TERRAVEST INCOME FUND
TSX : TI.UN

TERRAVEST INCOME FUND

August 14, 2007 21:00 ET

TerraVest Income Fund Releases 2007 Q2 Financial Results and Announces August Distribution

VEGREVILLE, ALBERTA--(Marketwire - Aug. 14, 2007) - TerraVest Income Fund (TSX:TI.UN) today released its financial results for the 2007 second quarter and announced its cash distribution to Unitholders for August.

For the 2007 second quarter, the Fund reported revenue of $50.4 million and a net loss of $79,000 or $0.01 per Unit, compared with revenue of $63.8 million and net earnings of $3.3 million or $0.22 per Unit for the 2006 second quarter. Included in the loss for the latest period was a non-cash income tax recovery of $344,000 of which $330,000 relates to the Fund's future income tax assets to be recorded as a result of tax legislation included in Bill C-52, the Budget Implementation Act, 2007, which received Royal Assent on June 22, 2007.

For the six-month period ended June 30, 2007, the Fund reported revenue of $114.7 million and net earnings of $3.7 million or $0.21 per Unit, compared with revenue of $131.1 million and net earnings of $6.1 million or $0.43 per Unit for the comparable six-month period. The 2007 six-month results include the non-cash income tax recovery of $330,000.

The payout ratio, which is the percentage of distributable cash that is paid as distributions to Unitholders, increased to 273% for the 2007 second quarter, compared with 102% for the 2006 second quarter. For the six-month period ended June 30, 2007, the payout ratio was 117%, compared with 92% for the 2006 six-month period. Distributable cash is not a defined term under Canadian generally accepted accounting principles and does not have a standard meaning. The Management's Discussion and Analysis, which is included in this release, includes a discussion of the meaning of distributable cash.)

The Fund also announced today that it has declared a cash distribution of $0.041667 per Unit, effective with the distribution to be paid on September 17, 2007 to Unitholders of record on August 31, 2007. The ex-distribution date is August 29, 2007.

The Trustees approved a reduction in the Fund's monthly distribution from $0.08333 per Unit ($1.00 on an annualized basis) to $0.04167 per Unit ($0.50 on an annualized basis). The reduction in the monthly distribution to Unitholders is in response to the continuing weakness in western Canadian exploration drilling activity, which Management now expects will continue for the remainder of 2007.

"The Fund's Trustees have reviewed Management's forecast for the remainder of this year and took prudent action in light of the continued weakness in natural gas exploration activity," said Dale Laniuk, President and Chief Executive Officer. "The reduction in the level of monthly distributions enables the Fund to prudently manage its financial resources until overall market conditions improve."



Highlights from the Fund's 2007 second quarter and its 2007 six-month
reporting period are as follows:



(thousands of Three Months ended June 30 Six Months ended June 30
dollars) 2007 2006 Change 2007 2006 Change

Revenues
RJV 5,044 15,829 25,510 35,058
Ezee-On 2,337 2,857 4,724 5,836
Stylus 8,372 8,598 16,685 17,818
Don Park 21,455 22,252 39,341 41,171
Diamond 5,113 5,156 11,661 13,261
Beco 8,122 9,056 16,749 17,947
------------------- -----------------
Total revenues 50,443 63,757 (21%) 114,670 131,091 (13%)

Net (loss) earnings
for the period (79) 3,319 (103%) 3,668 6,061 (39%)
Per Unit (0.01) 0.22 (105%) 0.21 0.43 (51%)
------------------- -----------------

Cash flow from
operations before
working capital
changes 2,288 6,099 (62%) 8,727 12,972 (33%)
Less: Maintenance
capital expenditures (624) (599) 4% (974) (1,665) (42%)
Less: Retractable non-
controlling interest (47) (173) (73%) (197) (472) (58%)
------------------- -----------------
Distributable cash 1,617 5,327 (70%) 7,556 10,835 (30%)
------------------- -----------------
------------------- -----------------
Per Unit 0.09 0.35 0.43 0.77
Distributions declared
Per Unit 0.25 0.35 0.50 0.69
Payout ratio 273% 102% 117% 92%
Proforma payout ratio(1) 302% 120% 129% 111%


(1) assumes conversion of all Exchangeable Shares


"Overall, the Fund delivered distributable cash in line with Management's expectations for the quarter," said Mr. Laniuk. "The Fund's energy businesses finished the quarter ahead of Management's forecast.

"However, Management anticipates that reduced exploration and drilling activity, due to weak natural gas commodity prices and high storage levels, will continue through most, if not all of 2007. As a result, Management is revising the forecast for the Fund's energy businesses downward for the remainder of 2007.

"In our non-energy businesses, Don Park and Stylus performed well in generating distributable cash for the quarter. Don Park delivered distributable cash significantly ahead of year ago levels. Beco was negatively impacted by reduced inventory carrying levels by one of its large customers, but was able to deliver distributable cash very close to forecasted levels through prudent cost management. Ezee-On experienced a disappointing quarter due to competitive pressure in the western Canadian market, but is responding with increased sales and marketing initiatives."

As of August 14, 2007, there are 17,626,498 Units and 1,410,642 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 at any time.

The Exchange Ratio for the Exchangeable Shares of TerraVest Industries Inc. has increased from 1.46702 to 1.47767, effective August 31, 2007. Further information about TerraVest's exchangeable shares and the calculation of the Exchange Ratio can be found at www.terravestindustries.com/invinfo_cash.htm.

The Fund's interim financial statements, as well as its MD&A 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: Wednesday, August 15, 2007
Time: 10:00 a.m. E.S.T.
Participants: Dale Laniuk, President and CEO
Tom Kileen, Chief Financial Officer
Tim Zosel, Senior Vice President
Access Number: Toronto: 416-406-6419
Toll-Free Access: 1-888-575-8232


A replay of the conference call will available at 416-695-5800 (Toll-Free Access: 1-800-408-3053) for seven days after the conference call (Pass code: 3228671). 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.

- 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.

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

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

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

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

MANAGEMENT'S DISCUSSION AND ANALYSIS

For the period ended June 30, 2007

Dated: August 14, 2007

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 2007 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 in the management's discussion and analysis of the Fund for the year ended December 31, 2006 and the annual information form of the Fund dated March 15, 2007, 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 discussion of factors in the management's discussion and analysis of the Fund for the year ended December 31, 2006 and the annual information form of the Fund dated March 15, 2007 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 Unit and per Unit amounts)

This MD&A is divided into the following sections:

1. The Fund

2. Investments and Capitalization of the Fund

3. Results

4. Liquidity and Capital Resources

5. 2007 Outlook

6. Risk Factors

7. Related Party Transactions

8. Accounting Policies

9. Income Taxes

10. Internal Control Over Financial Reporting

1. THE FUND

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 May 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, RJV Gas Field Services ("RJV") and Ezee-On Manufacturing ("Ezee-On"). Subsequently, the Fund acquired four other 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".

The Fund consists of two energy and four non-energy businesses. RJV is one of Canada's largest providers of wellhead processing equipment for the natural gas industry in western Canada. 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. Don Park is one of Canada's leading manufacturers and suppliers of heating, ventilation and air conditioning products. Stylus is one of Canada's leading made-to-order upholstered furniture manufacturers. 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.

Cash Distributions and Distributable Cash

The Fund has a policy of paying stable monthly distributions to Unitholders from its distributable cash. The Fund targets to distribute less than 90% of the distributable cash forecasted by its income producing businesses in its monthly distributions over a twelve month period. In accordance with the Declaration of Trust, the independent Trustees determine the amount of distributable cash to be distributed to Unitholders.

On July 6, 2007, the Canadian Securities Administration (CSA) published revised National Policy Statement 41-201 Income Trusts and Other Indirect Offerings that includes guidance about distributable cash. Subsequent to that the CICA's Canadian Performance Reporting Board (CPRB) issued an Interpretive Release that provides guidance on reporting Standardized Distributable Cash in Management's Discussion and Analysis in income trusts and other flow-through entities. This new guidance complements the CSA policy by providing a standardized measure for reporting distributable cash and disclosure framework that will assist preparers in meeting the objectives of the CSA policy. The Fund is currently evaluating this guidance which will be incorporated in disclosure for the third quarter of 2007.

Distributable cash is not a defined term under Canadian generally accepted accounting principles but is determined by the Fund to be cash flow provided by operating activities, before working capital changes, less capital expenditures related to maintenance of the portfolio businesses' property, plant and equipment, and less retractable non-controlling interest. A reconciliation of distributable cash to cash provided by operating activities can be found under "Results".

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 portfolio 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. Management believes that maintenance capital expenditures should be funded by cash flow from existing operating activities. Capital expenditures related to future growth or expansions are expected to provide additional future cash flows and are not deducted in determining distributable cash.

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 information contained in the unaudited consolidated statements 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 Fund receives indirect payments of cash from the portfolio businesses and from this cash 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 per Unit is not defined under Canadian generally accepted accounting principles, but it is determined by the Fund to be distributable cash divided by the weighted average number of Units outstanding.

2. INVESTMENTS AND CAPITALIZATION OF THE FUND

The investments and capitalization of the Fund have not changed since the release of its MD&A for the year ended December 31, 2006. Therefore, to review the investments and capitalization of the Fund, please refer to the corresponding sections in the MD&A for the year ended December 31, 2006.

3. RESULTS

Overall performance for the three month period ended June 30, 2007:

- The Fund's distributable cash was in line with Management's expectations for the quarter, but significantly below year ago levels. Most of the year-on-year reduction was due to difficult market conditions for the Fund's energy businesses;

- Sales decreased $13,314 to $50,443 from the second quarter of 2006;

- Net earnings decreased to $79, a reduction of $3,398 from the second quarter of 2006;

- Distributable cash generated of $1,617 was $3,710 below the second quarter of 2006;

- The Fund lost $0.01 per Unit compared to earnings of $0.22 per Unit in the second quarter of 2006; and

- The cash payout ratio of distributions declared to distributable cash generated increased to 273% for the quarter, compared to 102% for the second quarter of 2006.



Operating and Financial Results
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
2007 2006 2007 2006
----------------------------------------------------------------------------
Sales
RJV $ 5,044 $ 15,829 $ 25,510 $ 35,058
Ezee-On 2,337 2,857 4,724 5,836
Stylus 8,372 8,598 16,685 17,818
Don Park 21,455 22,252 39,341 41,171
Diamond 5,113 5,156 11,661 13,261
Beco 8,122 9,065 16,749 17,947
----------------------------------------------------------------------------
$ 50,443 $ 63,757 $ 114,670 $ 131,091

Cost of sales $ 38,157 $ 46,254 $ 85,026 $ 95,002
Gross profit $ 12,286 $ 17,503 $ 29,644 $ 36,089
Net (loss) earnings
for the period $ (79) $ 3,319 $ 3,668 $ 6,061
Earnings per Unit
- basic $ (0.01) $ 0.22 $ 0.21 $ 0.43
Earning per Unit
- diluted $ (0.01) $ 0.22 $ 0.21 $ 0.43
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash provided by
operating activities $ 9,290 $ 10,320 $ 18,253 $ 8,136
Change in non-cash
working capital (7,002) (4,221) (9,526) 4,836
----------------------------------------------------------------------------
$ 2,288 $ 6,099 $ 8,727 $ 12,972
Maintenance capital
expenditures (624) (599) (974) (1,665)
Retractable
non-controlling
interest (47) (173) (197) (472)
----------------------------------------------------------------------------
Distributable cash $ 1,617 $ 5,327 $ 7,556 $ 10,835
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Weighted average
number of Units
outstanding 17,626,376 15,073,721 17,626,112 13,945,620
Distributions (excluding
Exchangeable Shares)
Distributions declared $ 4,407 $ 5,436 $ 8,813 $ 9,854
Distributable cash per
Unit $ 0.09 $ 0.35 $ 0.43 $ 0.77
Distributions declared
per Unit $ 0.25 $ 0.35 $ 0.50 $ 0.69
Payout ratio 273% 102% 117% 92%
Proforma distributions
(including Exchangeable
Shares)
Proforma distributions
declared $ 4,884 $ 6,370 $ 9,768 $ 11,953
Proforma distributable
cash per Unit $ 0.08 $ 0.29 $ 0.39 $ 0.61
Distributions declared
per Unit $ 0.25 $ 0.35 $ 0.50 $ 0.69
Proforma payout ratio 302% 120% 129% 111%
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The 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 period had also been paid in respect of such Units. Accordingly, Proforma distributions declared, Proforma distributable cash per Unit and Proforma payout ratio 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 relating to 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 15, 2007.

Analysis of Operating and Financial Results

Sales

Sales decreased by $13,314 to $50,443 during the second quarter of 2007 and by $16,421 to $114,670 for the six-month period ended June 30, 2007 compared with the same periods last year. Commentary on sales for each of TerraVest's six portfolio businesses is set forth in the Operating Activities section below.

Cost of Sales

Cost of sales amounted to $38,157 in the second quarter of 2007 and $85,026 for the six-month period ended June 30, 2007 compared with $46,254 and $95,002 for the same periods last year. Cost of sales represented 75.6% of sales in the second quarter of 2007 and 74.1% for the six-month period ended June 30, 2007 as compared to 72.5% in each of the same periods of 2006.

Gross Profit

Gross profit margin decreased to 24.4% in the second quarter of 2007 from 27.5% in the second quarter of 2006 and to 25.9% for the six-month period ended June 30, 2007 from 27.5% for the six-month period ended June 30, 2006. The decrease in the quarter and for the six-month period ended June 30, 2007 is attributable to changes to product mix at the portfolio business level and a change in the relative contribution of the energy versus non-energy businesses. The energy businesses have historically delivered stronger gross profit margins.

Operating Activities

Overall, the Fund's portfolio businesses delivered distributable cash in line with Management's expectations. As expected by Management, the Fund's energy businesses experienced challenging conditions with significantly reduced activity levels in western Canada versus a year ago. Both reduced drilling programs and unfavourable weather contributed to the difficult conditions in the quarter. Overall, the Fund's energy businesses delivered more distributable cash than Management expected. In the non-energy businesses, overall distributable cash generation was below Management's expectations for the quarter. Most of the businesses delivered reduced performance versus year ago levels, but this was largely anticipated in Management's forecast; importantly, Don Park posted results that were significantly improved over the second quarter of 2006. Fund administration and other Fund expenses were below Management's forecast for the quarter.

Energy

RJV

Despite significant reductions in natural gas drilling activity year-over-year, RJV exceeded Management's expectations in generating distributable cash in the second quarter. For the three months ended June 30, 2007, RJV's sales decreased by $10,785, to $5,044 from the comparative three month period last year. Sales decreased by $9,548 to $25,510 for the six-month period ended June 30, 2007, compared to the same period last year. As previously disclosed, several of RJV's major customers have significantly reduced their capital budgets, citing low gas prices and high service costs as the main reasons. This, combined with a longer than expected spring breakup and wet weather, contributed to significant reductions in activity in the second quarter.

Despite the reduction in sales, RJV's margins remained strong in the quarter and year-to-date periods. Prudent cost management helped deliver distributable cash which exceeded Management's expectations during the second quarter of 2007. Management expects reduced margins on RJV for the remainder of the year, reflecting increased competitive activity.

Diamond

Diamond generated sales of $5,113 for the quarter which was $43 less than the same period last year. Sales decreased $1,600 to $11,661 for the six-month period ended June 30, 2007, compared to the same period last year. Performance in the quarter was impacted by lower utilization due in large part to a longer breakup and adverse weather conditions. Gross margins for the quarter were lower than the same period of 2006 due to higher fuel costs and lower utilization in Diamond's Coiled Tubing Division. The Coiled Tubing fleet operated with one fewer unit than year ago, due to a fire which damaged this unit at the end of the first quarter. This unit is expected to return to the field during the third quarter. Profitability and distributable cash generation were below Management's forecast for the quarter and year ago levels.

Non-Energy

Don Park

Don Park's second quarter sales of $21,455 were $797 lower than last year's second quarter. Sales decreased $1,830 to $39,341 for the six-month period ended June 30, 2007 compared to the same period last year. Stronger margins, due to structural cost reductions and stringent cost controls drove improved financial performance over the second quarter of 2006. At the store level, strong focus has been placed on product mix and pricing which contributed to improved margins in the second quarter of 2007. Don Park's Stores Division continued to improve its performance. The Wholesale Division met Management's expectations despite the slowdown in the US housing market. Continued strength in the Canadian residential new construction and condominium market helped the segment's performance during the quarter. The Commercial Division sales were above Management's expectations due to strong sales in equipment and metal product lines. Focused operational efficiencies in the supply chain have also contributed to improved margins. While the business delivered distributable cash below Management's forecast for the quarter, Don Park's gross margin and distributable cash significantly exceeded the comparative period in 2006.

Stylus

Stylus' second quarter sales of $8,372 were $226 lower than last year's second quarter. Sales decreased $1,133 to $16,685 for the six-month period ended June 30, 2007 compared to the same period last year. The reduction is attributed to the imports division which was transitioning to a new set of suppliers during the period. The manufacturing division significantly exceeded its sales target with both residential and contract business performing above Management's forecast. A US sales manager was hired during the second quarter and will lead the effort to increase Stylus sales in this market. Gross margins in the second quarter of 2007 were lower than the second quarter of last year primarily due to the change in mix of products. Stylus' generated distributable cash slightly ahead of Management's forecast.

Beco

Beco's second quarter sales of $8,122 were $943 below the same period last year. One of Beco's major customers reduced its inventory carrying levels, which negatively impacted Beco's sales for the quarter. Historically, the second quarter is Beco's weakest quarter in terms of sales and the generation of distributable cash. Lower sales and product mix contributed to reduced gross margins for the second quarter of 2007 compared to year ago levels. Beco, however, continues to make progress on attracting new customers. In the quarter, Beco received test orders from two new large customers and was awarded a large new program from an existing customer. Significant focus on costs and business processes reduced selling, general and administrative expenses by 17% as compared to second quarter 2006. Overall, Beco's distributable cash for the second quarter of 2007 was slightly below Management's forecast.

Ezee-On

Sales decreased by $520 to $2,337 during the second quarter of 2007 compared with the same period last year. Sales decreased $1,112 to $4,724 for the six-month period ended June 30, 2007 compared to the same period last year. The year-over-year sales decrease is attributed to a reduction in domestic sales due to increased competition. Management is increasing marketing and pricing initiatives to improve Ezee-On's domestic sales performance. Sales in the U.S. met Management's expectations. US farmers have benefited from better weather conditions resulting in better crop yields and much improved economic conditions due to higher commodity prices. Consequently, US dealers have now started to replenish inventories. International exports improved year-over-year, due to increased shipments of new discs to Europe. Gross margins in the second quarter of 2007 were in line with the same period last year. However, due to reduced sales, Ezee-On's financial performance did not meet Management's forecast.

Administration expenses

Administration expense of $5,419 decreased by $790 from the second quarter last year. For the six month period ended June 30, 2007, administration expense was reduced $813 to $11,332 from last year. The variance is mainly attributable to lower manager and employee-related expenses.

Selling expenses

Selling expenses decreased $527 to $4,098 in the second quarter of 2007 from the second quarter of 2006 and decreased by $809 to $7,924 for the six-month period ended June 30, 2007 from the six-month period ended June 30, 2006. Selling expenses represented approximately 8.1% and 7.3% of consolidated sales in the second quarters of 2007 and 2006, respectively, and 6.9% and 6.7% for the six-month periods ended June 30, 2007 and June 30, 2006, respectively. Lower sales contributed to reduced variable selling expenses, but increases in fixed expenses caused an overall increase in the relative selling expenses as a percentage of sales in both periods.

Amortization expense

Amortization expense increased to $2,169 in the second quarter of 2007 from $2,090 in the second quarter of 2006 and a decreased to $4,230 for the six-month period ended June 30, 2007 from $4,725 for the six-month period ended June 30, 2006. The decrease from the six-month period last year is primarily due to a reduction in amortization of short-life intangible assets associated with acquisitions.

FUTURE INCOME TAXES

Prior to June 2007, the Fund was not a taxable entity and, accordingly, its consolidated financial statements did not include a provision for Canadian income taxes related to the Fund's income or that of the Limited Partnerships in which it has an interest.

On October 31, 2006, the Minister of Finance (Canada) announced proposed tax legislation ("trust legislation") that will change income tax rules applicable to publicly traded trusts rendering income trusts taxable in 2011, subject to those trusts remaining within certain "normal growth" limits as described in the trust legislation. In 2011, when the Fund is expected to become a taxable entity, income taxes payable will reduce net earnings and will affect distributable cash by an equal amount.

The October 31, 2006 trust legislation was substantively enacted into law in June 2007. The impact of the enacted legislation is that the Fund must give accounting recognition to these new tax rules.

While the Fund is not expected to be liable for current taxes until January 1, 2011, based on remaining within certain "normal growth" limits, the impact of the trust legislation results in recognition, in the quarter ended June 30, 2007, of future income taxes arising from those temporary tax differences expected to reverse after January 1, 2011, at the currently substantively enacted rate of 31.5% tax rate that would be applicable to the Fund at that time.

Income taxes are also recognized for future income tax consequences attributed to estimated differences between the financial statement carrying value of existing assets and liabilities and their respective income tax bases in the corporate subsidiaries of the Fund.

Retractable non-controlling interest

The retractable non-controlling interest represents a specified percentage interest in each of Stylus Limited Partnership, Don Park Limited Partnership, Don Park (USA) Limited Partnership, Diamond Energy Services Limited Partnership and Beco Industries Limited Partnership (collectively the "Limited Partnerships") held by third parties. In each case, the Fund is entitled to preferred returns of annual distributable cash from these Limited Partnerships. 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 holders of 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 respective ownership interests. The amount recorded on the interim consolidated statements of operations for the three-month period ended June 30, 2007 of $(322) represents the total allocation of loss from the respective Limited Partnerships to its retractable non-controlling interest holders during the quarter (income of $173 in the second quarter of 2006). For the six-month period ended June 30, 2007, the amount of loss allocated was $549 (income of $472 for the six-month period ended June 30, 2006).

The retractable non-controlling interest holders have the right to cause the Fund to acquire their interest at the end of the terms of their employment agreements, at a value based upon an agreed multiple of the previous year's financial performance of the respective Limited Partnership, subject to a liquidity preference by the Fund which protects its invested capital. The retractable non-controlling interest is recorded on the interim consolidated balance sheets at the greater of the carrying value of the retractable non-controlling interest and the formula based value of the put liability at the balance sheet date, and will be revalued on the same basis at each balance sheet date, thereafter.

Non-controlling interest

The non-controlling interest on the interim 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 (loss) attributable to the non-controlling interest on the interim consolidated statements of operations for the second quarter of 2007 of $(13) and $409 for the six-month period ended June 30, 2007, represents the share of net earnings (loss) attributable to the non-controlling interest based on the Units issuable for Exchangeable Shares in proportion to total fully diluted Units issued and issuable (for Exchangeables) at each month end during the period.

Net Earnings

Net earnings decreased $3,398 in the quarter to a loss of $(79) and by $2,393 to $3,668 for the six-month period ended June 30, 2007 mainly due to reduced sales and gross margins, as well as increased unrealized foreign exchange losses, partially offset by reductions in administrative and selling expenses.

Distributable Cash

Distributable cash generated for the three month period ended June 30, 2007, was $1,617 compared to $5,327 for the three- month period ended June 30, 2006, and $7,556 and $10,835 for the six-month periods ended June 30, 2007 and June 30, 2006, respectively. Cash distributions declared to Unitholders in the second quarter of 2007 were $4,407 compared to $5,436 for the same period of 2006, and $8,813 and $9,854 for the six-month periods ended June 30, 2007 and June 30, 2006, respectively.

Cash provided by operating activities before change in non-cash working capital decreased to $2,288 during the second quarter of 2007 from $6,099 during the second quarter of 2006, and to $8,727 for the six-month period ended June 30, 2007 compared to $12,972 for the six-month period ended June 30, 2006. The decrease of $3,811 in the quarter is primarily attributable to decreases in net earnings of $3,398, non-controlling interest of $717, retractable non-controlling interest of $495, and an increase in unrealized foreign exchange losses of $666 from the prior year.

Maintenance capital expenditures for the second quarter of 2007 were $624 as compared to $599 for the second quarter of 2006, and $974 for the six-month period ended June 30, 2007 compared to $1,665 for the six-month period ended June 30, 2006. The portfolio businesses are prudently managing maintenance capital expenditures.

The calculation of distributable cash generated includes the cash portion of the retractable non-controlling interest of $197, which represents the third parties' portion of the actual cash distributions to be paid based on the distributable cash of the Limited Partnerships for the six months in 2007. The interim consolidated statements of cash flow include the total retractable non-controlling interest for the three months ended June 30, 2007, which was $(322) compared to $173 for the three months ended June 30, 2006, and $(549) for the six-month ended June 30, 2007 compared to $472 for the six-month ended June 30, 2006.

For the three months ended June 30, 2007, the payout ratio increased to 273% (before the proforma allocation of distributions to Exchangeable Shares) compared to 102% in the second quarter of 2006. The payout ratio for the six months ended June 30, 2007 increased to 117% compared to 92% in the six months ended June 30, 2006 (in each case, before the proforma allocation of distributions to Exchangeable Shares). This increase for the second quarter and six-months ended June 30, 2007, is primarily due to lower distributable cash generated partially offset by lower distributions.



Details of the cash distributions declared by the Fund for the six-months
ended June 30, 2007, are as follows:

----------------------------------------------------------------------------
----------------------------------------------------------------------------
Period Record Date Payment Date Per Unit Total
----------------------------------------------------------------------------
January January 31 February 15 $ 0.083 $ 1,468
February February 28 March 15 0.083 1,469
March March 30 April 13 0.083 1,469
April April 30 May 15 0.083 1,469
May May 31 June 15 0.083 1,469
June June 29 July 16 0.083 1,469
----------------------------------------------------------------------------
Total $ 0.498 $ 8,813
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Summary of Quarterly Results

The quarterly financial information presented below represents eight quarters of TerraVest's operating results. Information presented reflects results of operations for the respective portfolio businesses after acquisition. Diamond and Beco were acquired on October 3, 2005 and December 5, 2005, respectively.




----------------------------------------------------------------------------
----------------------------------------------------------------------------
2007 2007 2006 2006 2006 2006
Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter
----------------------------------------------------------------------------
Sales $ 50,443 $ 64,227 $ 67,341 $ 72,915 $ 63,757 $ 67,334
Net earnings
(loss) (1)
$ (79) $ 3,747 $ (12,874) $ 6,608 $ 3,319 $ 2,742
Earnings
(loss) per
Unit (1)
- Basic $ (0.01) $ 0.21 $ (0.84) $ 0.40 $ 0.22 $ 0.21
- Diluted $ (0.01) $ 0.21 $ (0.84) $ 0.40 $ 0.22 $ 0.21
Net earnings
before
goodwill
write-down
(1) $ (79) $ 3,747 $ 4,849 $ 6,608 $ 3,319 $ 2,742
Earnings
before
goodwill
write-down
per Unit (1)
- Basic $ (0.01) $ 0.21 $ 0.30 $ 0.40 $ 0.22 $ 0.21
- Diluted $ (0.01) $ 0.21 $ 0.28 $ 0.40 $ 0.22 $ 0.21
Distributable
cash $ 1,617 $ 6,006 $ 4,810 $ 7,936 $ 5,327 $ 5,440
Distributable
cash per
Unit $ 0.09 $ 0.34 $ 0.27 $ 0.48 $ 0.35 $ 0.42
Distributions
declared
per Unit $ 0.25 $ 0.25 $ 0.35 $ 0.35 $ 0.35 $ 0.35


----------------------------------------------------------------------------
----------------------------------------------------------------------------
2005 2005
Fourth Third
Quarter Quarter
----------------------------------------------------------------------------
Sales $ 63,743 $ 53,462
Net earnings (loss) (1) $ 3,210 $ 2,357
Earnings (loss) per Unit (1)
- Basic $ 0.25 $ 0.19
- Diluted $ 0.25 $ 0.19
Net earnings before goodwill write-down (1) $ 3,210 $ 2,357
Earnings before goodwill write-down per Unit (1)
- Basic $ 0.25 $ 0.19
- Diluted $ 0.25 $ 0.19
Distributable cash $ 5,632 $ 4,087
Distributable cash per Unit $ 0.42 $ 0.32
Distributions declared per Unit $ 0.34 $ 0.32
----------------------------------------------------------------------------
----------------------------------------------------------------------------

(1) Adjustments to net earnings made in the fourth quarter of 2006 include:
goodwill write-down of $24,586; goodwill recovery from retractable non-
controlling interest amounting to $(4,917); and non-controlling interest
impact of $(1,946).


4. LIQUIDITY AND CAPITAL RESOURCES

Financial Position
----------------------------------------------------------------------------
----------------------------------------------------------------------------
As at
----------------------------------------------------------------------------
June 30, 2007 December 31, 2006
----------------------------------------------------------------------------
Total assets $ 237,150 $ 255,966
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Long-term financial liabilities
Capital lease obligations $ 95 $ 115
Accrued long-term compensation 132 101
Retractable non-controlling interest 19,596 20,949
----------------------------------------------------------------------------
Total long-term financial liabilities $ 19,823 $ 21,165
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Long-term financial liabilities decreased $1,342 as at June 30, 2007 compared to December 31, 2006, due to losses in the portfolio businesses resulting in reduced carrying value of the retractable non-controlling interest in these businesses. 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.

Total Assets

Total assets at June 30, 2007, were $237,150 compared to $255,966 at December 31, 2006. The decrease is primarily due to the decreases in accounts receivable of $13,037 and inventory of $3,372.

Credit Facilities

During the quarter ended June 30, 2007, the Fund had credit facilities with a maximum level of indebtedness of $75,000. The credit facilities consisted of an operating loan facility with a maximum level of indebtedness of $45,000 and a term loan facility with a maximum level of indebtedness of $30,000. The available borrowing level under the credit facilities is restricted by certain financial performance covenants and based on those ratios the maximum borrowing level at June 30, 2007 was $65,052.

The credit facilities are secured by a first ranking debenture in the amount of $150,000, a debenture pledge agreement granted by the Fund and its subsidiaries, cross guarantees of each of the Fund and its subsidiaries, a share pledge agreement of TerraVest Industries Inc., security granted under Section 427 of the Bank Act (Canada) providing security over inventory, and a subordination agreement in which the Fund subordinates all present and future indebtedness, liabilities and obligations owed to the Fund by its subsidiaries. The interest rate is set quarterly based on the Fund's total debt level and ranges from Prime to Prime plus 0.75%. The rate charged under the credit facilities is Prime plus 0.75%.

As at June 30, 2007, the Fund satisfied all covenants contained in its credit facilities. However, Management projects the Fund to breach certain of its debt covenants within the next three months. Should a violation of the financial covenants occur, the lenders have the right to terminate the facilities, to demand repayment and or realize on its security. Management has informed the lenders of the possible future breach and is currently negotiating with the lenders to amend the respective covenants and is confident such an amendment will be mutually agreed. However there can be no assurance that management will obtain such an amendment. Management is confident, given the Fund's history of profitability and strong borrowing base, that it will either obtain an amendment from the lenders or replace the debt facility.

The forecasted covenant breach results in large part from the expected prolonged downturn in drilling activities associated with natural gas exploration. Management's outlook has been revised, delaying the expected energy market recovery from late in the third quarter of 2007 to no sooner than the first quarter of 2008. As a result, projected cash flows for the remainder of 2007 have been reduced. Management believes the Fund's businesses are well positioned to capitalize on a rebound in activities when they occur. The reduction in cash distributions strengthens the financial flexibility of the Fund. (See Section 5. 2007 Outlook)

Liquidity

Short-term borrowings under the operating loan provide flexibility for managing seasonal fluctuations in working capital. The credit facility has financial covenants related to: minimum interest coverage; funded debt to earnings before interest; taxes; depreciation and amortization; funded debt to capitalization; net worth; and working capital. As at June 30, 2007, the Fund met all of its financial covenants.

Management of the Fund will be closely monitoring its resources to meet its liquidity needs for the next twelve months. 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. Management continuously monitors the performance of each of the Fund's businesses and incorporates all available information in its projections which are used to assess the Fund's distribution policy.



Commitments

Contractual obligations consist of the following amounts:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total 1 year 2-3 years 4-5 years
----------------------------------------------------------------------------
Operating leases $ 19,811 $ 6,020 $ 8,923 $ 4,868
Capital leases 135 40 45 50
Commercial Letters of Credit 2,245 2,245 - -
----------------------------------------------------------------------------
Total $ 22,191 $ 8,305 $ 8,968 $ 4,918
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The Fund is liable for payment of an incentive fee to its external manager, TerraVest Management Partnership ("TMP") if certain targets related to distributions per Unit are met. Pursuant to the Management Services Agreement ("MSA") between the Fund and TMP, which expires July 9, 2009, the incentive fee is payable when monthly distributions exceed $0.08829 per Unit by 10%. The incentive fee earned in the three and six month periods ended June 30, 2007 was nil (2006 - $223 and $411, respectively). Subject to specific terms of the MSA, including payment of a termination fee, the Fund has an option for early termination of the MSA after July 9, 2007.

Subject to specific terms of the MSA, including payment of a termination fee, the Fund has an option for early termination of the MSA, upon a majority vote of the independent Trustees. In fulfilling their obligation to oversee the performance of TMP, the independent Trustees are continuing their review of the Fund management service requirements and options, including as currently provided under the MSA, as well as related costs. This review is ongoing and no conclusions have been reached. The material terms of the MSA, including with respect to termination fee and notice period, are summarized in the Annual Information Form of the Fund dated March 15, 2007.

The Fund is liable for standby letters of credit totaling $386 and documentary letters of credit totaling $1,859 as at June 30, 2007.

At June 30, 2007, the Fund had foreign exchange contracts to purchase US$9,800 currency for CDN$10,852 at an average rate of 1.10101 maturing up to June 30, 2008. At June 30, 2007, the contracts had a fair market value liability of $406.

Contingencies

During the ordinary course of business activities, the Fund and its subsidiaries may be made a party to certain claims and become contingently liable for various matters. Management believes that adequate provisions have been recorded in the accounts as required.

Although it is not possible to estimate the extent of potential costs and losses, if any, Management believes that the ultimate resolution of such contingencies will not have a material adverse effect on the financial position, results of operations or cash flows of the Fund and its subsidiaries.

The Fund is contingently liable for a payment of a maximum of $3,200, as additional consideration, to the vendors of Beco Industries Ltd. if certain targets related to Beco's earnings before interest, taxes, depreciation and amortization are met during the period January 1, 2006 through December 31, 2007. Additional consideration, if any, will be recorded once the contingency is resolved. Based on results to date and forecasted earnings in 2007, Management does not expect to make any contingent payment pursuant to this agreement.

Entities within the Fund, and their predecessor entities, may be subject to audits from federal and provincial tax authorities. These audits may give rise to assessments related to tax filing positions the Fund or these predecessors have taken. While Management believes that the filing positions are appropriate and supportable, the possibility exists that certain matters may be reviewed and challenged by the tax authorities. Management regularly reviews the potential for adverse outcomes and the adequacy of provisions relating to these matters, and believes it has adequately provided for such matters.

The Fund has recorded a recovery of $330 through recognition of future income tax assets resulting from the enactment of Bill C52 and the related legislation to tax income trusts in 2011. This is a non-cash recovery and is related to the Fund's share of the temporary differences between the accounting and tax bases of the Fund's assets and liabilities. This future recovery has no impact on the Fund's cash flows or distributions.

Units and Exchangeable Shares

The terms of the Units and exchangeable shares ("Exchangeable Shares") are described in the Fund's MD&A for the year ended December 31, 2006. The Units are listed on the Toronto Stock Exchange under the symbol TI.UN. The Exchangeable Shares are not listed or traded on any stock exchange. As at August 14, 2007, there were 17,626,498 Units and 1,410,642 Exchangeable Shares issued and outstanding. The exchange ratio, adjusted for the weighted average trading price of the Fund's Units for the twenty day period ended June 30, 2007, was 1.46702 and is effective July 31, 2007.

Unitholder Rights Plan

The Fund implemented a Unitholder Rights Plan (the "Plan"), effective January 22, 2007, which was ratified by Unitholders at the Annual General Meeting on May 22, 2007. The Plan is described in the Fund's MD&A for the year ended December 31, 2006.



Sources and Uses of Cash
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three month period ended Six month period ended
June 30, June 30,
2007 2006 2007 2006
----------------------------------------------------------------------------
Cash Provided By (Used in)
----------------------------------------------------------------------------
Operating Activities
Cash flow from operating
activities before change
in non-cash working
capital $ 2,288 $ 6,099 $ 8,727 $ 12,972
Change in non-cash
working capital 7,002 4,221 9,526 (4,836)
----------------------------------------------------------------------------
$ 9,290 $ 10,320 $ 18,253 $ 8,136
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Investing Activities
Purchase of property,
plant and equipment,
net $ (819) $ (2,040) $ (1,178) $ (3,794)
----------------------------------------------------------------------------
$ (819) $ (2,040) $ (1,178) $ (3,794)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Financing Activities
Net repayment of
operating loan $ (8,894) $ (35,217) $ (8,438) $ (33,621)
Change in restricted
cash - 201 - 2,416
Units issued for cash,
net of expenses - 32,148 - 32,148
Distribution to
retractable
non-controlling
interest - (282) (804) (282)
Distributions to
Unitholders (4,407) (5,097) (9,371) (9,514)
Other costs (10) (8) (20) 27
----------------------------------------------------------------------------
$ (13,311) $ (8,255) $ (18,633) $ (8,826)
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Cash Provided By (Used In):

Operating Activities

Cash flow from operations decreased $1,030 during the second quarter of 2007 and increased by $10,117 for the six-month period ended June 30, 2007. The net decrease in the second quarter of 2007 is mainly due to lower contributions from each of the portfolio businesses offset by cash provided from net reductions in non-cash working capital. The cash provided from reductions in non-cash working capital for the six-month period ended June 30, 2007, is mainly due to decreases in accounts receivables and inventory, partially offset by decreases in accounts payable and accrued liabilities.

Investing Activities

Cash used in investing activities decreased from $2,040 in the second quarter of 2006 to $819 in the second quarter of 2007, and from $3,794 for the six-months ended June 30, 2006 to $1,178 for the six-months ended June 30, 2007. A majority of these investing activities relate to maintenance capital expenditures.

Financing Activities

Distributions paid to Unitholders decreased from $5,097 in the second quarter of 2006 to $4,407 for the three months ended June 30, 2007, which reflects a decrease in the distribution per Unit amount, offset by an increase in the weighted average number of Units outstanding from 15,073,721 for the period ending June 30, 2006 to 17,626,376 for the period ending June 30, 2007. Total distributions per Unit declared in the second quarter of 2006 amounted to $0.345; and the second quarter distributions in 2007 amounted to $0.249 per Unit.

Financial Instruments

The Fund's financial instruments consist primarily of cash, accounts receivable, income taxes receivable, bank indebtedness, amounts payable under the operating loan, accounts payable and accrued liabilities, derivative instruments, income taxes payable, distributions payable, term debt, capital lease obligations and accrued long-term compensation. The carrying values of the Fund's financial instruments approximate fair values due to immediate or short-term maturity of these financial instruments.

5. 2007 OUTLOOK

A brief outlook for the Fund follows:

Management's outlook is revised from our prior communications. This revision reflects the challenging market conditions facing the Fund's energy businesses, as well as anticipated performance for the Fund's non-energy businesses. The most current information available with respect to natural gas drilling activity indicates that drilling activity is now unlikely to improve in the third quarter to the extent previously anticipated. Commodity prices for natural gas are lower than our prior assumptions and storage levels for gas remain at historically high levels. Our current outlook anticipates that a meaningful recovery in natural gas drilling activity will not occur before the first quarter of 2008 at the earliest. While we expect some seasonally driven increase in our energy businesses later in 2007, the market recovery we previously anticipated later this year appears to be delayed.

As a result, we are revising our outlook for the purpose of planning our cash distributions to Unitholders. Management recently recommended and Trustees approved a reduction in TerraVest's monthly distribution from $0.08333 ($1.00 on an annualized basis) to $0.04167 ($0.50 on an annualized basis) per Unit. This change will be effective with the distribution to Unitholders of record on August 31, 2007 for payment on September 17, 2007. Management believes this change in the Fund's distribution commitment will enable the Fund to prudently manage its financial resources. It provides the Fund with greater flexibility until there is an improvement in the energy market which is important to the Fund's ability to generate distributable cash. Trustees and Management will continue to closely monitor portfolio business performance and the Fund's ability to distribute cash to its Unitholders.

As a result of the low relative natural prices and high storage levels, exploration and new production efforts for natural gas are depressed relative to activity levels experienced since the Fund's inception. The Canadian Association of Oilwell Drilling Contractors ("CAODC") and the Petroleum Services Association of Canada ("PSAC") have made significant downward reductions in forecasted activity for 2007. On July 26, 2007, PSAC reduced its forecast to 17,650 rig released well completions (both oil and natural gas), down from its original forecast of 21,500 rig released well completions issued on November 1, 2006. CAODC also estimates a significant decline in natural gas well completions. In addition CAODC is expecting drilling rig utilization to average about 44% for the 2007 fiscal year compared to a utilization rate of 63% for 2006. This will be the lowest rig utilization level since 2002. As a result of the expected decline in drilling activity related to natural gas, management of RJV expects to have reduced levels of sales and distributable cash for the remainder of the year compared to the same period of 2006. RJV's management will continue to work closely with its customers to maintain relationships and market share during this difficult period.

Diamond management expects the reduced activity levels in the natural gas sector to continue to drive its mix of business in favour of oil well servicing. Diamond primarily focuses on wells already in service, in contrast to other well servicing companies which are more heavily oriented towards drilling. Diamond was negatively impacted by a longer than anticipated spring breakup due to inclement weather which reduced equipment utilization during the second quarter. Management anticipates reduced distributable cash generation for 2007 compared to 2006. Management anticipates reduced distributable cash generation for the balance of 2007 as compared to 2006. Diamond management continues to focus on cost control, and pursuing new business to improve fleet utilization.

Over the last 18 months, Don Park underwent a significant restructuring of its business. Management implemented significant cost reduction programs, made strategic investments and focused on customer service. These efforts are expected to reduce operating costs by over $2,000 from 2006 levels while increasing gross margins and increasing market share. Despite no expectation of material improvement in market conditions over last year, Management expects a continuation of improved financial results for the remainder of 2007.

Stylus has made significant progress in improving its manufacturing and distribution operations. Management is continuing to expand sales efforts in the United States, which has been strengthened by the recent hiring of a U.S.-based sales manager and the business' continuing participation at the Las Vegas Market. Stylus expanded its sourcing of imported product by significantly improving the import sofa program, expanding its product offerings and the number of suppliers. Despite a slow overall retail market for furniture products, Stylus's commercial sales and U.S. sales efforts are expected to improve Stylus' 2007 financial performance over 2006 levels for the remainder of the year.

Beco has addressed its fulfillment, quality and customer issues experienced in 2006. Sales prospects are positive as the business has renewed its reputation as a quality and service leader in the key segments in which it operates. The business is vigorously pursuing new customer opportunities, some of which are anticipated to positively impact 2007 and future periods. Beco continues to add value to its customer base by designing innovative products and sourcing across an international network. Beco's management continues to focus on growth initiatives, including sales of additional product lines to existing accounts and expanding Beco's customer base. Beco is also focused on a number of initiatives to improve its supply chain, reduce costs and improve service levels.

Ezee-On management expects performance below year ago levels for the remainder of the year primarily due to conditions in the western Canadian marketplace. Management is pursuing U.S. and export initiatives to partially offset the weak domestic market conditions. The European market continues to be challenging and is not expected to be a significant contributor to Ezee-On for the remainder of 2007.

Management continues to work with each of the portfolio businesses and prudently manage the Fund's resources. Fund administration costs have been significantly reduced from 2006 expenditures and Management continues to focus on reducing expenses and improving efficiencies wherever possible. The challenging market conditions, particularly for the Fund's energy businesses, have resulted in reduced levels of performance for the Fund overall.

6. RISK FACTORS

A detailed description of the risks relating to the portfolio businesses and the structure of the Fund is included in the Fund's MD&A for the year ended December 31, 2006 and the Annual Information Form of the Fund dated March 15, 2007.

7. RELATED PARTY TRANSACTIONS

During the quarter, pursuant to a MSA between the Fund and its external manager, TMP, which is controlled by significant Unitholders of the Fund, three of whom are also Trustees of the Fund, the Fund incurred the following expenses related to management of the Fund:



----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three month period ended Six month period ended
June 30, June 30,
2007 2006 2007 2006
----------------------------------------------------------------------------
Management fees $ 212 $ 214 $ 424 $ 428
Incentive fees - 223 - 411
Reimbursement of
expenses 75 218 186 382
----------------------------------------------------------------------------
$ 287 $ 655 $ 610 $ 1,221
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The amounts paid or payable to TMP are recorded at the exchange amount under normal business conditions.

During the year, the Fund, through certain of its subsidiary Limited Partnerships, paid rent for manufacturing and operating facilities to various parties controlled by the retractable non-controlling interest holders of the respective Limited Partnership as follows:



----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three month period ended Six month period ended
June 30, June 30,
2007 2006 2007 2006
----------------------------------------------------------------------------
Expense Incurred by:
----------------------------------------------------------------------------
Stylus $ 287 $ 115 $ 568 $ 230
Don Park 201 550 446 1,100
Beco 125 125 250 250
----------------------------------------------------------------------------
$ 613 $ 790 $ 1,264 $ 1,580
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The amounts paid or payable by the respective Limited Partnership are pursuant to lease agreements with expiry dates ranging from November 30, 2008 through November 30, 2014, and are based upon fair market values for similar facilities.

8. ACCOUNTING POLICIES

The Fund prepares its financial statements in accordance with Canadian GAAP. The Fund's accounting policies are disclosed in the notes to the audited consolidated financial statements for the period ended December 31, 2006 and unaudited interim consolidated financial statements for the period ended June 30, 2007.

On January 1, 2007, the Fund adopted Canadian Institute of Chartered Accountants ("CICA") Handbook Section 3855, Financial Instruments - Recognition and Measurement; Section 3865, Hedges; Section 1530, Comprehensive Income; Section 3251, Equity; and Section 3861, Financial Instruments - Disclosure and Presentation.

These new accounting standards provide requirements for the recognition, measurement, disclosure and presentation of financial instruments, the use of hedge accounting, and also establish standards for reporting and presenting comprehensive income. These standards were adopted retroactively without restating prior years.

The principal changes on adoption of these new accounting standards are described below:

Classification

Section 3855 establishes standards for recognizing and measuring financial assets, financial liabilities and non-financial derivatives. All financial instruments are required to be measured at fair value on initial recognition. Measurement in subsequent periods depends on whether the financial instrument has been classified as loans and receivables, held for trading, held to maturity, available for sale, or other liabilities. The classification depends on the purpose for which the financial instruments were acquired, their characteristics and/or Management's intent. Management determines the classification of financial assets and financial liabilities at initial recognition and, except in very limited circumstances, the classification is not changed subsequent to initial recognition.

(a) Loans and receivables

Loans and receivables are initially recognized at fair value including direct and incremental transaction costs and are subsequently measured at amortized cost, using the effective interest rate method. The classification of the Fund's accounts receivable into loans and receivables did not have a material impact on the unaudited interim consolidated financial statements as at, and for the six month period ended, June 30, 2007.

(b) Held for trading

Financial assets and financial liabilities that are purchased and incurred with the intention of generating income in the near term are classified as held for trading. Financial instruments included in this category are initially recognized at fair value and transaction costs are taken directly to earnings including gains and losses arising from changes in fair value. Cash, derivative instruments and bank indebtedness were designated as held for trading on January 1, 2007 and on June 30, 2007. The classification of these financial instruments as held for trading did not have a material impact on the unaudited interim consolidated financial statements as at, and for the six month period ended, June 30, 2007.

(c) Held to maturity

Held to maturity investments are financial assets with fixed or determinable payments that the Fund has the intention and ability to hold to maturity. These are initially recognized at fair value including direct and incremental transaction costs and are subsequently measured at amortized cost using the effective interest rate method. No financial assets or liabilities were classified as held to maturity on January 1, 2007 or on June 30, 2007.

(d) Available for sale

Available for sale assets are financial assets that are designated as available for sale and are not categorized into any other categories described above. They are initially recognized at fair value, with gains and losses arising from changes in fair value included in other comprehensive income until disposition, when the cumulative gain or loss is transferred to earnings. No financial assets were classified as available for sale on January 1, 2007 or on June 30, 2007.

(e) Other liabilities

Financial liabilities are classified as other liabilities. After their initial fair value measurement, they are measured at amortized cost using the effective interest rate method. The classification of the Fund's accounts payable and accrued liabilities, income taxes payable, distributions payable, capital lease obligations, accrued long-term compensation, operating loan and term debt into other liabilities, did not have a material impact on the unaudited interim consolidated financial statements as at, and for the six month period ended, June 30, 2007.

Transaction costs

Transaction costs with respect to instruments not classified as held for trading are recognized as an adjustment to the cost of the underlying instrument, when it is recognized, and amortized using the effective interest method. The change to the effective interest method did not have a material impact on the unaudited interim consolidated financial statements as at, and for the six month period ended, June 30, 2007.

Derivatives and hedge accounting

Derivative instruments, including embedded derivatives, are recorded at fair value unless exempted from derivative treatment as normal purchase and sale. All changes in their fair value are recorded in income unless cash flow hedge accounting is used, in which case changes in fair value are recorded in other comprehensive income. The Fund has elected to apply this accounting treatment for embedded derivatives on the date of formation of the Fund and the change in accounting policy did not have an impact on the interim consolidated financial statements as at, and for the six month period ended, June 30, 2007.

Comprehensive income

Comprehensive income is composed of the Fund's net earnings and other comprehensive income. Comprehensive income may include any unrealized gains and losses on available for sale securities, foreign currency translation gains and losses on the net investment in self-sustaining foreign operations, and changes in the fair market value of derivative instruments designated as cash flow hedges, all net of income taxes. As the Fund did not have any elements of other comprehensive income, the adoption of Section 1530 did not have an impact on the unaudited interim consolidated financial statements as at, and for the six month period ended, June 30, 2007.

Accounting changes

Effective January 1, 2007, the Fund adopted CICA Handbook Section 1506, Accounting Changes, which establishes criteria for changing accounting policies, together with the accounting treatment and disclosure of changes in accounting policies and estimates, and correction of errors. Under the new standard, accounting changes should be applied retroactively unless otherwise permitted or where impracticable to determine. As well, voluntary changes in accounting policy are made only when required by a primary source of GAAP or the change results in more relevant or reliable information. The Fund has determined that the application of section 1506 did not have any impact on the unaudited interim consolidated financial statements as at, and for the six month period ended, June 30, 2007.

Future accounting pronouncements

Effective January 1, 2008, the Fund will be required to adopt two new CICA standards, Section 3862, Financial Instruments - Disclosures and Section 3863, Financial Instruments - Presentation, which will replace Section 3861, Financial Instruments - Disclosure and Presentation. The new disclosure standard increases the emphasis on the risks associated with both recognized and unrecognized financial instruments and how these risks are managed. The new presentation standard carries forward the former presentation requirements. The Fund is currently assessing the impact these new standards will have on its consolidated financial statements.

9. INCOME TAXES

a) Specified Investment Flow Through Entities

The Fund is considered to be a Specified Investment Flow Through Entity based on legislation enacted in June 2007. Prior to June 2007, income tax obligations relating to distributions from the Fund were obligations of the Unitholders and, accordingly, no provision for income taxes had been made in respect of the income of the Fund. As described in Note 6, the Fund will recognize future income tax, in the quarter ended June 30, 2007, as a result of new tax legislation substantively enacted on June 12, 2007. Current income tax will not be recognized until the new tax reflected in this legislation on the Fund is effective. This will occur on January 1, 2011, subject to the Fund remaining within certain "normal growth" limits as described in the trust legislation.

Future income tax assets and liabilities are recorded on the difference between the accounting and carrying values of balance sheet assets and liabilities and the tax cost basis of these assets and liabilities. Assuming that the Fund remains "within normal growth limits", as described in the tax legislation, future income tax assets and liabilities will be based on substantively enacted tax laws and rates for those differences that are expected to reverse after January 1, 2011.

The Fund reviews the value of its future income tax assets and liabilities quarterly and records adjustments, as necessary, to reflect the realizable amounts of its future income tax assets and liabilities. The Fund expects that it will realize its future income tax assets and liabilities in the normal course of operations.

b) Corporate subsidiaries

Income taxes are recognized for future income tax consequences attributed to estimated differences between the financial statement carrying value of existing assets and liabilities and their respective income tax bases in the corporate subsidiaries of the Fund.

Critical Accounting Estimates

The Fund's critical accounting estimates are described in the Fund's MD&A for the year ended December 31, 2006.

10. INTERNAL CONTROL OVER FINANCIAL REPORTING

Internal control over financial reporting ("ICFR") is designed to provide reasonable assurance regarding the reliability of the Fund's financial reporting and its compliance with Canadian GAAP in its financial statements. The Chief Executive Officer and the Chief Financial Officer of the Fund have evaluated whether there were changes to its ICFR during the three-month period ended June 30, 2007 that have materially affected, or are reasonably likely to materially affect, the ICFR. No changes were identified through their evaluation.

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

Contact Information