TERRAVEST INCOME FUND
TSX : TI.UN

TERRAVEST INCOME FUND

August 14, 2006 09:21 ET

Terravest Income Fund Releases 2006 Q2 Financial Results

VEGREVILLE, ALBERTA--(CCNMatthews - Aug. 14, 2006) - TerraVest Income Fund (TSX:TI.UN) today released its financial results for the 2006 second quarter.

The Fund's highlights for the 2006 second quarter were:

- Per unit earnings of $0.22, up from $0.16 for the 2005 second quarter;

- Distributable Cash of $5.3 million, up from $3.5 million in 2005 second quarter; and

- Unitholder distributions of $5.4 million ($0.35 per Unit), up from $3.3 million ($0.32) in the 2005 second quarter period.

- Issued 2.95 million Units at $11.60 per Unit, raising net proceeds of $32.1 million after costs and used to reduce operating indebtedness

For the 2006 second quarter, the Fund reported revenue of $63.8 million and net earnings of $3.3 million or $0.22 per Unit. For the 2005 second quarter, TerraVest reported revenue of $49.0 million and net earnings of $1.6 million or $0.16 per Unit. The 2005 second quarter does not include results of either Diamond or Beco, which were acquired by the Fund subsequent to the completion of the period.

For the six-month period ended June 30, 2006, the Fund reported revenue of $131.1 million and net earnings of $6.1 million or $0.43 per Unit. For the comparable 2005 six-month period, TerraVest reported revenue of $80.9 million and net earnings of $4.5 million or $0.44 per Unit.

The payout ratio, which is the percentage of distributable cash paid as distributions to Unitholders, increased to 102% for the 2006 second quarter, compared with 93% for the 2005 second quarter. For the six-month period ended June 30, 2006, the payout ratio increased to 92%, compared with 65% for the 2005 six-month period. (Distributable cash is not a defined term under Canadian generally accepted accounting principles and does not have a standard meaning. The MD&A, which is included in this release, includes a discussion of the meaning of Distributable Cash.)

The increase in the payout ratio resulted from several factors, including the issuance of additional Units by the Fund. In July 2005, the Fund issued 2,550,000 new Units and in April 2006, the Fund issued 2,950,000 new Units. Additionally, two of the fund's six businesses performed below management expectations. Strong results in the Fund's other businesses did not fully offset the shortfall. Higher maintenance capital expenditures, as provided for in the Fund's 2006 budget, contributed to the increased payout ratio during the 2006 second quarter.

Highlights from the Fund's 2006 second quarter and its 2006 six-month reporting period are as follows:




thousands of dollars Three Months ended Six Months ended
June 30 June 30
2006 2005 Change 2006 2005 Change

Revenues
RJV 15,829 13,098 35,058 33,024
Stylus 8,598 9,336 17,818 18,171
Don Park 22,252 21,683 41,171 21,683
Diamond 5,156 - 13,261 -
Beco 9,065 - 17,947 -
Ezee-On 2,857 4,844 5,836 8,059
Total revenues 63,757 48,961 30% 131,091 80,937 62%

Net earnings for the
period 3,319 1,646 102% 6,061 4,524 34%
Per Unit 0.22 0.16 0.43 0.44

Cash flow from operations
before working capital
changes 6,099 4,495 36% 12,904 10,762 20%
Less: Maintenance capital
expenditures (599) (931) (1,665) (1,197)
Less: Retractable non-
controlling interest (173) (51) (472) 54

Distributable cash 5,327 3,513 52% 10,767 9,619 12%
Per Unit 0.35 0.34 0.77 0.94
Distributions declared 5,436 3,282 66% 9,854 6,254 58%
Per Unit 0.35 0.32 0.69 0.61
Payout ratio (1) 102% 93% 92% 65%


"The Fund's results during the 2006 second quarter benefited from continuing strong business conditions in the energy sector, with both RJV and Diamond providing excellent performances," said Dale Laniuk, President and Chief Executive Officer. "These were offset by Beco and Don Park, which both produced results that were below our forecasts. However, the management teams of these two portfolio businesses are responding with a number of actions that have reduced costs and improved efficiencies, and will improve their performance in subsequent periods.

"Despite challenges in some of the portfolio businesses, Fund management believes, based on the best information available, that the current level of distributions is sustainable."

As of August 14, 2006, there are 15,754,490 Units issued and outstanding and 2,897,577 Exchangeable Shares outstanding. The Exchangeable Shares are not listed on an exchange, but are exchangeable at the option of the holder for Units or are callable by the Fund at any time.

At the request of the Fund, Mr. Laniuk has agreed to exchange 900,000 Exchangeable Shares for Units on or before August 31, 2006. Mr. Laniuk indicated that he has no intention of disposing these Units after the 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.terravestincomefund.com.



Date: Monday, August 14, 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 (Pass code: 628168). 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 businesses:

- 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.

- Don Park is one of Canada's largest manufacturers and suppliers of heating, ventilation and air conditioning (HVAC) products.

- Diamond 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 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 period ended June 30, 2006

Dated: August 14, 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, distributions, 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 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 portfolio businesses. 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 and the markets in which they compete are considered in setting the business plan for the Fund, forecasting the Fund's expected financial results and ability to pay distributions, 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 markets for household materials and household goods) will remain stable. It is also assumed that the Fund is able to finance acquisitions necessary for its growth strategy and that current Canadian income tax regime with respect to income trusts will not change. Should any of these factors or assumptions vary, actual results may differ materially from the forward-looking statements.

(NOTE: numbers 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.

The Fund was created in June 2004 to provide a means whereby investors could acquire an interest in strong vibrant Canadian businesses that are capable of producing attractive investment returns to the owners of the Fund ("Unitholders").

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, consisting of RJV Gas Field Services ("RJV") and Ezee-On Manufacturing ("Ezee-On"). Subsequently the Fund acquired four more operating divisions: Stylus Made to Order Sofas ("Stylus"); Don Park and Don Park (USA) (collectively "Don Park"); Diamond Energy Services ("Diamond"); and Beco Industries ("Beco"). RJV, Ezee-on, Stylus, Don Park, Diamond and Beco are collectively referred to as the portfolio businesses.

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 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 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 and sales in Canada and the United States.

Overall Strategies of the Fund

Acquisitions

The Fund is focused on acquiring and managing diverse businesses which operate independently without reliance on synergistic acquisition assumptions. Growth in the Fund's cash flow is intended to take place both through long-term organic growth of the portfolio businesses and through investments in other businesses which fit the acquisition criteria of the Fund.

Part of the acquisition strategy is to ensure that the senior management of each acquired business retains an interest in the operating business after the acquisition in order to create an incentive to increase the overall value of that operating business.

Further, the Fund believes that the diversity of the various portfolio businesses substantially enhances the stability of the Fund's overall distributable cash generation capabilities. Diversification minimizes the overall effect on the Fund of changes in market circumstances in any one of the Fund's businesses, thus facilitating the Fund's continuing to make consistent monthly distributions to Unitholders.

Cash Distributions

In negotiating its acquisitions, the Fund endeavours to ensure that Unitholders receive priority returns from the distributable cash of the businesses. In four of the investments, Stylus, Don Park, Diamond and Beco, the Fund is entitled to preferred returns of annual distributable cash from the limited partnerships (the "Limited Partnerships") under which these businesses are operated. Each year, this preference entitles the Fund to receive all distributions of cash by these Limited Partnerships up to pre-established thresholds, 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 Limited Partnerships, the retractable non-controlling interest holders receive all distributions of cash from that Limited Partnership to a second higher pre-determined threshold. Once both of the thresholds are achieved by one of these Limited Partnerships, the distributions of cash are allocated on a pre-determined basis in relation to the ownership interests.

Acquisition Criteria

Generally, the Fund intends to acquire 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 the Fund's distributable cash per Unit.

The Fund 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-traded 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 acquirers of private businesses.

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 acquisitions. TerraVest Industries Inc., the Fund's Administrator, does provide additional managerial support through its experience in strategy development, assistance with planning and analysis, industry contacts, and focus on operational and financial disciplines.

To further diversify its sources of cash flow, the Fund seeks to invest in businesses that operate in diverse industries.

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

ACQUISITIONS AND CAPITALIZATION OF THE FUND

2004

- In July 2004, the Fund issued 2,830,000 Units at a price of $8.15 per Unit. The aggregate proceeds from the offering were $23,065. On July 9, 2004, the Fund acquired the business operations of Laniuk, which comprised the operating divisions of RJV and Ezee-On. 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. The Fund then issued Units to the former shareholders of Laniuk to satisfy the note payable of $33,743 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.

- In late 2004, the Fund issued 3,277,500 Units at a price of $10.60 per Unit for aggregate proceeds of $34,741. On December 17, 2004, the Fund acquired an 80% interest in the assets and shares of Stylus Furniture Ltd. for $21,816 plus costs of $586 for a total acquisition price of $22,402. 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.

2005

- On April 1, 2005, the Fund acquired an 80% interest in the assets of Don Park, Inc. and Don Park (USA), Inc. for $30,157 plus transaction costs of $1,000 for a total acquisition price of $31,157. The acquisition was funded by existing credit facilities.

- In July 2005, the Fund issued 2,550,000 Units at $13.65 per Unit for gross proceeds of $35,063. Costs related to this offering were $2,046. The Fund used the net proceeds to reduce the debt incurred on the acquisition of Don Park.

- On October 3, 2005, the Fund acquired an 87.1% interest in the assets of Diamond Energy Services, Inc. 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. for $33,600 plus acquisition costs of $1,373. The acquisition was funded by existing credit facilities.

2006

- In April 2006, the Fund issued 2,950,000 Units, at a price of $11.60 per Unit. The total proceeds from the offering were $34,220. Costs related to this offering were $2,072. The net proceeds of $32,148 were used to reduce the debt incurred to acquire Diamond and Beco.

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 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 as cash flow from operations before changes in non-cash working capital, less capital expenditures related to maintenance of the portfolio businesses' 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 unaudited consolidated statement of cash flows as a measure of liquidity. Further, the Fund's method of calculating distributable cash may not be comparable to measures used by other entities.

In the view of Management, the Fund has taken a conservative approach to differentiating maintenance capital expenditures (which are treated as a deduction in determining distributable cash) from capital expenditures for growth or expansion of the businesses (which are not treated as a deduction in determining distributable cash). In order to be classified as a capital expenditure for growth or expansion, the capital expenditure must be for a new product line, a new division or a facet of the business that will create a new stream of revenue that did not previously exist in the organization. All other investments in capital assets are considered to be for the maintenance of existing lines of business, whether or not they yield significant cost or production efficiencies. The Fund expects the costs of acquiring capital assets for growth purposes will be fully recovered out of the cash flows generated by the new or expanded lines of business, and therefore are not deducted in determining distributable cash.

The Fund receives indirect payments of cash from the portfolio businesses and from this cash the Fund pays distributions to the Unitholders, 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 businesses experience seasonality and as a result, there are timing differences in the generation of distributable cash in individual months. It has been the Fund's experience that distributable cash generated by the portfolio businesses will exceed cash distributed to the Fund in some months and that the Fund will also have months in which cash distributed will exceed distributable cash generated.

Distributable cash generated for the three months ended June 30, 2006 was $5,327 as compared to $3,513 in the comparable period ended June 30, 2005. The Fund declared distributions to its Unitholders of $5,436 for the three months ended June 30, 2006 as compared to $3,282 for the comparable period ended June 30, 2005. The increase in distributable cash generated can be attributed to the inclusion of acquisitions which were made after the second quarter of 2005 as well as the strong financial performance by RJV.

On a year-to-date basis, distributable cash generated for the six-months ended June 30, 2006 was $10,767 as compared to $9,619 in the comparable period ended June 30, 2005. The Fund declared distributions to its Unitholders of $9,854 for the six-months ended June 30, 2006 as compared to $6,254 for the six-months ended June 30, 2005. The six-month period ended June 30, 2005 included Don Park from April 1 2005 to June 30, 2005 and did not include Diamond and Beco, as these businesses were acquired on October 3, 2005 and December 5, 2005, respectively.

The payout ratio, being the ratio of distributions paid over distributable cash generated, for the three months ended June 30, 2006, has increased to 102% as compared to 93% in the comparative period. For the six-month period ended June 30, 2006, the payout ratio increased to 92% as compared to 65% in the comparative six-month period. The increase is the result of several factors including the issuance of additional Units by the Fund. In July 2005, the Fund issued 2,550,000 new Units and in April 2006, the Fund issued 2,950,000 new Units, causing total monthly distributions to rise significantly. In addition, two of the portfolio businesses had results that were below Management's expectations, and were not fully offset by the strong performance of the other portfolio businesses and, in particular, RJV. Also, maintenance capital expenditures increased significantly in the three and six-month periods ended June 30, 2006. Maintenance capital expenditures were up $468 for the six-month period ended June 30, 2006, when compared to the same period in the previous year.

The weighted average Units outstanding during the six-month period ended June 30, 2006, was 15,073,721 as compared to 10,253,753 in the comparable period ended June 30, 2005.


------------------------------------------------------------
------------------------------------------------------------
Three months ended Six-months ended
June 30 June 30
------------------------------------------------------------
2006 2005 2006 2005
------------------------------------------------------------
Cash flow from
operations before
non-cash
working capital
changes $ 6,099 $ 4,495 $ 12,904 $10,762
Less: maintenance
capital
expenditures (599) (931) (1,665) (1,197)
Less: retractable
non-controlling
interest (173) (51) (472) 54
------------------------------------------------------------
Distributable cash
generated $ 5,327 $ 3,513 $ 10,767 $ 9,619
------------------------------------------------------------
------------------------------------------------------------
Distributions
(excluding
exchangeable
shares)
Distributions
declared $ 5,436 $ 3,282 $ 9,854 $ 6,254
Distributable cash
per Unit $ 0.35 0.34 $ 0.77 0.94
Distributions
declared per Unit $ 0.35 0.32 $ 0.69 0.61
Payout ratio 102% 93% 92% 65%
Proforma
distributions
(including
exchangeable
shares)
Proforma
distributions
declared $ 6,370 4,259 $ 11,953 8,117
Proforma
distributable cash
per Unit $ 0.29 0.26 $ 0.61 0.72
Distributions
declared per Unit $ 0.35 0.32 $ 0.69 0.61
Proforma payout
ratio 120% 121% 111% 84%
------------------------------------------------------------
------------------------------------------------------------


The above calculations under "Proforma 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 "Proforma distributions (including exchangeable shares)" do not reflect distributions actually paid by the Fund, but, rather, reflect a hypothetical scenario. The Fund believes that presenting these amounts in this fashion provides useful supplemental information which reflects on the performance of the Fund and provides information that would be relevant should all of the Exchangeable Shares be exchanged for Units.

While business conditions remain challenging for some of the Fund's businesses, Management believes, based on information currently available, that the proforma payout ratio for fiscal 2006 will be lower than the proforma payout ratio for the six months ended June 30, 2006.

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 dated March 29, 2006.

Details of the cash distributions declared by the Fund for the six months ended June 30, 2006 are as follows:



----------------------------------------------------------------
----------------------------------------------------------------
Period Record Date Payment Date Per Unit Total
----------------------------------------------------------------
January January 31 February 15 $ 0.115 $ 1,472
February February 28 March 15 0.115 1,473
March March 31 April 17 0.115 1,473
April April 28 May 15 0.115 1,812
May May 31 June 15 0.115 1,812
June June 30 July 17 0.115 1,812
----------------------------------------------------------------
Total $ 0.690 $ 9,854
----------------------------------------------------------------
----------------------------------------------------------------


As a result of the Fund's acquisitions and financial performance, the Fund has increased the rate of its annual distribution by a total of 30% since commencing operations in July 2004. The current annual distribution per Unit is $1.38.

A Brief Look Back at 2005

The Fund has grown significantly since its inception in July 2004, at which time the transaction with Laniuk occurred. Laniuk's largest business, RJV, is today TerraVest's largest portfolio business in terms of distributable cash generated. 2005 marked 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. Ezee-On, another Laniuk business, had sales of $15,272 in 2005. 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 acquisition strategy. In December 2004, the Fund added Stylus; Don Park was added in April 2005; Diamond was added in October 2005; and Beco followed in December 2005. On a combined basis, these acquisitions increased the Fund's 2005 sales by $117,393.

Long-term financial liabilities also increased in 2005 as the Fund executed its acquisition strategy. As a result, the Fund's debt facility was amended to accommodate growth. Today, debt requirements are primarily funded by a 364-day operating loan and a 364 day fixed term-loan. Long-term financial liabilities consist of capital lease obligations,retractable non-controlling interests in each of Stylus, Don Park, Diamond and Beco, and accrued long-term compensation.

Quarterly Information

The quarterly financial information presented below represents eight quarters of TerraVest's operating results from inception on July 9, 2004 to June 30, 2006:



-------------------------------------------------------------------
-------------------------------------------------------------------
2006 2006 2005 2005
Second First Fourth Third
Quarter Quarter Quarter Quarter
-------------------------------------------------------------------
Sales $ 63,757 $ 67,334 $ 63,743 $ 53,462
Net earnings $ 3,319 $ 2,742 $ 3,210 $ 2,357
Earnings per
Unit/Share - Basic $ 0.22 $ 0.21 $ 0.25 $ 0.19
- Diluted $ 0.22 $ 0.21 $ 0.25 $ 0.19
Distributable cash $ 5,327 $ 5,440 $ 5,632 $ 4,087
Distributable cash
per Unit $ 0.35 $ 0.42 $ 0.42 $ 0.32
Distributions declared
per Unit $ 0.35 $ 0.35 $ 0.34 $ 0.32
-------------------------------------------------------------------

July 9,
2005 2005 2004 2004 to
Second First Fourth Sept. 30,
Quarter Quarter Quarter 2004
-------------------------------------------------------------------
Sales $ 48,961 $ 31,976 $ 16,533 $ 9,260
Net earnings $ 1,646 $ 2,878 $ 665 $ 572
Earnings per
Unit/Share - Basic $ 0.16 $ 0.28 $ 0.09 $ 0.08
- Diluted $ 0.16 $ 0.28 $ 0.09 $ 0.08
Distributable cash $ 3,899 $ 6,269 $ 1,608 $ 1,682
Distributable cash
per Unit $ 0.38 $ 0.61 $ 0.22 $ 0.24
Distributions declared
per Unit $ 0.32 $ 0.29 $ 0.26 $ 0.24
-------------------------------------------------------------------
-------------------------------------------------------------------


Significant changes during each quarter were as follows:

- Operations in the second quarter of 2006 included the same six portfolio businesses as the first quarter of the year. Seasonality results in higher sales in the first quarter for RJV and Diamond. Beco's and Don Park's sales for the second quarter were lower than Management's expectations, and this further contributed to the net decrease in total sales from the first quarter to the second quarter.

- Sales increased in the first quarter of 2006 over the fourth quarter of 2005 due to the inclusion of Beco for the full three months, as compared to including Beco only from the date of acquisition on December 5, 2005 in the previous quarter.

- Sales increased in the fourth quarter of 2005 from the third quarter primarily due to the addition of Diamond and Beco, 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. 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, 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 and record sales for RJV. Net earnings in the first quarter of 2005 reflected the additional sales, and improved margins which reflected pricing taken in response to 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 cost of steel, a key input for both RJV and Ezee-On, dampened the net earnings performance. Net earnings were up 16% in the fourth quarter over the third.

The interim consolidated financial statements of the Fund for the six-months ended June 30, 2006 include the operations of the six portfolio businesses. Don Park, Diamond and Beco were acquired on April 1, 2005, October 3, 2005 and December 5, 2005, respectively. For the purposes of this Management's Discussion and Analysis, comparative figures include operations of the portfolio businesses owned by the Fund during the period January 1, 2005 to June 30, 2005. Portfolio businesses acquired by the Fund during 2005 are included only for the portions of the relevant periods in which they were owned by the Fund.



Sales Breakdown
----------------------------------------------------------------------
----------------------------------------------------------------------
Three months Three months Six-months Six-months
ended ended ended ended
June 30, 2006 June 30, 2005 June 30, 2006 June 30, 2005
----------------------------------------------------------------------
RJV $ 15,829 $ 13,098 $ 35,098 $ 33,024
Ezee-On 2,857 4,844 5,836 8,059
Stylus 8,598 9,336 17,818 18,171
Don Park 22,252 21,683 41,171 21,683
Diamond 5,156 - 13,261 -
Beco 9,065 - 17,947 -
----------------------------------------------------------------------
$ 63,757 $ 48,961 $ 131,091 $ 80,937
----------------------------------------------------------------------
----------------------------------------------------------------------


Operating Activities

RJV

The energy sector continued its robust performance during the second quarter of 2006, such that RJV's sales for the three months ended June 30, 2006 were $2,731 higher than the comparable quarter in 2005 and $2,034 higher during the six-month period than during the comparative period. The continued activity in the natural gas sector throughout the quarter resulted in strong demand for natural gas processing equipment as completed wells were put into production. There was continued pressure for natural gas separation equipment as producers remained sensitive to product availability. The business carefully managed its overhead and operating expenses, such that it was able to increase its earnings in the quarter by over $2,210, and $3,420, during the six-month period ended June 30, 2006, as compared to the same periods in 2005. The growth resulted in distributable cash from RJV that exceeded Management's expectations for the quarter and six-month period ended June 30, 2006.

Ezee-On

Ezee-On continues to face difficult economic times in the agricultural industry sector, but was able to complete the quarter with sales that were higher than had been forecasted due to a large increase in sales of one of its product offerings. In addition, the product sales mix for the period enabled the business to increase its gross margin over the comparative period. Sales in Canada were above expectations overall. Sales in the U.S. were slower than expected during the first half of the year. Management attributes a significant portion of the decrease in U.S. sales to the strengthening of the Canadian dollar. The business has faced challenges in the Australian market due to a widespread drought in the western part of the country. Ezee-On generated distributable cash during the quarter in line with Management's expectations.

Stylus

Stylus' sales during the quarter were less than expected due to a general slow-down in the retail sector of the Canadian economy. The business continued its marketing initiatives through its showrooms in Las Vegas and San Francisco and focused on expanding its geographic reach within the United States. During the period, Stylus carefully managed manufacturing and overhead expenses. The business finished the quarter at the profitability level that had been expected by Management. Accordingly, Stylus generated distributable cash during the quarter in line with Management's expectations.

Don Park

At $22,252, Don Park's second quarter sales were less than Management expected, but exceeded the sales of $21,683 in the same quarter of 2005. Sales in the Branch Stores division improved compared to the three months ended June 30, 2005. However, sales at the Branch Stores had a higher mix of equipment manufactured by third parties, which drove lower margins for the period. The sales in the Wholesale division were down in both the U.S. and Canadian distribution segments. The strengthening of the Canadian dollar has reduced the Wholesale division's ability to compete in the U.S. markets. The Canadian wholesale market has been slow so far this year. Weaker than expected new residential construction markets in Ontario, and delays in gaining market share through new initiatives in Atlantic Canada and Quebec have also impacted the Wholesale division's sales. Sales in the Commercial division were in line with the prior year's performance, but behind Management's expectations for the quarter. With the increase in total sales over the comparable quarter last year, and a change in the mix of products sold throughout the various divisions, the business achieved a gross margin greater than that of the same period last year, but below Management's expectation for the current period. Additionally, increased overhead costs, resulting in part from the restructuring of the business into strategic business units and related personnel costs, contributed to the reduced level of distributable cash generated for the business.

The business is maintaining its focus on lowering costs and improving its efficiency, as well as adding depth to its management team. A new chief executive officer is expected to join Don Park during 2006 to lead this revitalized management team and continue executing its current strategy of supplying heating and air conditioning products to both wholesale and commercial customers. Current chief executive officer, Stan Meek, will remain with Don Park and assume the position of Chairman.

Diamond

In the first quarter of 2006, Diamond capitalized on favourable weather conditions and strong demand for oilfield services which resulted in high utilization rates for its equipment. As a result, Diamond generated net income and distributable cash that was well in excess of Management's expectations. However, in the second quarter, spring break up, combined with a generally wet spring in Diamond's operating areas, resulted in lower than expected utilization rates for its rigs, and consequently, lower than expected distributable cash generated for the Fund. On a year-to-date basis, Diamond has achieved solid growth compared to the previous year in both its hourly rates and its utilization rates, and Management believes that this division performed very well for the second quarter despite the adverse impact of the weather. The business is operating with more rigs this year than in the past, and has contracted to have two new rigs built for delivery near the end of 2006 to meet the expected continuing demands of the oil industry. Diamond generated distributable cash during the six-month period ended June 30, 2006 that was in line with Management's expectations.

Beco

Beco's sales in the second quarter improved over the first quarter, but the total sales for the first half of the year were significantly less than expected. The business experienced delays in spring programs due in part to factors within the business's control and in part to changes at key customers. Delays in first quarter programs resulted in reduced demand for follow-on sales in the first and second quarters. Other delays by customers in ordering seasonal products resulted in fewer opportunities for follow-on orders. Beco took actions during the second quarter to reduce fixed costs. The impact of these benefits is expected to contribute to improved performance during the second half of 2006. Beco still faces challenges in meeting Management's sales expectations, but existing orders on hand and new product opportunities being presented to customers indicate that the second half of the year should be better than the first half. Beco generated less distributable cash during the quarter than Management expected.

Overall Fund Results

The Fund is presently comprised of six diverse businesses and intends to continue to acquire operating entities that fall within its investment criteria. Diversity is one of the strategic advantages of the Fund in that fluctuating operating results in any single portfolio business may be mitigated by operating results in one or more of the other portfolio businesses within the group. In addition, the structuring of the investments in Stylus, Don Park, Diamond and Beco provide the Fund with a priority return of cash, providing significant additional protection to the Fund's Unitholders.

On total sales of $63,757 in the three months ended June 30, 2006, the Fund achieved a gross profit of $17,503 (27%) and net earnings of $3,319. In the comparable period last year the Fund had sales of $48,961, a gross profit of $11,620 (24%), and net earnings $1,646. For the six-month period ended June 30, 2006, the Fund had total sales of $131,091, achieved a gross profit of $36,089 (28%) and net earnings of $6,061. In the comparable six-month period sales were $80,937, gross profit was $20,631 (25%) and net earnings were $4,524.

With the addition of Don Park, Diamond and Beco after the first quarter of 2005, a meaningful comparison of overhead expenses is somewhat difficult. Administration, selling and other sundry overhead expenses totaled $6,682 for the three months ended June 30, 2005, but in the quarter ended June 30, 2006 amounted to $10,834. Similarly, the total amortization, interest and retractable non-controlling interest total in the three months ended June 30, 2005 was $2,446, whereas this amount was $3,378 in the three months ended June 30, 2006.

The retractable non-controlling interest represents specified percentage interests in each of Stylus, Don Park, Diamond and Beco held by third parties. The amount recorded in the quarter of $173 represents the total allocation of income from the respective partnerships to their non-controlling interest holders during the quarter. In the six-month period ended June 30, 2006 the allocation to the retractable non-controlling interest holders was $472.

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 $704 for the three months ended June 30, 2006, represents the 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. For the six-month period ended June 30, 2006, the net earnings attributable to the non-controlling interest is $1,440.

Interest expense

The Fund's affiliates, TerraVest Industries Limited Partnership, Stylus, Don Park, Diamond and Beco as guarantors, and the Fund as covenantor, are parties 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 June 30, 2006. At June 30, 2006, the Fund had drawn $21,300 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 current three-month period was $1,011. In the three months ended June 30, 2005, total interest charged was $491. Interest charged in the six-month period ended June 30, 2006 was $2,272 as compared to $626 in the comparative six-month period. The overall increase in interest costs is the result of significant changes to the credit facilities in 2005, additional debt being carried as compared to the same periods in 2005, and increases to the prime lending rate during the period ended June 30, 2006.

Income taxes

The Fund's current and future income tax recovery has increased by $793 for the six-months ended June 30, 2006 due to a change in income tax rates enacted in the second quarter.

LIQUIDITY AND CAPITAL RESOURCES

Consolidated working capital at June 30, 2006 was $39,739 compared to $9,030 as at December 31, 2005. The working capital position has increased since December 31, 2005, due to the issuance of 2,950,000 Units of the Fund in April 2006, for net proceeds of $32,148, which were used to reduce the Fund's operating loan.

Short-term borrowings under the operating loan provide flexibility for managing seasonal fluctuations in working capital. 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; net worth; and working capital. As at June 30, 2006, the Fund met all of its financial covenants.

In Management's view, the Fund has sufficient resources available to meet its liquidity needs for the next twelve months. The Credit Facility is expected to be renewed prior to its expiry date, November 27, 2006.

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 June 30, 2006 consist of documentary letters of credit totaling $5,698 for the purchase of raw materials and standby letters of credit totaling $1,805.



COMMITMENTS

Contractual obligations consist of the following amounts:
-----------------------------------------------------------
-----------------------------------------------------------
Total 1 year 2-3 years 4-5 years
-----------------------------------------------------------
Operating leases $ 22,328 $ 6,127 $ 10,373 $ 5,828
Capital leases 176 45 90 41
Equipment purchase
commitments 1,027 1,027 - -
Documentary letters
of credit 5,698 5,698 - -
-----------------------------------------------------------

Total $ 29,229 $ 12,897 $ 10,463 $ 5,869
-----------------------------------------------------------
-----------------------------------------------------------


UNITS AND EXCHANGEABLE SHARES OUTSTANDING

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

The Declaration of Trust 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 at amounts related to market prices at the time, subject to a maximum of $50 in cash redemptions by the Fund in any particular month. This limitation may be waived at the discretion of the Trustees of the Fund. Redemptions in excess of this amount, assuming no waiving of the limitation, shall be paid by way of a distribution in specie of a pro rata number of notes or securities held by the Fund.

As at August 14, 2006, there were 15,754,490 Units issued and outstanding.

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

Exchangeable Shares - Series 1

The Exchangeable Shares - Series 1 ("Exchangeable Shares") are convertible at the option of the holder into Units at any time. In addition, the Fund may cause the holders of the Exchangeable Shares to convert their shares to Units upon 90 days written notice.

Exchangeable Shares - Series 2

The Exchangeable Shares - Series 2 were subordinated to both the Units and the Exchangeable Shares and were not exchangeable for Units until the subordination period ended. The subordination period expired on July 9, 2006 after certain conditions related to distribution levels and financial results of the Fund were met. As a result, the remaining Series 2 Exchangeable Shares were automatically converted to Exchangeable Shares.

The number of Units issuable upon conversion of the Exchangeable Shares is based on the exchange ratio in effect at the conversion date. The exchange ratio, which was originally one-to-one at the time the Fund acquired Laniuk, 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 giving effect to the June 30, 2006 distribution declared was 1.24238 to 1, which is effective July 17, 2006. The Exchangeable Shares can only be exchanged for Units of the Fund.

As at August 14, 2006, there were 2,897,577 Exchangeable Shares issued and outstanding (after the automatic exchange for Exchangeable Shares of all Series 2 Exchangeable Shares). At the request of the Fund, the chief executive officer of the Fund has agreed to exchange for Units 900,000 Exchangeable Shares in accordance with the terms thereof on or before August 31, 2006. As a result of this exchange, a portion of the Fund's investment in TerraVest Industries Inc. will change from an equity investment to a loan by the Fund to TerraVest Industries Inc., the interest on which is deductible for income tax purposes by TerraVest Industries Inc. and, therefore, reduces the tax paid by the Fund, on a consolidated basis.

The terms of the Exchangeable Shares are summarized in the Annual Information Form of the Fund dated March 29, 2006.

RISK FACTORS

A detailed description of operating and financial risks relating to the portfolio businesses is included in the management's discussion and analysis of the Fund for the year ended December 31, 2005 under "Risk Factors" and a detailed description of risks related to the Fund's growth strategy and risks relating to units is included in the Annual Information Form of the Fund dated March 29, 2006 under "Risk Factors". The management's discussion and analysis of the Fund for the year ended December 31, 2005 and the Annual Information Form of the Fund are available on the Internet at www.sedar.com.

RELATED PARTY TRANSACTIONS

During the quarter, the Fund incurred costs related to management of the Fund totaling $214 (2005 - $107). During the six-month period ended June 30, 2006, the management fees were $428 (2005 - $386). 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 quarter, TMP became entitled to receive an incentive payment, payable in Units, pursuant to the terms of the contract. The incentive payment for the quarter totaled $233 (2005 - $93) and for the six-month period ended June 30, 2006, totaled $411 (2005 - $93) and is included in contributed surplus. The Fund also paid $218 (2005 - $52) for expenses incurred by TMP during the quarter. In the six-month period ended June 30, 2006, the Fund paid expenses to TMP totaling $382 (2005 - $118).The amounts were recorded at the exchange amount under normal business conditions.

During the quarter, the Fund, through Stylus Limited Partnership, paid rent of $115 (2005 - $115) for the Stylus manufacturing facility, to a company owned by the retractable non-controlling interest holders of Stylus Limited Partnership. During the six-month period ended June 30, 2006, the rent paid was $230 (2005 - $230). The amount paid is pursuant to a lease agreement that expires on July 9, 2009 and is based upon fair market value rent for a similar facility. Stylus has entered into a new lease agreement for warehouse property owned by the retractable non-controlling interest holders of Stylus Limited Partnership. The new lease will be effective September 1, 2006. The amounts payable for the new lease are based upon fair market value rent for a similar facility.

During the quarter, the Fund, through Don Park (USA) Limited Partnership, paid rent of US$77 (2005 - US$77) for operating facilities to a company owned by the retractable non-controlling interest holders of Don Park (USA) Limited Partnership. During the six-month period ended June 30, 2006, the rent paid was US$154 (2005 - US$77). The amount paid is pursuant to a lease agreement that expires in April 2009, and is based upon fair market value rent for a similar facility.

During the quarter, the Fund, through Don Park Limited Partnership, paid rent of $461 (2005 - $461) for several operating facilities to companies owned by the retractable non-controlling interest holders of Don Park Limited Partnership. During the six-month period ended June 30, 2006 the rent paid was $922 (2005 - $461). The amounts paid are pursuant to lease agreements and are based on fair market value rents for similar facilities, and the leases expire on various dates between November 2008 and November 2014.

During the quarter, the Fund, through Beco Limited Partnership paid rent of $125 (2005 - Nil) for its operating facilities to a company owned by the retractable non-controlling interest holders of Beco Industries Limited Partnership. During the six-month period ended June 30, 2006, the rent paid was $250 (2005 - Nil). The amount paid is pursuant to a lease agreement with no fixed expiry date and is based on fair market value rents for similar facilities.

During the quarter, the Fund's subsidiary, Diamond Energy Services Limited Partnership, paid consulting fees of $14 (2005 - Nil) to a company owned by a director of Diamond Energy Services General Partner Ltd. which is a wholly-owned subsidiary of the Fund. During the six-month period the amount paid was $28 (2005 - NIL). The amount paid is pursuant to a consulting agreement with no specific expiry date. The amounts were recorded at the exchange amount under normal business conditions.

OUTLOOK

The outlook for the Fund continues to be positive.

The oil and natural gas sector continues to be strong. Despite recent weaknesses, long-term natural gas prices are expected to remain high relative to long-term historical prices. While natural gas prices averaged $6.87 in the quarter and $8.53 in the six-month period ended June 30, 2006, futures contracts for natural gas on NYMEX exchange for December 2006 delivery average US$9.73. Despite the decline in natural gas prices and recent announcements of cutbacks by several major producers, exploration and production activity in the oil and natural gas sector is expected to continue to be strong. The latest forecast issued by Petroleum Services Association of Canada estimates a decline in completed wells to just over 23,000 for 2006. The number of wells currently forecast is still well above long-term historical averages and the reduction has had no measurable impact on the operations of RJV. Diamond expects the reduced activity levels in the natural gas sector to drive its mix of business more in favor of oil well servicing. Despite this shift, Management expects overall results will be strong for the Diamond business for the remainder of 2006.

Ezee-On's performance is expected to remain flat year over year after discounting the bulk sale of inventory in Australia in 2005. In addition to its efforts in the domestic markets in Canada, management of Ezee-On will continue its sales initiatives in the United States and internationally.

The slow-down in the retail sector of the Canadian economy has affected Stylus' sales. The business has been striving to attract new customers to offset the sales decline with existing customers. The opening of the show room in Las Vegas, Nevada and attendance at the Las Vegas Market allowed Stylus to increase its exposure to a large dealer base in the United States. In addition, the business re-established a presence in San Francisco during the second quarter of this year. As a result, Management expects improved sales in the United States market across all product lines.

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 increasing efficiencies in its Branch Store, Wholesale and Commercial divisions. The business is striving to become Canada's lowest cost manufacturer in the industry while continuing to maintain its projected level of sales.

Beco's sales for the first half of the year were significantly below Management expectations, but the third and fourth quarters of 2006 are expected to be stronger, based on orders already received and orders that are anticipated based on successful presentations that have already been made to existing and potential customers. Sales prospects for early 2007 also seem positive. The business continues to add value to its customer base by designing innovative products and sourcing across a vast international network. Management of Beco continues to focus on ways to grow the business, including adding additional product lines to existing accounts and expanding its base of customers. Management of Beco is also focused on a number of initiatives to improve its supply chain management.

Despite challenges in some of the portfolio businesses, Fund management believes, based on the best information available, that the current level of distributions is sustainable.

ACCOUNTING POLICIES

The Fund prepares its financial statements in accordance with Canadian GAAP. The Fund's accounting policies are disclosed in the notes of the unaudited consolidated financial statements for the period ended June 30, 2006.

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 recommend 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.

Non-Monetary Transactions

Effective January 1, 2006, the Fund adopted the recommendations of CICA Handbook Section 3831, Non-Monetary Transactions, replacing section 3830 of the same title. The new accounting standard requires all non-monetary transactions be measured at fair value unless certain conditions are satisfied. The new requirements are effective for non-monetary transactions initiated in periods beginning on or after January 1, 2006.

The adoption of Section 3831 did not have an effect on the Fund's financial position, results of operations or cash flows in the current periods presented.

Implicit Variable Interests under AcG-15

Effective January 1, 2006 the Fund adopted the recommendations of abstract No. 157, Implicit Variable Interests under AcG-15 (EIC-157). The new abstract addresses whether a company has an implicit variable interest in a variable interest entity (VIE) or potential VIE when specific conditions exist. An implicit variable interest acts the same as an explicit variable interest except it involves the absorbing and/or receiving of variability indirectly from the entity (rather than directly). The identification of an implicit variable interest is a matter of judgment that depends on the relevant facts and circumstances.

The adoption of EIC-157 did not have an effect on the Fund's financial position, results of operations or cash flows in the current periods presented.

CRITICAL ACCOUNTING ESTIMATES

The Fund's 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.

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 acquisition 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 Fund's intention is to minimize its tax liabilities through distributions to its Unitholders. However, income taxes may be incurred and payable at the entity level, and in such cases are reflected in the operations of the particular entity. 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.

Additional information concerning the Fund can be found at www.sedar.com

Contact Information