TERRAVEST INCOME FUND
TSX : TI.UN

TERRAVEST INCOME FUND

November 13, 2006 07:00 ET

TerraVest Income Fund Releases 2006 Q3 Financial Results

VEGREVILLE, ALBERTA --(CCNMatthews - Nov. 13, 2006) - TerraVest Income Fund (TSX:TI.UN) announces its financial results for the 2006 third quarter.

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

- Net Earnings of $6.6 million, compared with $2.4 million in the 2005 third quarter;

- Per unit earnings of $0.40, up from $0.19 for the 2005 third quarter;

- Distributable Cash of $7.9 million ($0.48 per Unit), up from $4.1 million ($0.32 per Unit) in 2005 third quarter; and

- Unitholder distributions of $5.7 million ($0.35 per Unit), up from $4.1 million ($0.32 per Unit) in the 2005 third quarter period.

For the 2006 third quarter, the Fund reported revenue of $72.9 million and net earnings of $6.6 million or $0.40 per Unit. This compares with the 2005 third quarter, when TerraVest reported revenue of $53.5 million and net earnings of $2.4 million or $0.19 per Unit. The 2005 third 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 nine-month period ended September 30, 2006, the Fund reported revenue of $204.0 million and net earnings of $12.7 million or $0.85 per Unit. For the comparable 2005 nine-month period, TerraVest reported revenue of $134.4 million and net earnings of $6.9 million or $0.62 per Unit.

The payout ratio, which is the percentage of Distributable Cash paid as distributions to Unitholders, totaled 71% for the 2006 third quarter, compared with 100% for the 2005 third quarter. For the nine-month period ended September 30, 2006, the payout ratio was 83% of Distributable Cash, compared with 73% for the 2005 nine-month period. On a proforma basis assuming all Exchangeable Shares were converted into Units, the 2006 payout ratio was 84% for the third quarter (99% for the 2006 nine-month period), compared with 124% in the year-earlier third-quarter period (92% for the 2005 nine-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 reduction of the payout ratio for Distributable Cash during the 2006 third quarter resulted from the strong performance of RJV and Diamond, which offset weaker than expected results by other portfolio businesses. On a per Unit basis, the payout ratio in the latest period was higher than it would otherwise have been as a result of the conversion of 1,486,465 Exchangeable Shares into 1,871,355 Units on September 1, 2006.

The increase in the payout ratio for the 2006 nine-month period was due to the issuance of 2,950,000 new Units by the Fund in April 2006 and, to a lesser extent, the increase in the number of Units as a result of the conversion of exchangeable shares. The 2006 increase in the payout ratio for the nine-month period was also due to higher maintenance capital expenditures, as provided for in the Fund's 2006 budget, which totaled $2.7 million, up from $1.4 million in the 2005 period.



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

thousands of dollars Three Months Nine Months
ended September 30 ended September 30
2006 2005 Change 2006 2005 Change
-------------- ---------------
Revenues
RJV 22,397 13,464 57,455 46,488
Stylus 7,236 10,310 25,054 28,481
Don Park 22,078 24,447 63,249 46,130
Diamond 7,144 - 20,405 -
Beco 11,673 - 29,620 -
Ezee-On 2,387 5,241 8,223 13,300
-------------- ---------------
Total revenues 72,915 53,462 36% 204,006 134,399 51%
-------------- ---------------
-------------- ---------------
Net earnings for
the period 6,608 2,357 180% 12,669 6,881 84%
-------------- ---------------
-------------- ---------------
Per Unit 0.40 0.19 110% 0.85 0.62 37%
-------------- ---------------
-------------- ---------------
Cash provided by
operating activities
before changes in
non-cash working
capital 9,282 5,150 80% 22,186 15,912 39%
Less: Maintenance
capital expenditures (1,009) (758) 33% (2,674) (1,406) 90%

Less: Retractable
non-controlling
interest (337) (305) 10% (809) (251) 222%
-------------- ---------------
Distributable cash 7,936 4,087 94% 18,703 14,255 31%
-------------- ---------------
-------------- ---------------
Per Unit 0.48 0.32 1.27 1.29
Distributions
declared
Per Unit 0.35 0.32 1.04 0.93
Payout ratio 71% 100% 83% 73%
Proforma payout
ratio(1) 84% 124% 99% 92%

(1) assumes conversion of all Exchangeable Shares


"The Fund's results during the 2006 third 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. "We continue to focus on initiatives to increase profitability at our other businesses. While their combined results were below our expectations, we are pleased with the Fund's overall performance."

Mr. Laniuk made the following general comments: "The Trustees and Management of the Fund are currently evaluating the announcement made on October 31 by the Minister of Finance that Canadian tax laws will be amended to impose taxation on income funds relating to distributions of income commencing in 2011. It's too early to state with certainty what changes, if any, will be required by our business in the months and years leading to 2011. The Fund will continue to manage its portfolio on sound business principles and await further clarification of the tax regime before determining whether there will be any impact on how we operate."

The Fund also announces the appointment of Peter Olierook as President and Chief Executive Officer of Don Park. Mr. Olierook joins Don Park following an extensive career as a senior business executive, including almost 30 years associated with Carrier Corporation, the largest manufacturer of heating, ventilation and air conditioning products in the world. Stan Meek, who has been President and CEO of Don Park since 1973, becomes Chairman of Don Park.

As of September 30, 2006, there are 17,625,845 Units and 1,411,112 Exchangeable Shares issued and 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.

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.



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

Date: Monday, November 13, 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: 416-695-5259
Toll-Free Access: 1-877-461-2814


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: 634665). 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 one of Canada's largest designers, manufacturers and importers 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 September 30, 2006

Dated: November 13, 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 and operations, business strategy, proposed acquisitions, budgets, distributions, 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.

Assumptions and analysis about the performance of the Fund, as a whole, and the Fund's portfolio businesses and the markets in which they compete are considered in setting the business plan for the Fund, in forecasting the Fund's expected financial results and the Fund's ability to pay distributions, in setting financial targets for the Fund and in making related forward-looking statements. The key assumption in respect of the Fund's level of distributions is that the cumulative distributable cash will be able to support the Fund's current level of distributions. The Fund receives distributable cash from its portfolio businesses. In respect of the portfolio businesses, key assumptions include those relating to the demand for products and services of the portfolio businesses and in respect of 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). Should any of these factors or assumptions vary, actual results may differ materially from the forward-looking statements.

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. In making forward-looking statements, the Fund makes assumptions about those of these risk factors which are relevant. We caution that the list of factors discussed under "Risk 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 the factors discussed, as well as other uncertainties and potential events, and the inherent risks and uncertainties of forward-looking statements.

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. Except as required by applicable securities laws, 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.

(NOTE: numbers in thousands except Units and per Unit amounts, shares and per share amounts)

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 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 one of Canada's largest designers, manufacturers and importers of home textile products and has sales in Canada and the United States.

Overall Strategies of the Fund

Acquisitions

The Fund is focused on investing in 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 investment 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.

Management believes that the diversity of the various portfolio businesses 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 stable 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 portfolio 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.

Investment Criteria

Generally, the Fund intends to invest in manufacturing or service oriented businesses that meet its investment criteria. Businesses that meet the Fund's investment 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.

As a result of proposed changes to the taxation of trusts, as discussed more fully under "Proposed Changes to Tax Legislation Affecting Income Trusts", the Fund's investment strategy and the tax efficiency of the structure may be negatively impacted if the proposed changes become law.

Implementation of Investment 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 many different industries. To complement its present businesses in the energy, home design and improvement, construction and agriculture sectors, the Fund is looking at other unrelated market segments to further enhance the diversity of the Fund. Within its present sectors, Management believes it has also selected businesses that will continue to be in demand by consumers over the long term, despite economic swings in particular business sectors. In the natural gas portion of the energy market, RJV has developed a stable customer base that is committed to continued development of new and existing supply sources. Diamond's role in the energy market is to provide service rigs at existing and newly created oil wells and, to a lesser extent, to provide coiled tubing units to the natural gas extractors. The geographic location of Diamond's marketplace and the large number of existing operating wells has enabled the business to maintain its high utilization rates. Don Park provides heating and air conditioning components to the residential new construction and the residential renovation markets, as well as wholesale distribution and commercial construction segments. Stylus and Beco provide reasonably priced household furnishings that appeal to consumers despite fluctuations in other closely-related segments of the economy. Ezee-On continues to supply equipment to the agricultural industry that Management believes will be required well into the future.

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 $2,004. The net proceeds of $32,216 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 items, less capital expenditures related to maintenance of the portfolio businesses' property, plant and equipment, and retractable non-controlling interest charges as set out in the table following. 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.

The starting point for the calculation of distributable cash is cash provided by operating activities, before changes for non-cash working capital. The increase in cash from operating activities, before changes in non-cash working capital, for the three month period ended September 30, 2006, when compared to the three months ended September 30, 2005, was $4,132 which is comparable to the increase in net earnings of $4,251 between the same periods. The increase in cash flow from operating activities, before changes in non-cash working capital, for the nine months ended September 30, 2006, when compared to the nine months ended September 30, 2005, was $6,274, of which $5,788 is attributable to an increase in net earnings between the same periods. The reasons for the increases in net earnings for the three months and nine months ended September 30, 2006 are reflected in the discussions later in this MD&A and are primarily attributable to the strong financial performance of RJV and Diamond. In addition, the nine-month period ended September 30, 2005 included results for Don Park from its acquisition on April 1, 2005 to September 30, 2005 and did not include Diamond and Beco, as these businesses were acquired on October 3, 2005 and December 5, 2005, respectively.

Maintenance capital expenditures for the three months ended September 30, 2006 were $1,009 as compared to $758 in the three months ended September 30, 2006. In the nine month period ended September 30, 2006, maintenance capital expenditures were $2,674 as compared to $1,406 for the nine months ended September 30, 2005. The increase in maintenance capital expenditures is primarily attributable to, for the three and nine month periods, capital expenditures by RJV. In addition, for the nine month period, maintenance capital expenditures have also increased as a result of the inclusion of Diamond and Beco, which were acquired in the fourth quarter of 2005.

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.

Retractable non-controlling interest, as discussed under "Cash Distributions", for the three months ended September 30, 2006 was $337 as compared to $305 for the three months ended September 30, 2005. For the nine months ended September 30, 2006, retractable non-controlling interest was $809 as compared to $251 for the nine-month period ended September 30, 2006. The increase in retractable non-controlling interest reflects the inclusion of Diamond, which was acquired in the fourth quarter of 2005.

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 cash flow from operations and hence 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 September 30, 2006 was $7,936 as compared to $4,087 in the comparable period ended September 30, 2005. The Fund declared distributions to its Unitholders of $5,651 for the three months ended September 30, 2006 as compared to $4,098 for the comparable period ended September 30, 2005. On a year-to-date basis, distributable cash generated for the nine-months ended September 30, 2006 was $18,703 as compared to $14,255 in the comparable period ended September 30, 2005. The Fund declared distributions to its Unitholders of $15,505 for the nine-months ended September 30, 2006 as compared to $10,352 for the nine-months ended September 30, 2005.

The payout ratio, being the ratio of distributions paid over distributable cash generated, for the three months ended September 30, 2006, has decreased to 71% as compared to 100% in the comparative period. The decline in the payout ratio for the quarter is the result of the increase in distributable cash previously discussed, partially offset by distributions paid. For the nine-month period ended September 30, 2006, the payout ratio increased to 83% as compared to 73% in the comparative nine-month period. The increase for the nine-month period is the result of several factors including the issuance of additional Units by the Fund and an increase in distributions per Unit declared. In April, 2006, the Fund issued 2,950,000 new Units, causing total monthly distributions to rise significantly. On September 1, 2006, at the request of the Fund, the Chief Executive Officer of the Fund exchanged 1,486,465 Exchangeable Shares for 1,871,355 Units of the Fund. The increase in distributions were not fully offset by the increase in distributable cash generated, resulting in the higher payout ratio.

The weighted average Units outstanding during the nine-month period ended September 30, 2006, was 14,760,622 as compared to 11,040,585 in the comparable period ended September 30, 2005.



The following summary table shows the calculation of distributable cash
generated during the periods:

---------------------------------------------------------------------------
---------------------------------------------------------------------------
Three months ended Nine-months ended
September 30 September 30
---------------------------------------------------------------------------
2006 2005 2006 2005
---------------------------------------------------------------------------
Cash provided by operating
activities, before
changes in non-cash working
capital 9,282 5,150 22,186 15,912
Maintenance capital expenditures (1,009) (758) (2,674) (1,406)
Retractable non-controlling
interest (337) (305) (809) (251)
---------------------------------------------------------------------------
Distributable cash generated $ 7,936 $ 4,087 $ 18,703 $ 14,255
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Distributions (excluding
exchangeable shares)
Distributions declared $ 5,651 $ 4,098 $ 15,505 $ 10,352
Distributable cash per Unit $ 0.48 0.32 $ 1.27 1.29
Distributions declared per Unit $ 0.35 0.32 $ 1.04 0.93
Payout ratio 71% 100% 83% 73%
Proforma distributions (including
exchangeable shares)
Proforma distributions declared $ 6,677 5,049 $ 18,561 13,111
Proforma distributable cash per
Unit $ 0.41 0.26 $ 1.04 1.01
Distributions declared per Unit $ 0.35 0.32 $ 1.04 0.93
Proforma payout ratio 84% 124% 99% 92%
---------------------------------------------------------------------------
---------------------------------------------------------------------------


The above calculations under "Proforma distributions (including exchangeable shares)" are calculated as though, before commencement of the relevant period, 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.

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 nine months
ended September 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
July July 31 August 15 0.115 1,812
August August 31 September 15 0.115 1,812
September September 29 October 16 0.115 2,027
---------------------------------------------------------------------------
Total $ 1.035 $ 15,505
---------------------------------------------------------------------------
---------------------------------------------------------------------------


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.

Due to seasonality of the portfolio businesses, the Fund has distributed less than its annual target payout ratio as of September 30, 2006. The Fund's annual target distribution payout ratio is 90%. It is expected that a portion of the excess distributable cash generated will be distributed in periods when distributable cash distributed exceeds distributable cash generated.

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 reflected 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:

---------------------------------------------------------------------------
---------------------------------------------------------------------------
2006 2006 2006
Third Second First
Quarter Quarter Quarter
---------------------------------------------------------------------------
Sales $ 72,915 $ 63,757 $ 67,334
Net earnings $ 6,608 $ 3,319 $ 2,742
Earnings per Unit/Share
- Basic $ 0.40 $ 0.22 $ 0.21
- Diluted $ 0.40 $ 0.22 $ 0.21
Distributable cash $ 7,936 $ 5,327 $ 5,440
Distributable cash per
Unit $ 0.48 $ 0.35 $ 0.42
Distributions declared per
Unit $ 0.35 $ 0.35 $ 0.35
---------------------------------------------------------------------------
---------------------------------------------------------------------------

---------------------------------------------------------------------------
---------------------------------------------------------------------------
2005 2005 2005 2005 2004
Quarter Quarter Quarter Quarter Quarter
Fourth Third Second First Fourth
---------------------------------------------------------------------------
Sales $ 63,743 $ 53,462 $ 48,961 $ 31,976 $ 16,533
Net earnings $ 3,210 $ 2,357 $ 1,646 $ 2,878 $ 665
Earnings per Unit/Share
- Basic $ 0.25 $ 0.19 $ 0.16 $ 0.28 $ 0.09
- Diluted $ 0.25 $ 0.19 $ 0.16 $ 0.28 $ 0.09
Distributable cash $ 5,632 $ 4,087 $ 3,899 $ 6,269 $ 1,608
Distributable cash per
Unit $ 0.42 $ 0.32 $ 0.38 $ 0.61 $ 0.22
Distributions declared per
Unit $ 0.34 $ 0.32 $ 0.32 $ 0.29 $ 0.26
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Significant changes during each quarter were as follows:

- Operations in the third quarter of 2006 included the same six portfolio businesses as the first and second quarters of the year. The increase in sales from the second quarter to the third quarter can be attributed primarily to the increased performances of RJV (an increase of $6,568), Diamond (an increase of $1,988) and Beco (an increase of $2,608). Ezee-On's, Stylus' and Don Park's sales for the quarter were $2,006 less in total than the previous quarter.

- Operations in the second quarter of 2006 included the same six portfolio businesses as the first quarter of the year. Seasonality resulted 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 primarily 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 heating and ventilation 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.

The interim consolidated financial statements of the Fund for the nine-months ended September 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 September 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 Nine-months Nine-months
ended ended ended ended
September 30, September 30, September 30, September 30,
2006 2005 2006 2005
---------------------------------------------------------------------------
RJV $ 22,397 $ 13,464 $ 57,455 $ 46,488
Ezee-On 2,387 5,241 8,223 13,300
Stylus 7,236 10,310 25,054 28,481
Don Park 22,078 24,447 63,249 46,130
Diamond 7,144 - 20,405 -
Beco 11,673 - 29,620 -
---------------------------------------------------------------------------
$ 72,915 $ 53,462 $ 204,006 $ 134,399
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Operating Activities

RJV

RJV continued to benefit from the robust energy sector in the third quarter. Sales reached a record $22,397 for the three months ended September 30, 2006, which represents a 66% increase over sales of $13,464 in the same three months of 2005. Year to date sales reached $57,455 for the nine months ended September 30, 2006, as compared to $46,488 in the same nine-month period of 2005 and represents a 24% increase over that period. Revenues in the nine-month period increased as a result of more product volume shipped and price and product mix changes. Increased volume accounted for approximately 44% of the increase in sales, while price and sales mix changes accounted for approximately 56%. For the three month period ended September 30, 2006, increased product volume accounted for 68% of the increase and price and sales mix changes accounted for approximately 32%. Given the strength of demand for RJV's products, the business was able to increases prices across its product lines and the result has been strong improvements in RJV's gross margins. As a result of the movement in price, RJV''s gross margins increased 6.8 basis points in the quarter ended September 30, 2006 as compared to the same quarter of 2005. Year-to-date, gross margins have improved 8.2 basis points compared to the same period last year. RJV generated distributable cash during the nine-month period ended September 30, 2006 that exceeded Management's expectations. Two of RJV's largest customers have recently communicated significant reductions to their winter drilling programs as a result of lower natural gas prices. This reduced level of activity is expected to reduce RJV's future revenues and gross margins.

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 slightly higher than Management's expectations. However, total sales on a year-to-date basis are approximately 62% of the amount for the same nine-month period last year. Sales in the comparative period included a bulk sale of the entire inventory of Ezee-On (Australia) Pty Ltd. to a third party distributor in the third quarter of 2005. Adjusting for the bulk sale of inventory in Australia, sales are approximately 76% of prior year sales. The product sales mix for the period and the strength of the Canadian dollar in buying components priced in U.S. funds enabled the business to increase its gross margin over the comparative period. Sales in Canada were above expectations, however sales in the U.S. were slower than expected during the first half of the year. Management attributes the decrease in U.S. sales to poor weather conditions and to the strengthening of the Canadian dollar. The business has faced challenges in the Australian market due to a wide-spread drought in the western part of the country which has contributed to a significant decline in sales in that country. Ezee-On generated distributable cash during the quarter in line with Management's expectations.

Stylus

Stylus' sales during the quarter were significantly less than expected due to a general slow-down in customer traffic at the retailers the business supplies. The business continued its marketing initiatives through its showroom in Las Vegas and focused on expanding its geographic reach within the United States. The business has a growing network of boutique retailers and is actively increasing its imported product offering. During the quarter, Stylus carefully managed manufacturing and overhead expenses, but with the decrease in sales, disruptions in operations due to the delay in the completion of the new finished goods warehouse and delays from key suppliers, the business finished the quarter at a lower profitability level than had been expected by Management. Accordingly, Stylus generated distributable cash during the quarter that was below Management's expectations. Management believes that the retail slow-down will continue in the fourth quarter, with the result that the business will fall short of its projected 2006 sales target. With the resulting reduced gross margin contribution, the overall amount of distributable cash generated for the year will be lower than Management's expectations.

Don Park

Don Park's third quarter sales of $22,078 were similar in amount to the second quarter, but were lower than Management's expectations, and were lower than the sales of $24,447 for the same quarter in 2005. Sales in the Branch Stores division did not meet Management's expectations for the quarter, but two-thirds of the stores are ahead of 2005 on a year-to-date basis. As expected, sales in the Wholesale division were down in both the U.S. and Canadian distribution units, but produced more gross margin when compared to 2005. The Commercial division did not meet Management's expectations for the quarter, with sales at prior year levels on a year-to-date basis. The business was also impacted by $290 of expenses related to the ongoing restructuring of the business. Despite a focus on reducing expenses, the lower sales level resulted in gross margin contribution below Management's expectations, and the distributable cash generated for the nine-month period ended September 30, 2006 was well below Management's expectations.

Diamond

Overall, results at Diamond were strong. Diamond continued to have high utilization rates in its service rig business in the third quarter and was able to maintain strong hourly rates throughout this period, yielding results that exceeded forecast. The coiled tubing division experienced utilization rates below forecast due to reduced activity levels in shallow gas fields. On a year-to-date basis, the business has exceeded Management's forecasts, and Management believes that the business will continue to perform strongly for the remainder of the year. By concentrating in select geographical areas, the business has been able to establish itself as an important supplier to the oil and gas companies producing and exploring in those areas. Since the largest portion of its business is derived from servicing existing operating wells, the business' overall revenue has not been affected in the short run by fluctuations in resource prices. On a comparative basis, 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 nine-month period ended September 30, 2006 that exceeded Management's expectations.

Beco

Beco's sales in the third quarter improved over sales experienced in both the first and second quarters of this year. The business has been able to rectify certain quality and fulfillment issues with its largest customer, resulting in successful fall product launches and stronger sales in this quarter. In addition, the actions taken in the second quarter to reduce costs contributed to the improved financial performance for the three months ended September 30, 2006. Beco's sales are comprised of household fashion items that appeal to consumers with moderate budgets. Management expects sales in the fourth quarter to be almost as strong as the third quarter. Beco generated distributable cash during the nine-month period ended September 30, 2006, well below Management expectations.

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 provides the Fund with a priority return of cash, providing additional protection to the Fund's Unitholders.

On total sales of $72,915 in the three months ended September 30, 2006, the Fund achieved a gross profit of $21,230 (29.1%) and net earnings of $6,608. In the comparable period last year the Fund had sales of $53,462, a gross profit of $12,932 (24.2%), and net earnings of $2,357. For the nine-month period ended September 30, 2006, the Fund had total sales of $204,006, achieved a gross profit of $57,319 (28.1%) and net earnings of $12,669. In the comparable nine-month period sales were $134,399, gross profit was $33,563 (25.0%) and net earnings were $6,881. Increases in gross profit, as a percentage of revenue, is primarily the result of improvements at RJV and Diamond in the quarter and year to date.

With the addition of Don Park, Diamond and Beco after the first quarter of 2005, a meaningful comparison of total overhead expenses is somewhat difficult. Administration, selling and other sundry overhead expenses totaled $7,690 for the three months ended September 30, 2005, but in the quarter ended September 30, 2006 amounted to $10,360. Similarly, the total amortization, interest and retractable non-controlling interest total in the three months ended September 30, 2005 was $2,063, whereas this amount was $3,476 in the three months ended September 30, 2006. Overhead expenses related solely to the management of the Fund account for $1,616 of the total overhead expenses for the three-months ended September 30, 2006 and $4,583 for the nine months ended September 30, 2006. In the three and nine month periods ended September 30, 2005 the Fund administration expenses were $1,164 and $2,377, respectively. The increased costs at the Fund level in both the three and nine-month periods ended September 30, 2006, can be attributed to increases in external manager compensation and expenses (see "Related Party Transactions"), increased audit and legal fees, increased payroll costs as the Fund developed its administration staff, and increased costs related to public company compliance issues specifically related to internal controls, governance and Chief Executive Officer and Chief Financial Officer certifications.

The retractable non-controlling interest represents third party claims on income, after adjusting for the Fund's preferred return, based on third parties interest in each of Stylus, Don Park, Diamond and Beco. The amount recorded in the quarter of $337 represents the total allocation of income from the respective partnerships to their non-controlling interest holders during the quarter. In the nine-month period ended September 30, 2006, the allocation to the retractable non-controlling interest holders was $809.

The non-controlling interest on the consolidated balance sheets 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 $1,277 for the three months ended September 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 nine-month period ended September 30, 2006, the net earnings attributable to the non-controlling interest was $2,717.

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 September 30, 2006, the Fund had drawn $26,395 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 $956. In the three months ended September 30, 2005, total interest charged was $171. Interest charged in the nine-month period ended September 30, 2006 was $3,228 as compared to $797 in the comparative nine-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 September 30, 2006.

Income taxes and future income taxes

The net recovery of taxes and future income taxes in the nine-month period ended September 30, 2006 was $651, and is primarily the result of changes in substantively enacted tax rates.

LIQUIDITY AND CAPITAL RESOURCES

Consolidated working capital at September 30, 2006 was $41,814 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 $32,216, 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 September 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 has been extended to May 31, 2007, to align with the Fund's reporting and budgeting processes.

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.

If cash distributed to Unitholders exceeds distributable cash generated in a particular month, the shortfall will be funded through the Fund's Credit Facilities, as long as the Fund meets all of its debt covenants, and through reductions in working capital. Conversely, if the distributable cash generated exceeds cash distributed to Unitholders, the excess will be used to reduce the outstanding amount on the Credit Facilities.

The Fund's off balance sheet financing arrangements as at September 30, 2006 consist of documentary letters of credit totaling $902 for the purchase of raw materials and standby letters of credit totaling $1,810.



COMMITMENTS

Contractual obligations consist of the following amounts:
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Total 1 year 2-3 years 4-5 years
---------------------------------------------------------------------------
Operating leases $ 22,560 $ 6,285 $ 10,354 $ 5,921
Capital leases 165 40 90 35
Equipment purchase commitments 1,027 1,027 - -
Documentary letters of credit 902 902 - -
---------------------------------------------------------------------------

Total $ 24,654 $ 8,254 $ 10,444 $ 5,956
---------------------------------------------------------------------------
---------------------------------------------------------------------------


CONTINGENCIES

The Fund is contingently liable for a payment of a maximum of $3,200, as additional consideration, to the vendors from which the Fund purchased Beco. 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.

During the quarter, the Fund received a proposal letter from Canada Revenue Agency (the "CRA") with respect to challenging certain deductions taken by a corporation owned by one of the Fund's portfolio businesses. The Fund disagrees with the proposed adjustments and has provided additional information to CRA regarding the deductions. Should the proposed adjustments prevail, a current tax liability of approximately $1,200 will arise. If this occurs, Management expects a future income tax asset of approximately $800 will also arise. Minority shareholders would be responsible for 12.9% of these amounts. To date, no reassessment has been received from CRA.

No amounts have been recorded in these interim financial statements related to this matter. The Fund will monitor the situation including CRA's response to the additional information provided. Should the Fund determine that it is more likely than not that CRA's position will prevail, it will record an appropriate provision at that time.

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 November 13, 2006, there were 17,625,845 Units issued and outstanding.

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

Exchangeable Shares

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.

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 Exchangeable Shares - Series 2 were automatically converted to Exchangeable Shares.

On September 1, 2006, at the request of the Fund, the Chief Executive Officer of the Fund exchanged 1,486,465 Exchangeable Shares for 1,871,355 Units in accordance with the terms thereof. As at November 13, 2006, there were 1,411,112 Exchangeable Shares issued and outstanding.

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 October 2006 distribution declared was 1.29232 to 1, which is effective October 31, 2006. The Exchangeable Shares can only be exchanged for Units of the Fund.

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 the risks relating to the structure of the Fund is included in the Annual Information Form of the Fund dated March 29, 2006.

Risks Relating to the Businesses

The Fund's economic condition depends on the economic condition of its portfolio businesses. While stronger performance by one of the portfolio businesses may compensate for weaker performance by another of the portfolio businesses, any negative effects on the financial condition or results of operations of a portfolio business has a negative effect on the financial condition or results of operations of the Fund.

Demand for Products and Services

All of the portfolio businesses operate in industries in which the demand for its products 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.

More recently, natural gas prices have lagged behind oil prices relative to the price correlation between these commodities which has occurred historically. The price of oil is determined by a global market that is affected, on the demand side, by economic conditions generally and economic growth rates in emerging economies and, on the supply side, by geopolitical conditions in the regions where there is significant oil production such as parts of the Middle East and Africa. By comparison, the price of gas is determined primarily by a North American market (with some imports of liquid natural gas) where the demand side is significantly affected by the rate of consumption of natural gas for heating in winter and cooling in the summer, with consumption being greater during periods of extreme temperatures in heavily populated areas of North America. The supply of natural gas is generally more stable, subject to disruptions (particularly in the Gulf of Mexico caused by tropical storms). The price of natural gas can fall significantly when the capacity available for storage is full.

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 levels of exploitation of the basin depending on pricing of natural gas in the case of RJV and oil and natural gas in the case of Diamond. This is particularly so for RJV because most of the well-head processing equipment that RJV manufactures is installed on new wells and is left in place through the life of the well and, accordingly, demand for RJV's equipment depends more directly on the number of gas wells drilled, whereas a greater share of Diamond's business relates to the maintenance of existing wells for which services are required even when drilling activity subsides - so long as current production is not being shut-in.

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 businesses 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 rates of construction of new homes and businesses replacement of old equipment in existing homes and renovation of existing homes and businesses in Ontario and the other markets that it serves. The replacement market which makes up a large portion of Don Park's sales is impacted by weather. The demand for new homes and the levels of renovation activity generally depend 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 some of the 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. Ezee-On's agricultural equipment is primarily suited to farming of large scale grain farms. An exception is the demand for Ezee-On's front-end loaders which is more generally sensitive to the agricultural industry as a whole because front-end loaders are more widely used in both farming and the raising of livestock. Demand for Ezee-On's agricultural equipment 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 businesses' products or services may result in lower sales which will have an adverse effect on the results of operations and financial condition of the affected business.

Competition

All the markets in which the portfolio businesses 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 businesses. Some of the competitors are divisions of large corporations that have greater financial and other resources. There can be no assurances that 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 businesses or that new competitors will not enter into the markets served by the portfolio businesses. The portfolio businesses also compete with smaller manufacturers or service providers in the markets which the portfolio businesses serve, some of which have 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. The majority of the value of the products sold by Beco are now imported from countries such as China, Bangladesh, India, Pakistan, Korea and Thailand. In 2005, Stylus commenced importing leather furniture from China. 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 businesses 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 businesses 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 businesses 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 businesses purchase materials that are priced on world markets which may be subject to economic and seasonal fluctuations and for which prices may raise 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 a response often lags 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 businesses and the Fund.

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 businesses 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 businesses or their future operations.

Among the portfolio businesses, 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 may 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 businesses. Although insurance coverage is carried at levels which Management believes to be standard in Canada for businesses operating in the sectors in which the portfolio businesses operate, there can be no assurance that the coverage will be sufficient to satisfy any liability claim. There can be no assurance that adequate insurance coverage will be available in the future or available on commercially acceptable terms or rates. Any such claims that exceed the scope of coverage or an inability to obtain coverage or adequate coverage could result in material liabilities to one or more of the portfolio businesses.

Foreign Exchange

A number of the portfolio businesses 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 businesses 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 businesses. Imbalances between foreign currency purchases and sales are managed by each of the portfolio businesses and, if deemed material, future purchase or sale commitments of US funds are initiated.

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

Foreign Operations

Beco sources raw material and products from factories in China, Bangladesh, India, Pakistan, Korea and Thailand. Importing product over great distances involves logistical challenges for Beco. This coupled with stringent delivery schedules and product specifications set by its customers means that, should Beco fail to deliver products which meet its customers' delivery schedules and product specifications, the customer may refuse to take delivery of the product or cancel orders. As many of Beco's products are seasonal, if a customer does take late delivery of a product, sales may not be strong and Beco will lose the benefit of replenishment orders during the season. Failures in meeting logistical and product specification requirements of its customers will adversely affect Beco's sales and will have an adverse affect on its results of operations and financial condition.

Obsolescence

The technology used by the portfolio businesses 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 a given portfolio business 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 a portfolio business to provide state-of-the-art products and technologies may adversely affect their respective portfolio businesses 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 businesses 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 the portfolio businesses to maintain their respective productivity and profitability. The productivity and profitability of the portfolio businesses may be limited by their ability to employ, train and retain the skilled personnel necessary to meet their respective requirements. None of portfolio businesses 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 the portfolio businesses 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 a portfolio business to maintain or grow its respective portfolio business.

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

In addition, a collective bargaining unit was established at Stylus, in 2005. Failure to renegotiate this collective bargaining agreement on expiry on March 31, 2009 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 businesses.

Leverage and Restrictive Covenants

The Fund and certain of its portfolio businesses 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 businesses. In addition, these portfolio businesses 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 businesses 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 businesses 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 businesses 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 with respect to certain business matters and may, in certain circumstances, restrict the portfolio businesses' 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, to 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 entities 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 businesses 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 has been extended to May 31, 2007, with full repayment due at maturity. If the Credit Facility is replaced by new debt that has less favourable terms, 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 businesses 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 businesses 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 nonqualified 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).

PROPOSED CHANGES TO TAX LEGISLATION AFFECTING INCOME TRUSTS

On October 31, 2006, the Minister of Finance (Canada) released proposals to change the taxation regime applicable to certain income trusts and limited partnerships to be known as specified investment flow-throughs ("SIFTs") as well as the taxation regime applicable to investors of SIFTs. Specifically, certain distributions made by a SIFT that are attributable to the SIFT's "non-portfolio earnings" other than certain dividends will not be deductible in computing the SIFT's income and will be subject to tax, at a rate that is equivalent to the federal general corporate tax rate, plus 13% (the 13% is a proxy for provincial tax). Amounts that become payable to a SIFT investor which the SIFT cannot deduct as a result of these proposals, will be taxed in the hands of the SIFT investor on the same basis as eligible taxable dividends received from a taxable Canadian corporation. These proposals will not apply to SIFTs that were publicly traded before November 1, 2006, or to investors in such SIFTs, until January 1, 2011; provided, however, while there is now no intention to prevent existing SIFTs from normal growth during that transitional period, any undue expansion of an existing SIFT (such as might be attempted through the insertion of a disproportionately large amount of capital) could cause this to be revisited. Detailed legislative measures to give effect to these proposals have not yet been released but it appears that under the proposals the Fund will be a SIFT and that the proposed tax will not affect the Fund or its Unitholders until 2011. Furthermore, it appears that under the proposals a significant portion of the Fund's income which is distributed to Unitholders will be subject to the new tax on SIFTs after 2010 and that Unitholders will be taxed on a significant portion of their distribution as eligible taxable dividends after 2010. Management of the Fund will be considering these proposals as more detailed legislative measures are released in order to assess their impact on the Fund and its Unitholders.

RELATED PARTY TRANSACTIONS

During the quarter, the Fund incurred costs related to management of the Fund totaling $212 (2005 - $328). During the nine-month period ended September 30, 2006, the management fees were $640 (2005 - $535). 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. In addition, the Management Services Agreement provides for an incentive fee payable to TMP. The independent Trustees of the Fund approved the amendment of the Management Services Agreement on August 11, 2006 to provide that the incentive fee payable to TMP be payable in cash rather than in Units. Until that time, the incentive fee had been accrued but unpaid pending resolution of certain internal matters by TMP. On September 6, 2006, the external manager was paid $725, being the accrued but unpaid incentive as at June 30, 2006. During the quarter, TMP became entitled to receive an incentive fee pursuant to the terms of the contract. The incentive fee earned for the quarter totaled $225 (2005 - $111) and is included in accounts payable. For the nine-month period ended September 30, 2006, the incentive fee totaled $636 (2005 - $204) and is included in administration expenses of the Fund. The Fund also reimbursed $154 (2005 - $30) for out of pocket expenses incurred by TMP during the quarter. In the nine-month period ended September 30, 2006, the Fund reimbursed out of pocket expenses to TMP totaling $536 (2005 - $148).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 nine-month period ended September 30, 2006, the rent paid was $345 (2005 - $345). 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 became 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 nine-month period ended September 30, 2006, the rent paid was US$231 (2005 - US$154). 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 $434 (2005 - $461) for several operating facilities to companies owned by the retractable non-controlling interest holders of Don Park Limited Partnership. During the nine-month period ended September 30, 2006 the rent paid was $1,356 (2005 - $922). 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 nine-month period ended September 30, 2006, the rent paid was $375 (2005 - Nil). The amount paid is pursuant to a lease agreement that expires on April 30, 2011 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 nine-month period the amount paid was $42 (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

A brief outlook for the Fund is as follows:

Natural gas prices continue to be soft relative to prices seen over the last 18 months. As a result, natural gas exploration in the near term is expected to significantly decline. At the end of the third quarter, two of RJV's largest customers indicated that they would be significantly reducing their winter drilling programs. The impact of lower natural gas prices and decreased exploration activity for natural gas is expected to have a significant negative impact on RJV's sales in the near term, and could result in reductions to gross margins if the activity slows for a prolonged period of time and competitive pressures force price reductions. Management will continue to work closely with its customers to maintain market share.

Diamond expects the reduced activity levels in the natural gas sector to drive its mix of business more in favor of oil well servicing. Management expects overall results will be strong for the Diamond business for the remainder of 2006, since the largest portion of its business is derived from servicing existing operating wells. The business is operating with more rigs this year than in the past and has contracted to have two new service rigs built for delivery near the end of 2006 to meet the expected continuing demands of the oil industry.

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.

Stylus has made significant progress in increasing its targeted boutique retail customer base. These increases have not yet offset the decline in purchases by large retail customers. The opening of the show room in Las Vegas, Nevada and attendance at the Las Vegas Market allowed Stylus to increase its dealer base in the United States. With the completion of the move to the new warehouse the business is in a better position to grow its import program. Reduced sales levels are expected to continue through the balance of this year.

Don Park is striving 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 decline in sales in all three divisions is expected to continue through the fourth quarter of the year. The impact of the business' changes in the Branch Store division will not be felt until early 2007 and the Wholesale division will continue to be negatively affected by the strong Canadian dollar and reductions in housing starts in the residential new single family construction market.

Beco has overcome the fulfillment and quality issues experienced in the first half of 2006, and did achieve stronger sales in the third quarter of this year. The fourth quarter's sales are expected to be similar to those of the third quarter. Sales prospects for early 2007 are positive as the business is now perceived as a quality and service leader in the key segments in which it operates by its major customers. The business continues to add value to its customer base by designing innovative products and sourcing across an 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 continue its improvement in its supply chain management and its continued focus on reducing operating expenses.

Management will continue to evaluate the sustainability of the current distribution level.

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 interim consolidated financial statements for the period ended September 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, and potential tax reassessments, 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