TERRAVEST INCOME FUND
TSX : TI.UN

TERRAVEST INCOME FUND

August 15, 2005 07:00 ET

TerraVest Income Fund Releases Second Quarter of 2005 Financial Results

VEGREVILLE, ALBERTA--(CCNMatthews - Aug. 15, 2005) -

Highlights for the second quarter of 2005:

- Sales on a comparable basis for TerraVest's four investments were up 18.6% from the second quarter of 2004.

- Distributable cash generated in the quarter totaled $4.0 million.

- Distributions declared totaled $3.3 million in the quarter.

- The Fund raised $35.1 million in new equity subsequent to the end of the quarter.

TerraVest Income Fund (TSX:TI.UN) today released its financial results for the second quarter ended June 30, 2005.

For the second quarter of 2005, the Fund reported sales of $49.0 million with net earnings of $1.6 million. The second quarter of 2005 net earnings are net of non-cash amortization of definite life intangible assets of $1.1 million, resulting from the Fund's acquisition activities that commenced after the second quarter of 2004, and non-controlling interest of $0.5 million. For the 2004 comparative quarter, the Fund reported combined sales of $41.3 million and net earnings on a combined basis of $3.2 million.

For the six-month period ended June 30, 2005, the Fund reported sales of $80.9 million with net earnings of $4.5 million. The six-month period of 2005 net earnings are net of non-cash amortization of definite life intangible assets of $2.5 million, resulting from the Fund's acquisition activities that commenced after the second quarter of 2004, and non-controlling interest of $1.4 million. For the comparative 2004 six-month period, the Fund reported combined sales of $70.9 million and net earnings on a combined basis of $6.3 million.

Distributable cash for the 2005 second quarter totaled $4.0 million. The Fund distributed $3.3 million to unitholders during the latest period or 83% of distributable cash. For the six-month comparative period, distributable cash totaled $10.1 million, with distributions paid of $6.3 million, or 62% of distributable cash.

Comparative figures are provided for illustrative purposes only and are reported on a combined basis for the predecessor companies. Laniuk Industries Inc. and Stylus Furniture Ltd. are included for the second quarter and six-month period. Don Park is included for the second quarter only in both the second quarter and six-month periods in 2005 and the comparative periods in 2004, reflecting the Fund's acquisition date of April 1, 2005. The results of the Fund for the 2005 second quarter and six-month period represent a different capital and management structure and restated asset values. Certain expenses of the Fund differ from those of the predecessor companies.

During the second quarter, the Fund adopted EC-151 issued by the Canadian Institute of Chartered Accountants and changed its accounting treatment for its two classes of exchangeable shares. The exchangeable shares (including the subordinated exchangeable shares), which were previously characterized as equity, are now classified as non-controlling interest.



Highlights from the Fund's second quarter are as follows:

Operating Highlights
($ thousands, except per Unit earnings amounts)

Three months Three months
Ended Ended
June 30, 2005 June 30, 2004
------------------------------------------------------------------------

Sales 48,961 41,288
Gross Profit 11,620 11,335
Net Earnings 1,646 (1) 3,213
Basic and diluted earnings per Unit 0.16 n/a

Distributable Cash 3,950 n/a
Distributions Declared 3,282 n/a
Distributions per Unit 0.32001 n/a
------------------------------------------------------------------------

(1) net of $504 non-controlling interest and non-cash amortization of
definite life intangible assets of $1,092
------------------------------------------------------------------------


Operating Highlights
($ thousands, except per Unit earnings amounts)

Six months Six months
Ended Ended
June 30, 2005 June 30, 2004
------------------------------------------------------------------------

Sales 80,937 70,880
Gross Profit 20,631 19,370
Net Earnings 4,524 (2) 6,288
Basic and diluted earnings per Unit 0.44 n/a

Distributable Cash 10,114 n/a
Distributions Declared 6,255 n/a
Distributions per Unit 0.61002 n/a
------------------------------------------------------------------------

(2) net of $1,377 non-controlling interest and non-cash amortization of
definite life intangible assets of $2,541
------------------------------------------------------------------------


"The Fund's portfolio companies reported strong growth in sales year on year," said Dale Laniuk, President and Chief Executive Officer.

RJV continues to operate at seasonally high levels to meet record levels of demand. RJV continues to benefit from the record levels of natural gas drilling in western Canada and is operating at near capacity with a significant number of orders booked for the remainder of 2005.

Stylus reported strong sales, reflecting the strength of its expanded line of leather products and continuing strength in its contract business. Management continues to focus on expanding its core customer base, small format independent furniture retailers, after reducing sales to larger format retailers in the last year. Stylus is building its dealer network through geographic expansion and its sales through several product line extensions.

Don Park experienced lower than anticipated sales in April and May driven by the unseasonably cool weather in the Ontario market, but sales rebounded in the month of June. Margins were impacted by steel sourcing contracts, secured before the Fund's ownership, at prices above current market costs. The continuation of above average temperatures in southern Ontario is producing strong sales of air conditioners and ancillary products.

Ezee-On continued its efforts to increase sales to the United States and Eastern Europe as market conditions in Western Canada remained soft. The business recently announced it has entered into an agreement to sell the inventory of Ezee-On's Australian operation to an established distributor of agricultural products. The Distributor will sell Ezee-On's products through its existing dealer network in Australia. Management expects the new arrangement to increase sales, while reducing Ezee-On's inventory carrying requirements.

"We are pleased with the results of the Fund's four investments," said Mr. Laniuk. "As a result of the Fund's rapid growth, trustees have approved two increases in the cash distributions to unitholders during its first year of operations."

These increases have totaled 21%, with the Fund's current annual distribution at $1.28 per Unit.

The Fund's mandate is to grow its cash flow both through organic growth of its existing investments and through acquisitions of other businesses that have characteristics attractive to income funds, but lack the scale to succeed as stand-alone income funds. The Fund continues to actively search for additional investment opportunities that meet its investment criteria.

The Fund was established as an open-ended trust during the Spring of 2004 and began active operations on July 9, 2004 following the completion of an initial public offering of Units and listing for trading on the Toronto Stock Exchange.

As of August 11, 2005, the Fund had 12,803,753 Units listed for trading on the TSX. There are also 1,494,220 Exchangeable Shares - Series 1 and 1,404,000 Exchangeable Shares - Series 2 outstanding, held by Fund management. Exchangeable Shares - Series 1 and Exchangeable Shares - Series 2 are not listed and are not traded on an exchange.

The Fund's financial statements are available on SEDAR at www.sedar.com and on the Fund's website at www.terravestindustries.com. A conference call with management will take place today at 10:00 a.m. eastern time. Shareholders and others may call toll free at 1 (888) 280-8349 (or (416) 695-9713 in Toronto) to listen to a presentation by management.

The following constitutes Management's Discussion and Analysis of the unaudited interim consolidated financial statements of the Fund for the three months ended June 30, 2005.


MANAGEMENT'S DISCUSSION AND ANALYSIS

For the period January 1, 2005 to June 30, 2005

Dated: August 15, 2005

Caution Regarding Forward-Looking Statements

The Fund's public communications 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 2005 and beyond, our strategies or future actions, and our expectations for our financial results and condition.

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

The future outcomes that relate to forward-looking statements may be influenced by many factors, including but not limited to: future capital and other expenditures; commodity prices; interest rates and currency value fluctuations; the effects of war or terrorist activities; the effects of disruptions to public infrastructure, such as transportation, communications, power or water supply; industry and worldwide economic and political conditions; regulatory and statutory developments; the effects of competition in the geographic and business areas in which we operate; management actions; and technological changes. We caution that the foregoing list of factors is not exhaustive and that when relying on forward-looking statements to make decisions with respect to the Fund, investors and others should carefully consider these factors, as well as other uncertainties and potential events, and the inherent uncertainty of forward-looking statements. The Fund does not undertake to update any forward-looking statement, whether written or oral, that may be made, from time to time, by the organization or on its behalf.

(NOTE: numbers in thousands except Unit and per Unit amounts, share 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 currently has four operating divisions, RJV, Stylus, Don Park and Ezee-On. RJV is one of the largest providers of wellhead processing equipment for the Canadian natural gas industry. Stylus is one of Canada's leading made-to-order furniture manufacturers. Don Park is one of Canada's leading manufacturers and suppliers of heating and ventilation equipment. Ezee-On manufactures heavy-duty equipment for large acreage grain farms and livestock operations.

OVERALL STRATEGY OF THE FUND

Management believes that the Fund is an attractive investment opportunity due to both the quality of the underlying businesses (RJV, Stylus, Don Park and Ezee-On) and the Fund's unique growth strategy. The Fund intends to grow its cash flow both through organic growth of RJV, Stylus, Don Park and Ezee-On, and through acquisitions of other businesses that have characteristics attractive to income funds, but lack the scale to succeed as stand-alone income funds.

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

Investment Criteria

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

- annual revenues of between $20,000 and $100,000,

- demonstrated track record of generating stable cash flow,

- durable competitive advantage in an attractive industry,

- ongoing participation of key senior personnel post-acquisition,

- opportunities for organic growth under existing business practices, and

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

Implementation of Acquisition Strategy

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

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

It is Management's intention to continuously monitor the Fund's portfolio of businesses, and to undertake future acquisitions and divestitures as deemed beneficial to the Fund.

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

INCEPTION OF THE FUND

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

ACQUISITIONS IN 2004

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. The acquisition was funded by a public offering of Units. In total 3,277,500 Units, including 427,500 Units from an over allotment option exercised by the Fund's underwriters, were issued at a price of $10.60 per Unit for aggregate proceeds of $34,741. Additional costs of $2,520 were incurred by the Fund for the issuance of Units. The total cost of the transaction and the issuance of the Units was $3,106. The Fund used the excess proceeds from the offering to reduce its operating loan.

ACQUISITIONS IN 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 $730 for a total acquisition price of $30,887. The acquisition was funded by debt through an additional draw on the operating facility of $27,000 and issuance of term debt totaling $5,000. The excess amount drawn of $813 was used to fund working capital requirements.

In addition, the Fund is contingently liable for payment of a maximum of $4,800, as additional consideration, to the vendor of Don Park Inc., if certain targets related to Don Park's earnings before interest, taxes, depreciation and amortization are met during the period April 1, 2005 to March 31, 2006.

The Fund is also contingently liable for payment of a performance bonus to management of Don Park Limited Partnership if earnings before interest, taxes, depreciation and amortization of Don Park Limited Partnership and Don Park (USA) Limited Partnership on a combined basis exceed $10,400 in the period April 1, 2005 to March 31, 2006.

In connection with the acquisition of Don Park, the Fund has provided a standby letter of credit in the amount of US $350 to a U.S. financial institution as security for an operating loan for Don Park's U.S. subsidiary.

RESULTS OF OPERATIONS

Because the Fund commenced active operations on July 9, 2004, no figures exist for the comparative period for the prior year. The unaudited interim consolidated financial statements of the Fund include the operations of RJV Gas Field Services ("RJV"), Stylus Made to Order Sofas ("Stylus") and Ezee-On Manufacturing ("Ezee-On"), for the period January 1, 2005 to June 30, 2005 and Don Park for the period April 1, 2005 to June 30, 2005. Comparative figures included are provided for illustrative purposes only and are for the predecessor companies, Laniuk Industries Inc. (Laniuk, RJV and Ezee-On), and Stylus Furniture Ltd. for the period January 1, 2004 to June 30, 2004 (the "comparative period") and for Don Park for the period April 1, 2004 to June 30, 2004. The results of the Fund represent a different capital structure, a different management structure and restated asset values. Certain expenses of the Fund differ from those of the predecessor companies.

Sales

Consolidated sales of the Fund in the second quarter of 2005 were $48,961 as compared to combined sales for RJV, Don Park, Stylus and Ezee-On of $41,288 in the comparative quarter.



Three months Three months Six months Six months
ended ended ended ended
June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004
------------------------------------------------------------------------
RJV $ 13,098 $ 9,142 $ 33,024 $ 25,270
Stylus 9,336 8,043 18,171 16,819
Ezee-On 4,844 4,542 8,059 9,230
Don Park 21,683 19,561 21,683 19,561
------------------------------------------------------------------------
$ 48,961 $ 41,288 $ 80,937 $ 70,880
------------------------------------------------------------------------
------------------------------------------------------------------------


The increase in RJV's sales for the quarter was primarily the result of continued strength in the natural gas sector. Sales at RJV increased by $3,956 (43%) in the quarter when compared to the same quarter last year and by $7,754 (30%) for the period when compared to the same period one year ago. This increase reflects the continuing high levels activity in the oil and gas sector.

Sales at Stylus increased by $1,293 (16%) in the quarter compared to the same quarter of 2004 and by $1,352 (8%) in the period compared to the same period of 2004. Sales of leather furniture and contract sales continue to be strong and have offset reduced sales in upholstered furniture during the period. The reduction in sales of upholstered furniture was expected, as Stylus has decreased its exposure to some marginal accounts as it continues to expand its relationships with its key small format retailers.

During the quarter, Ezee-On's sales were up $302 (7%), compared to the same quarter in the year ago quarter but were down $1,171 (13%) compared to the comparative period. The increase in the quarter is the result of shipping the balance of the export order received in the latter part of the first quarter and is offset by declines in sales in Australia where Ezee-On continues to be hampered by soft market conditions. Sales in Australia declined to $858 in the quarter from $1,288 in the comparative quarter and declined to $1,532 in the period compared to $2,651 in the same period last year. Management had previously stated that Ezee-On would be focusing more of its sales and marketing efforts in Canada and the United States. As part of that strategy, on July 5, the Fund entered into an agreement to sell the inventory of its Australian operation to a third party. Sales in the US market during the second quarter were $846, or 1.5% ahead of the same quarter last year and year to date sales are approximately $1,585 or 16% higher than the same period of 2004. Sales in the Canadian market were hampered by wet weather in Manitoba that left large tracts of acreage unseeded. Sales in Canada in the second quarter were $1,533 compared to $1,635 in the second quarter of 2004. For the period sales in Canada were $3,120 compared to $2,777 in the comparative period of 2004.

Don Park sales are from the date of acquisition, April 1, 2005 to June 30, 2005. Sales at Don Park were hampered by cooler than expected weather in its primary Ontario market in the months of April and May and price pressures. .In addition, a backlog in issuing permits for new construction in Toronto during April and May impacted sales. The hot humid weather in the month of June led to strong sales of air conditioning units, and contractor sales were up as the backlog of permits was being worked through. Sales in the US were lower than expected as a major project, expected to be completed in May, was deferred until September 2005. Despite the slow, start sales at Don Park increased $2,122 in the quarter compared to the same quarter of 2004. This represents an increase of 11%. The increase is largely the result of additions of new operating branches in August of 2004 and increased contract business for a major customer.

Cost of Sales

Costs of sales for the quarter were $37,341 compared to $29,953 on a combined basis for RJV, Don Park, Stylus and Ezee-On in the comparative quarter. Cost of sales for the six-month period was $60,306 compared to $51,510 on a combined basis in the comparative six-month period of 2004. The increase reflects the usage of raw materials, primarily steel and steel components that were inventoried at higher prices than year ago. In addition, the new branches added by Don Park, Inc. in August of 2004 have resulted in higher cost of sales in the period as compared to the prior period.

Gross margin

Gross margins for the quarter were $11,620 or 24% of consolidated sales compared to $11,335 or 27% of the combined sales of RJV, Don Park, Stylus and Ezee-On in the comparative quarter. Year to date gross margins are $20,631, or 25% of consolidated sales, compared to $19,370 or 27% of combined sales. Don Park's gross margins have been impacted by product and customer mix, cost related to the reorganization of the Company's central warehouse and competitive pressures resulting from a significant drop in steel prices which reduced prices in the highly competitive segments of the market. Margins at Stylus in the quarter and the period were lower than in the comparative quarter and comparative period due to changes in product mix. Margins at RJV and Ezee-On have remained consistent with margins in the comparative quarter and comparative period.

Administration expenses

Administration expenses for the quarter were $3,381 compared to $2,945 on a combined basis for Laniuk, RJV, Don Park, Stylus and Ezee-On for the comparative quarter. Year to date administration expenses are $4,982 compared to $4,420 on a combined basis for the same six-month period of 2004. The increase in the quarter and the six-month period is due to additional accounting, legal, governance and management costs.

Selling expenses

Selling expenses relate to the operations of Don Park, Stylus and Ezee-on. Selling expenses in the quarter were $3,236 compared to $3,051 in the comparative quarter. Year to date selling expenses were $4,269 compared to $4,084 in the same period last year. The increase is primarily related to the increase in sales.

Product development expenses

Product development expenses relate to the design and engineering of Ezee-On's product line. Product development expenses were $65 in the quarter compared to $82 in the comparative quarter. Year to date product development costs were $130 compared to $166 in the comparative year to date period. In 2004, Ezee-On redesigned its series 3000 air carts in order to ship them fully assembled overseas.

Amortization expense

The Fund's property, plant and equipment were restated to fair market value at the date of the Fund's acquisition of Laniuk Industries. In addition, the Fund acquired $5,160 in capital assets as part of the Don Park acquisition. Amortization expense of $696 in the quarter and $1,093 reflects utilization of these assets during the quarter and year to date. The Fund also incurred $466 in costs related to its operating loan facility. These costs are amortized over the one-year life of the related debt. Amortization of $116 in the quarter and $156 year to date is related to these costs.

The Fund acquired certain definite life intangible assets as part of its acquisition of each of Laniuk Industries, Don Park and Stylus. These intangible assets consisted of contracted sales order backlogs totaling $2,740, non competition agreements totaling $4,241, employment agreements totaling $1,382, and service contracts totaling $3,462. Amortization in the quarter of $1,092 and $2,541 in the six-month period ended June 30, 2005 relate to these assets.

Interest on operating and term debt

The Fund, through its affiliate, TerraVest Industries Limited Partnership, has an operating loan with a Canadian financial institution with a maximum available indebtedness of $50,000 as at June 30, 2005 and a 364 day term loan totaling $5,000 for total debt capacity of $55,000. The average daily balance on the operating loan during the quarter was approximately $38,000 and on the term loan was $5,000. Interest was charged at prime plus 0.5% on the operating loan and prime plus 0.75% on the term loan during the quarter. Total interest charged for the quarter was $491 and year to date interest was $626.

The Fund through its affiliate, Don Park (USA) Limited Partnership, has an operating line of credit of US $350, which is fully secured by a documentary letter credit for the same amount. As at June 30, 2005, no amount had been drawn on this line of credit.



SELECTED CONSOLIDATED FINANCIAL INFORMATION
Quarterly Information

TerraVest fiscal year ended December 31
------------------------------------------------------------------------
Quarter Quarter Quarter July 9,
ended ended ended 2004 to
June 30 March 31 December September
2005 2005 31 2004 30 2004
------------------------------------------------------------------------
Sales (2) $48,961 $31,976 $16,533 $ 9,260
Net earnings $ 1,646 $ 2,878 $ 665 $ 572
Earnings per Unit/ share
Basic (1) $ 0.16 $ 0.28 $ 0.09 $ 0.08
Diluted (1) $ 0.16 $ 0.28 $ 0.09 $ 0.08
------------------------------------------------------------------------

Laniuk Industries fiscal year ended August 31
------------------------------------------------------------------------
Quarter Quarter Quarter Quarter
ended ended ended ended
May 31 February November August 31
2004 29 2004 30 2003 2003
------------------------------------------------------------------------
Sales (2) $16,649 $18,141 $11,836 $ 7,527
Net earnings $ 2,085 $ 2,441 $ 1,197 $ (695)
Earnings per Unit/ share
Basic (1) $ 0.06 $ 0.06 $ 0.03 $ (0.02)
Diluted (1) $ 0.04 $ 0.05 $ 0.02 $ (0.02)
------------------------------------------------------------------------

Notes
(1) The per Unit/share amounts are per Unit for TerraVest and per share
for Laniuk Industries.
(2) Sales and net earnings reflect the addition of Stylus only from the
date of acquisition, December 17, 2004 and Don Park from the date of
acquisition, April 1, 2005.


The increase in sales in the quarter ended June 30, 2005, as compared to the March 31, 2005, results primarily from the inclusion of Don Park for the full second quarter. Net earnings in the second quarter of 2005 were lower than for the first quarter of 2005 reflecting a slower seasonal period for RJV and a slow start to the sales season for Don Park due to cool weather in April and May as well as significant amortization of intangibles in this quarter.

The increase in sales in the quarter ended March 31, 2005, as compared to the quarter ended December 31, 2004, results primarily from the inclusion of Stylus for the full first quarter and record sales for RJV resulting from continuing strong levels of exploration activity in the natural gas sector. Net earnings in the first quarter of 2005 were higher than for the fourth quarter of 2004 as a result of these factors, as well as RJV and Ezee-On being able to fully pass on higher steel costs to their customers in the first quarter of 2005, which they were not able to do in the fourth quarter of 2004.

Sales in the quarter ended December 31, 2004 improved in relation to the quarter ended September 30, 2004 primarily due to better results for RJV as a result of the strong the natural gas sector. Earnings, however, were affected by higher input costs (primarily steel), which RJV and Ezee-On were unable to fully pass through to their customers until the first quarter of 2005.

Prior to its acquisition by the Fund in July 2004, Laniuk Industries had an August 31 year-end, which makes comparative analysis difficult. Generally speaking, the months of December through April were the strongest months for RJV as this is when the majority of the natural gas well completion activity occurs. Historically, Ezee-On's sales have been stronger in the spring and fall.

Over the periods listed above, generally, RJV has benefited from the strength in the natural gas sector, which has been growing.

Ezee-On's performance has been impacted since the cases of BSE were discovered in Alberta during the quarter ended May 31, 2003 and due to generally poor crop conditions in Western Canada over the periods listed above. In addition, the stronger Canadian dollar has hurt Ezee-On's exports. For the quarter ended May 31, 2004, Ezee-On did have larger than usual sales due to its recognition, in the quarter, of approximately $2,100 of a large export order from a European company for ultimate sale in Kazakhstan.

TOTAL ASSETS

Total assets at June 30, 2005 were $185,410 compared to $136,852 at December 31, 2004. The increase is primarily attributable to the addition of Don Park and an increased investment in working capital.



COMMITMENTS

Contractual obligations consist of the following amounts:

Total Less than 1 year 1-3 years 4-5 years
------------------------------------------------------------------------
Operating leases $10,896 $ 1,391 $ 7,577 $ 1,928
------------------------------------------------------------------------
------------------------------------------------------------------------


As at June 30, 2005, the Fund has outstanding documentary letters of credit totaling US$522 for the purchase of raw materials.

The Fund is liable for payment of an incentive fee, in the form of Units, to its external manager if certain targets related to distributions per Unit are met. Pursuant to the Management Services Agreement between the fund and the external manager, which expires July 9, 2009, the incentive fee is payable when monthly distributions per Unit exceed 10% of $0.08829 per Unit. An incentive fee of $93 was earned in the quarter ended June 30, 2005 and has been accrued as an expense of the Fund. The unpaid amount is recorded in contributed surplus at June 30, 2005 and will be reclassified to Units once the Units have been issued.

LIQUIDITY AND CAPITAL RESOURCES

Consolidated working capital at June 30, 2005 was $24,270 compared to $32,398 as at December 31, 2004. The decrease is primarily the result of an increase in debt capacity to $55,000 of which $42,712 was drawn at June 30, 2005 compared to capacity of $20,000 with $10,400 drawn as at December 31, 2004.

In addition, the Fund, through Don Park (USA) Limited Partnership has an operating line of credit in the amount of US $350. There was no amount outstanding on this line of credit as at June 30, 2005.

Short-term borrowings under the operating loan provide flexibility for managing seasonal fluctuations in working capital. During the second quarter of 2005, the Fund had an operating loan, which had a maximum authorized limit of $45,000. On April 1, 2005, Management successfully negotiated an increase in its operating loan from $20,000 to a maximum amount of $45,000 and an interest only term loan of $5,000 to fund its acquisition of Don Park, Inc. On June 30, 2005, the maximum debt capacity under the operating loan was increased to $50,000. The operating loan 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, 2005, the Fund met all of its financial covenants.

As at June 30, 2005, the Fund had an outstanding operating loan balance of $37,712 and an outstanding term loan balance of $5,000. The Fund also had further bank indebtedness of $264 reflecting cheques issued in excess of funds on deposit at June 30, 2005. On July 8, 2005, the Fund closed a public offering for Units that raised net cash of $33,309. The funds received for the offering were used to reduce the Fund's operating loan.

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

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

The Fund's off balance sheet financing arrangements as at June 30, 2005, consist of documentary letters of credit totaling US $522 for the purchase of raw materials and a standby letter of credit for US $350 as security on an operating loan for its US operations.

UNITS OUTSTANDING

The Fund's Units are listed on the Toronto Stock Exchange under the symbol TI.UN. Exchangeable Shares - Series 1 and Exchangeable Shares - Series 2 are not listed and are not traded on an exchange. As at June 30, there were 10,253,753 Units issued and outstanding and 1,494,220 Exchangeable Shares - Series 1 and 1,404,000 Exchangeable Shares - Series 2 issued and outstanding. On July 8, 2005, the Fund closed a public offering for Units. As a result of this offering an additional 2,550,000 Units were issued. As at August 11, 2005, there are 12,803,753 Units issued and outstanding, and 1,494,220 Exchangeable Shares - Series 1 and 1,404,000 Exchangeable Shares - Series 2 issued and outstanding.

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.

RISK FACTORS

Risks Related to RJV

The demand for natural gas wellhead processing equipment is sensitive to current pricing of natural gas and general industry perception of future natural gas prices. Natural gas pricing has historically been cyclical and there is no assurance that natural gas prices will remain at current levels.

The market for RJV's natural gas wellhead processing equipment is geographically concentrated in the Western Canadian Sedimentary Basin and the demand for such equipment may be affected by changes in the level of exploration in the basin independent of the pricing of natural gas.

RJV derives a significant portion of its revenues from a limited customer base. If one or more of RJV's significant customers were to cease doing business with RJV, or significantly reduce or delay its purchase of equipment from RJV, RJV's business, financial condition and results of operations could be materially adversely affected.

There is no proprietary protection for primary product lines or processes of RJV.

Risks Related to Don Park

The demand for heating, ventilation and air conditioning equipment is sensitive to the housing and commercial construction industry. The housing and commercial construction industry in Ontario and North America, generally, has been strong, but there is no assurance that development will remain at current levels.

If Don Park does not maintain its reputation for high quality design and manufacture or its levels of customer service, Don Park may lose sales. Don Park's sales depend on sufficient inventory of finished products being on-hand for its customers.

Steel is a major component of the equipment produced by Don Park. Steel prices are subject to economic and seasonal fluctuations and may rise at rapid rates over short periods of time. In some, but not all, cases Don Park is able to recover higher costs of steel through the prices charged for the products manufactured. This is more difficult to do in periods when the price of steel is more volatile. Don Park may not be able to recover higher costs of steel through the prices charged for the products manufactured.

The Canadian heating, ventilation and air conditioning equipment industry is highly competitive. Don Park competes with a broad range of other companies some of whom manufacture equipment similar to Don Park. Some of Don Park's competitors are divisions of large corporations that may have greater financial and other resources than Don Park. There can be no assurance that such competitors will not substantially increase the resources devoted to the development and marketing of products that will compete with those of Don Park or that new competitors will not enter the Canadian heating, ventilation and air conditioning equipment market. Don Park also competes with many small and medium sized companies in Canadian regional markets or in the Canadian market as a whole, some of which may have certain competitive advantages such as lower overhead costs, strong customer relationships and specialized regional strengths.

Don Park is party to a number of collective agreements. All of Don Park's unionized workers are currently working under ratified contracts with multiple years left before they expire, however, when they expire failure to negotiate a collective agreement may result in work stoppage. If prolonged, such work stoppages may have an adverse effect on Stylus' and the Fund's financial performance.

There is only limited proprietary protection for primary product lines and processes of Don Park.

Risks Related to Stylus

As a manufacturer and distributor of furniture, Stylus is subject to a number of risk factors including increases in the prices of raw material and parts and general economic cycles in Canada and the United States including: interest rates; levels of new home ownership; consumer confidence; and employment levels. Reduced consumer confidence will result in lower purchases of home furnishings, and could have a material adverse effect on Stylus' financial condition and the results of operations.

If Stylus does not maintain its reputation for high quality design and manufacture or its levels of customer service, it may lose sales. If furniture retailers that carry Stylus products fail to maintain sufficient inventory, Stylus may lose sales due to product not being immediately available.

Stylus' business is subject to foreign exchange risk for sales and purchases denominated in foreign currencies. Foreign currency risk arises from the fluctuations of foreign exchange rates and the degree of volatility of these rates relative to the Canadian dollar. Stylus does not actively manage this risk.

On July 14, 2005, a union certification vote was held which resulted in certification of the CAW union. Negotiations of the first collective agreement will begin in due course. Failure to negotiate a collective agreement may result in work stoppages at Stylus. If prolonged, such work stoppages may have an adverse effect on Stylus' and the Fund's financial performance.

There is no proprietary protection for primary product lines or processes of Stylus.

Risks Related to Ezee-On

As a manufacturer of short-line agricultural equipment, Ezee-On is subject to a number of risk factors including: changes in agricultural commodity prices in Canada, the United States, Australia and other countries in which Ezee-On sells its equipment; weather conditions in the major agricultural producing regions of the world; and governmental 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, and could materially adversely affect Ezee-On's financial condition and its results of operations.

Ezee-On's sales depend on there being sufficient inventory of finished products on-hand for Ezee-On and its dealers. If Ezee-On and its dealers fail to maintain sufficient inventory, Ezee-On may lose sales due to product not being immediately available - particularly during seasons of higher demand. However, in periods of sudden decline in demand for Ezee-On's finished products, inventories can build up to levels that are greater than what might be needed to meet the demand. This may result in one or both of price discounts, which adversely affect Ezee-On's financial results and Ezee-On having to carry a higher level of inventory over an extended period of time that may constrain its working capital.

Ezee-On's business 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. Ezee-On does not actively manage this risk.

Ezee-On sells some of its equipment to purchasers located in emerging markets such as Kazakhstan. By selling equipment in such markets, Ezee-On may be subject to collections and other business risks. Ezee-On has mitigated its collections risk for its prior sales in Kazakhstan and Russia by requiring documentary letters of credit or cash payments in advance and it plans to require similar terms on such future sales.

There is no proprietary protection for the primary product lines or processes of Ezee On.

Volatility of Steel Prices

Steel is a major component of the equipment produced by Don Park, Ezee-On and RJV. Steel prices are subject to economic and seasonal fluctuations and may rise at rapid rates over short periods of time. This is more difficult to do in periods when the price of steel is more volatile. Don Park, Ezee-On and RJV may not be able to recover higher costs of steel through the prices charged for the equipment manufactured.

Competition

The Canadian natural gas wellhead processing equipment business is highly competitive. RJV competes with a broad range of other companies some of whom provide fully integrated units similar to RJV and others which only compete with RJV with respect to certain of the components used for processing natural gas. Some of RJV's competitors are divisions of large corporations that may have greater financial and other resources than RJV. There can be no assurance that such competitors will not substantially increase the resources devoted to the development and marketing of products that will compete with those of RJV or that new competitors will not enter the Canadian natural gas market. RJV also competes with many small and medium sized companies in Canadian regional markets or in the Canadian market as a whole, some of which may have certain competitive advantages such as lower overhead costs, strong customer relationships and specialized regional strengths.

The Canadian HVAC manufacturing and distribution industry is highly competitive. Don Park competes with a broad range of companies some of whom provide the same product lines as Don Park and others which only provide certain of the components required in the HVAC industry. Some of these companies may have greater financial and other resources than Don Park. There can be no assurance that such competitors will not substantially increase the resources devoted to the development and marketing of products that will compete with those of Don Park or that new competitors will not enter Don Park's markets.

The Canadian furniture manufacturing and distribution industry is highly competitive. Stylus competes with a broad range of companies ranging from highly specialized domestic furniture manufacturers to larger domestic and foreign standardized longer production run furniture manufacturers. Many of these companies have greater financial and other resources than Stylus. There can be no assurance that such competitors will not substantially increase the resources devoted to the development and marketing of products that will compete with those of Stylus or that new competitors will not enter Stylus' markets. Stylus also competes against many companies with other competitive advantages including stronger brand loyalty, lower overhead, larger distribution systems and greater buying power.

The Canadian and international short line agriculture equipment market is highly competitive. Ezee-On competes with a broad range of companies ranging from multinational agricultural equipment manufacturers to local manufacturers, many of whom service both the Canadian and international marketplace. Many of these companies have greater financial and other resources than Ezee-On. There can be no assurance that such competitors will not substantially increase the resources devoted to the development and marketing of products that will compete with those of Ezee-On or that new competitors will not enter Ezee-On's markets. Ezee-On also competes against many companies with other competitive advantages including stronger brand loyalty, lower overhead, larger distribution systems and greater buying power.

Environmental Legislation

All phases of the oil and gas business, including RJV's business, are subject to regulation under a variety of federal, provincial, territorial, state and municipal laws and regulations relating to health and safety and the environment. Management believes that RJV is currently in compliance with such laws and regulations. RJV has invested financial and managerial resources to ensure compliance and will continue to do so in the future. Although such expenditures historically have not been material to RJV, such laws or regulations are subject to change. Accordingly, it is impossible to predict the cost or effect of such laws and regulations to RJV's future operations.

Don Park, Stylus and Ezee-On are subject to regulation under a variety of federal, provincial, territorial, state and municipal laws and regulations relating to health and safety and the environment. Management believes that Don Park, Stylus and Ezee-On are currently in compliance with such laws and regulations. Don Park, Stylus and Ezee-On have invested financial and managerial resources to ensure compliance and will continue to do so in the future. Although such expenditures historically have not been material to Don Park, Stylus and Ezee-On, such laws or regulations are subject to change. Accordingly, it is impossible to predict the cost or effect of such laws and regulations to future operations of Don Park, Stylus and Ezee-on.

Labour

The success of the Fund depends on the ability of RJV, Don Park, Stylus and Ezee-On (the "existing business units") and other acquired businesses to maintain their productivity and profitability. The productivity and profitability of the existing business units may be limited by their ability to employ, train and retain the skilled personnel necessary to meet their respective requirements. None of the existing business units 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 existing business units 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 on the existing business units to maintain or grow their respective businesses.

Key Personnel

The success of the Fund depends on the skills, experience and effort of its senior management and the senior management of its existing business units. 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 businesses.

Leverage and Restrictive Covenants

The Fund and certain of its subsidiaries 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 subsidiaries. In addition, these subsidiaries may borrow additional funds from other third parties. The degree to which the Fund's subsidiaries 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 subsidiaries 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 subsidiaries to make scheduled payments of interest on, or to refinance, its indebtedness will depend on future cash flow, which is subject to the operations of their businesses, prevailing economic conditions, prevailing interest rate levels, and financial, competitive, business and other factors, many of which are beyond their control. These factors might inhibit refinancing of indebtedness on favourable terms, or at all.

The Credit Facility contains restrictive covenants that limit the discretion of the borrower's Management with respect to certain business matters and may, in certain circumstances, restrict TerraVest Limited Partnership's ability to pay interest or make distributions, and the ability of the other Fund's subsidiaries to pay interest on debt securities or dividends or distributions on equity securities which could adversely impact cash distributions on the Units. These covenants will place restrictions on, among other things, the ability of the borrower to incur additional indebtedness, to create other security interests, to complete mergers, amalgamations and acquisitions, to undertake an unsolicited take-over bid utilizing the Credit Facility, make capital expenditures, to pay dividends or make certain other payments, investments, loans and guarantees, and to sell or otherwise dispose of assets. In addition, the Credit Facility includes covenants restricting a change of control of the borrower (excluding the effect of any sales of securities by Dale H. Laniuk or Lee Lan Holdings Ltd.). The Credit Facility also contains financial covenants requiring the borrower to satisfy financial ratios and tests. A failure of the borrower to comply with its obligations under the Credit Facility could result in an event of default which, if not cured or waived, could permit the acceleration of the relevant indebtedness. The Credit Facility is secured by customary security for transactions of this type, including first ranking security over all present and future personal property of the borrower and a first ranking pledge of all present and future material subsidiaries 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.

Tax Related Risks

The income of the Fund and its subsidiaries 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 subsidiaries accrues at the Fund level for income tax purposes whether or not actually paid. The declaration of trust by which the Fund is constituted provides that an amount equal to the taxable income of the Fund will be distributed each year to Unitholders in order to eliminate the Fund's taxable income and provides that additional Units may be distributed to Unitholders in lieu of cash distributions. In such event, Unitholders will generally be required to include an amount equal to the fair market value of those Units in their taxable income, in circumstances when they do not directly receive a cash distribution.

If the Fund ceases to qualify as a "mutual fund trust" under the Tax Act, the Units will cease to be qualified investments for trusts governed by registered retirement savings plans, registered retirement income funds and deferred profit sharing plans and registered education savings plans, as defined in the Tax Act ("Exempt Plans"). The Fund will endeavor to ensure that the Units continue to be qualified investments for Exempt Plans. The Tax Act imposes penalties for the acquisition or holding of non-qualified investments in such plans and there is no assurance that the conditions prescribed for such qualified investments will be adhered to at any particular time. If the Fund ceases to be a mutual fund trust for the purposes of the Tax Act, the Units will be foreign property for Deferred Income Plans and other persons subject to Part XI of the Tax Act. 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).

DISTRIBUTIONS

The Fund makes monthly distributions of its available distributable cash. Distributable cash is not a defined term under Canadian generally accepted accounting principles, but is determined by the Fund as cash flow from operations before changes in working capital adjusted for unrealized foreign exchange gains less capital expenditures related to maintenance of the operating subsidiaries' property, plant and equipment and any provision determined necessary by the Fund's independent trustees. Management believes that distributable cash as a liquidity measure is a useful supplemental measure of performance as it provides the Fund's trustees an indication of the amount of cash available for distribution to the Fund's Unitholders. Investors are cautioned, however, that distributable cash should not be construed as an alternative to net earnings as a measure of profitability or to cash flow. Further, the Fund's method of calculating distributable cash may not be comparable to measures used by other companies or trusts.

The Fund has a policy of paying stable monthly distributions. Trustees set cash distributions, assisted in part by projections and analysis prepared by Management and historical financial results. The Fund's policy is to make equal monthly distributions to Unitholders based on forecasted distributable cash. The businesses of the Fund experience seasonality and as a result, there are timing differences in the generation of distributable cash and distribution of cash in certain individual quarters. It is likely that distributable cash generated by the businesses will exceed cash distributed in individual quarters and conversely, the Fund will have quarters in which cash distributed will exceed distributable cash generated. Declarations of distributions are made to Unitholders of record on the last business day of each month and are payable on or about the 15th day of the month following the declaration.

Distributable cash generated during the quarter was $3,950, and the Fund declared distributions in the quarter of $3,282 for payment to its Unitholders. Distributable cash for the six-months ended June 30, 2005 was $10,114 and the Fund declared distributions totaling $6,255 in the period for payment to its Unitholders. The following table shows the calculation of distributable cash for the quarter and six-month period ended June 30, 2005:



------------------------------------------------------------------------
Cash flow from operations before
working capital changes $ 4,495 $ 10,762
Less: maintenance capital expenditures (545) (648)
------------------------------------------------------------------------
Distributable cash $ 3,950 $ 10,114
------------------------------------------------------------------------
------------------------------------------------------------------------

Distributions declared $ 3,282 $ 6,255
Distributions declared per Unit
(excludes exchangeable shares) $0.32001 $0.61002
------------------------------------------------------------------------
------------------------------------------------------------------------


Details of the cash distributions declared by the Fund in the six months
ended June 30, 2005 are as follows:
------------------------------------------------------------------------
Period Record Date Payment Date Per Unit Total
------------------------------------------------------------------------
January January 31 February 15 $0.09667 $ 991
February February 28 March 15 0.09667 991
March March 31 April 15 0.09667 991
April April 29 May 16 0.10667 1,094
May May 31 June 15 0.10667 1,094
June June 30 July 15 0.10667 1,094
------------------------------------------------------------------------
Total $0.61002 $6,255
------------------------------------------------------------------------
------------------------------------------------------------------------


EXCHANGEABLE SHARES

The Series 1 and Series 2 Exchangeable Shares can only be exchanged for Units of the Fund. The holders of Series 1 and Series 2 Exchangeable shares are not entitled to cash distributions but are entitled to an economic equivalent of a cash distribution through an adjustment in the number of exchangeable shares. Each month an exchange ratio adjustment is determined to reflect the economic equivalent of a cash distribution. Holders of Series 1 Exchangeable Shares exchanged 3,572 originally issued Exchangeable Shares multiplied by the weighted average exchange ratio of 1.0619 for 3,793 Units. The exchange ratio, giving effect to the June 30, 2005 distribution declared, was 1.10312 to 1. The terms of the Exchangeable Shares are summarized in the annual information form of the Fund dated March 31, 2005.

RELATED PARTY TRANSACTIONS

During the period, 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, three of whom are also Trustees of the Fund, the Fund incurred costs related to management of the Fund totaling $386. During the period, the Fund's external manager became entitled to receive an incentive payment pursuant to the terms of the contract. The incentive payment for the period totaled $93 and is included in contributed surplus. The Fund also accrued $116 for expenses incurred by TMP, which is included in accounts payable. The amounts were recorded at the exchange amount under normal business conditions.

The terms of the external Management agreement are summarized in the annual information form of the Fund dated March 31, 2005.

During the quarter the Fund, through Stylus Limited Partnership, paid rent of $115, for the Stylus manufacturing facility, to a company owned by the non-controlling interest holders of Stylus Limited Partnership. During the period the rent paid was $230. The amount paid is pursuant to a lease agreement that expires on July 9, 2009 and is based upon fair market value for a similar facility.

During the quarter and the period, the Fund, through Don Park (USA) Limited Partnership, paid rent of US $77 for operating facilities to a company owned by the non-controlling interest holders of Don Park (USA) Limited Partnership. The amount paid is pursuant to a lease agreement and is based upon fair market value for a similar facility.

During the quarter and the period, the Fund, through Don Park Limited Partnership, paid rent of $461 for several operating facilities to a company owned by the non-controlling interest holders of Don Park Limited Partnership. The amounts paid are pursuant to lease agreements and are based on fair market values for similar facilities.

OUTLOOK

Management's outlook for TerraVest is positive.

With respect to RJV, industry groups continue to forecast record natural gas drilling in 2005. The latest forecast issued by the Canadian Association of Drilling Contractors estimates 24,099 well completions in 2005 with an emphasis on natural gas. This represents a 9% increase over the number of wells completed in 2004. RJV is well positioned to capitalize on any such increase. Currently, RJV is operating at near capacity and has secured significant forward orders for delivery during the remainder of 2005.

The outlook for Don Park is strong. With the continued heat wave in southern Ontario through mid-August, sales of air conditioners and ancillary products are expected to remain strong in the near term. In the US, one major project that was deferred in the second quarter is expected to be completed by September 2005. Margins are also expected to improve as management of Don Park has seen significant reductions in the price of steel and has taken action to buy at the current lower prices.

Prospects for Stylus are also quite positive. Sales of imported leather sofas and chairs continue to be strong. The line was introduced in the second quarter of 2004, and Management expects strong year on year performance. The core custom products are also positioned for growth. By eliminating sales of products with marginal profitability, Stylus is better able to focus on its more profitable small format retail customers, many of whom purchase both leather and upholstered products. In contract sales, Stylus continues to provide solutions in the hospitality sector and prospects in 2005 appear solid. Stylus will continue its growth efforts, focusing on geographic expansion and product line extensions and its core small format retail customers. Subsequent to the end of the quarter, Stylus participated in the first ever Las Vegas Market at the World Market Center held July 25 - 30 in Las Vegas, Nevada. Stylus products were very well received and the company was able to increase its active dealer base.

Ezee-On's management remains focused on expanding Ezee-On's presence in the United States, and was successful in adding new dealers the first quarter of 2005. Early indications continue to be positive in this market as sales have increased by 16% in the first six-months. In Canada, with the recent announcement of the opening of the US border to Canadian live cattle exports, management expects to see an improvement in sales related to its front-end loaders and post drivers. In addition, Ezee-On continues to explore opportunities in Eastern European countries such as Kazakhstan, Russia and most recently the Ukraine.

On July 5, the Fund entered into an agreement to sell the inventory of its Australian operation to a third party for approximately AUS $3.2 million. The sale will close two days after an independent audit of the existence of the inventory. This audit is expected to be completed by the end of the second week in August. A condition of the sale is that the purchaser enters into an exclusive distributorship agreement with Ezee-On for a five-year period. This arrangement is expected to generate significant continuing cash flows for Ezee-On in Australia. The purchaser is an established distributor of JCB tractors in Australia and has an established dealer network that will be enhanced by Ezee-On's dealer network in Australia. It is expected that sales in the Australian market will improve as a result of this arrangement.

Additionally, Fund Management is evaluating a number of investment opportunities that Management believes will be accretive to existing unithholders and will continue to increase the diversification and distributable income of the Fund. The Fund has a stated objective of being a multi-business, diversified income trust. Acquisitions are being pursued across multiple industries to further diversify the businesses of the Fund.

ACCOUNTING POLICIES

The Fund prepares its financial statements in accordance with Canadian GAAP. The Fund's accounting policies are disclosed in Note 4 of the annual audited restated consolidated financial statements for the period ended December 31, 2004.

The unaudited interim consolidated financial statements of the Fund include the operations of RJV, Don Park, Stylus and Ezee-On.

ACCOUNTING POLICY CHANGES

Variable Interest Entities

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

Financial Instruments - disclosure and presentation

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

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, the CICA released new Handbook Section 1530, Comprehensive Income, and Section 3251, Equity, effective for annual and interim periods beginning on or after October 1, 2006. Section 1530 establishes standards for reporting and display of comprehensive income. It defines other comprehensive income to include revenues, expenses, gains and losses, that in accordance with primary sources of generally accepted accounting principles, are recognized in comprehensive income, but excluded from net income. The Section does not address issues of recognition or measurement for comprehensive income and its components.

Section 3251 establishes standards for the presentation of equity and changes in equity during the reporting period. The requirements in this Section are in addition to Section 1530 and recommends that an enterprise should present separately the following components of equity: retained earnings; accumulated other comprehensive income; contributed surplus; share capital; and reserves. Management has not yet determined the impact of the adoption of this standard on the presentation of the results from operations or financial position.

CRITICAL ACCOUNTING ESTIMATES

The Fund's unaudited interim 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. The goodwill arose on the Fund's acquisition of Laniuk Industries and Stylus. 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 Industries and Stylus. 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 in the fourth quarter of each fiscal year based on historical results and any change is charged to income in that period.

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

Valuations of acquired assets and liabilities on the acquisition date require 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 required. 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, term debt, accounts payable and accrued liabilities, distributions payable and retractable non-controlling interest.

The carrying value of cash, accounts receivable, amounts payable under the operating loan, term debt, accounts payable and accrued liabilities, and distributions payable, approximate their fair values due to their immediate or short-term maturity. The non-controlling interest approximates fair value due to calculation of the put liability to determine fair market value.

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

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 its businesses selling products and services to a broad range of customers. 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 and on the Fund's website at www.terravestindustries.com.

Contact Information