the results from operations or financial position.

CRITICAL ACCOUNTING ESTIMATES

The Fund's audited consolidated financial statements include estimates and assumptions made by Management relating to the results of operations, financial condition, contingencies, commitments and related disclosures. Actual results may vary from these estimates. The following are, in the opinion of Management, the Fund's most critical accounting estimates.

Inventory valuation requires the use of estimates to determine obsolescence and to ensure that the cost of inventory is not in excess of net realizable value.

Capital assets amortization requires estimates by Management as to the estimated useful life of the assets, the residual value at the end of the useful life, and the appropriate amortization rates. Effective October 1, 2005, based on experience with its portfolio companies, Management changed its estimate with respect to amortization of property, plant and equipment from a straight line basis to a declining balance basis. The change was applied prospectively. Amortization for the year was $2,874 and would have been $3,006 under the straight-line basis.

Goodwill impairment incorporates, at a minimum, an annual assessment of the value of the Fund's goodwill by applying a fair value based test to each segment of goodwill. Each fair value test may incorporate estimates such as normalized earnings, future earnings, price earnings multiples, future cash flows, discount rates, and terminal values. Goodwill arose on the Fund's acquisitions of Laniuk, Stylus, Don Park, Diamond and Beco. Any impairment of goodwill would reduce net earnings. Management conducts an annual assessment of goodwill in the fourth quarter of each fiscal year.

Intangible asset impairment incorporates, at a minimum, an annual assessment of the value of the Fund's intangible assets by applying a fair value based test to each segment of intangible asset. Each fair value test may incorporate estimates such as normalized earnings, future earnings, price earnings multiples, future cash flows, discount rates, and terminal values. The intangible assets arose on the Fund's acquisition of Laniuk, Stylus, Don Park, Diamond and Beco. Any impairment of intangible assets would reduce net earnings. Management conducts an annual assessment of intangible assets in the fourth quarter of each fiscal year.

Warranty costs require estimates by Management as to the warranty expense expected to be incurred. An estimate of future warranty costs is made annually based on historical results and any change is charged to income in the period.

Income tax provisions, including current and future income tax assets and liabilities, may require estimates and interpretations of federal and provincial income tax rules and regulations, and judgments as to their interpretation and application to the Fund's specific situation. Current income taxes are not provided by the Fund, as the policy of the Fund is to distribute all taxable income to Unitholders. Any changes in future income tax assets and liabilities are charged to income in the period.

Accounts receivable collectibility may require an assessment and estimation of the creditworthiness of customers, the timing of collection, and the amounts that will be received. An allowance is provided against any amount estimated to be uncollectible, and reflected as a bad debt expense.

Valuation of acquired assets and liabilities on the acquisition date requires the use of estimates to determine the purchase price allocation. Estimates are made as to the valuations of capital assets, intangible assets and goodwill as well as to the fair value of assets acquired. In certain circumstances such as the valuation of intangible assets and property, plant and equipment, Management also relies on independent third party estimates.

FINANCIAL INSTRUMENTS

The Fund's financial instruments consist primarily of cash, accounts receivable, amounts payable under the operating loan, accounts payable and accrued liabilities, derivative instruments, distributions payable, term debt and capital lease obligations.

The carrying value of cash, accounts receivable, amounts payable under the operating loan, accounts payable and accrued liabilities, derivative instruments, and distributions payable, term debt and capital lease obligations approximate their fair values due to their immediate or short-term maturity.

The Fund is exposed to interest rate risk arising from fluctuations in interest rates on its amounts payable under the operating loan and the term loan.

The Fund is subject to foreign exchange risk for sales and purchases denominated in foreign currencies. Foreign currency risk arises from the fluctuation of foreign exchange rates and the degree of volatility of these rates relative to the Canadian dollar. The Fund uses the temporal method for translation of foreign currencies. Monetary assets and liabilities denominated in foreign currencies are translated to Canadian dollars at exchange rates in effect at the balance sheet date. Non-monetary assets and liabilities are translated at rates of exchange at each transaction date. Revenues and expenses are translated at the average exchange rate for the period. Gains and losses resulting from translation are credited or charged to income.

The Fund is exposed to credit risk. Credit risk arises from the potential that a counter party will fail to perform its obligations. The Fund's credit risk is minimized by selling its products and services to a broad range of customers, many of which maintain investment grade credit ratings. The Fund maintains allowances for potential bad debts on its accounts receivable and any such losses to date have been within Management's expectations.

2005 INCOME TAX INFORMATION

The following table outlines the breakdown of cash distributions per unit declared by TerraVest Income Fund for the year ended December 31, 2005 for Canadian Income Tax purposes.



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Record Date Payment Date Total Distribution Taxable other
paid Per Unit income/Unit
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January 31 February 15 $ 0.09667 $ 0.09667
February 28 March 15 0.09667 0.09667
March 31 April 15 0.09667 0.09667
April 29 May 16 0.10667 0.10667
May 31 June 15 0.10667 0.10667
June 30 July 15 0.10667 0.10667
July 29 August 15 0.10667 0.10667
August 31 September 15 0.10667 0.10667
September 30 October 17 0.10667 0.10667
October 31 November 15 0.11083 0.11083
November 30 December 15 0.11083 0.11083
December 30 January 16 0.11500 0.11500
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Total per Unit $ 1.26669 $ 1.26669
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DISCLOSURE CONTROLS

The Company's Chief Executive Officer and Chief Financial Officer are responsible for establishing and maintaining the Fund's disclosure controls. The Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Company's disclosure controls and procedures as at December 31, 2005, have concluded that the Fund's disclosure controls and procedures are adequate and effective to ensure that material information relating to the Fund and its portfolio companies would have been known to them.

Additional information concerning the Fund, including its annual information form, can be found at www.sedar.com.

Contact Information