TERRAVEST INCOME FUND
TSX : TI.UN

TERRAVEST INCOME FUND

November 10, 2005 07:00 ET

TerraVest Income Fund Releases Third Quarter 2005 Financial Results

VEGREVILLE, ALBERTA--(CCNMatthews - Nov. 10, 2005) - TerraVest Income Fund (TSX:TI.UN):

Highlights for the third quarter of 2005:

- The Fund raised $35.1 million from the sale of 2.2 million Units of new equity in a bought deal;

- Sales on a comparable basis for TerraVest's four investments were up 25% from the third quarter of 2004;

- Distributable cash generated in the quarter totaled $4.4 million;

- Distributions declared totaled $4.1 million in the quarter, equal to 93% of distributable cash;

- On October 3, 2005, TerraVest completed the purchase of an 87% interest in Diamond Energy Services for $33.7 million; and

- Annual Unit distributions were increased by $0.05 to $1.33 after the Diamond acquisition. This was the Fund's third increase since its inception in July 2004, with a cumulative distribution per Unit increase of more than 25%.

TerraVest Income Fund today released its interim consolidated financial results for the third quarter ended September 30, 2005.

The following is a summary of the Fund's financial results for the 2005 third quarter and a comparison to the same quarter of 2004, which was its first quarter of operations. Results for the nine months ended September 30, 2005 are also provided.



------------------------------------------------------------------------
(In thousands of dollars, Three Nine
except per Unit amounts) months months
ended ended
(unaudited) September September
30 30
------------------------------------------------------------------------
2005 2004 (1) Change 2005
------------------------------------------------------------------------
Sales 53,462 9,260 44,202 134,399
------------------------------------------------------------------------
Gross profit 12,932 2,934 9,998 33,563
------------------------------------------------------------------------
Net earnings for the period 2,357 572 1,785 6,881
------------------------------------------------------------------------

------------------------------------------------------------------------

------------------------------------------------------------------------
Cash flow from operations
before working capital changes 5,150 1,690 3,460 15,912
------------------------------------------------------------------------
Less: Maintenance capital
expenditures (758) (8) 750 (1,406)
------------------------------------------------------------------------
Distributable cash 4,392 1,682 2,710 14,506
------------------------------------------------------------------------
Distributions declared (Cash) 4,098 1,668 2,430 10,352
------------------------------------------------------------------------
Payout ratio 93% 99% (600 basis 71%
points)
------------------------------------------------------------------------
Distributions declared per Unit 0.32001 0.23924 0.08077 0.93003
------------------------------------------------------------------------
------------------------------------------------------------------------

(1) The three months ending September 30, 2004 are for the period
beginning on July 9, 2004, the date on which the Fund began active
operations.


"The Fund reported strong growth year on year, driven by our acquisitions and the organic growth in each of our businesses," said Dale Laniuk, President and Chief Executive Officer. "On a comparative basis, revenue growth for our businesses was up 25%."

Laniuk added, "We are pleased to welcome Diamond Energy Services of Swift Current into the TerraVest family after the Fund's purchase of an 87% interest at the beginning of the fourth quarter."

Highlights of Operations

- RJV is operating at record levels and has secured significant forward orders for delivery during the remainder of 2005 and into 2006. It continues to benefit from the record levels of natural gas drilling in western Canada.

- At Stylus, sales of imported leather sofas and chairs continue to be strong. Its leather line was introduced in the third quarter of 2004, and the business expects strong year on year performance. The manufactured custom fabric products are also positioned for growth. Over the last year, Stylus has successfully re-focused its efforts on its more profitable small format retail customers, many of whom purchase both leather and fabric products. The company is experiencing an increase in its dealer base in the United States as a result of its increased marketing efforts.

- The outlook for Don Park is strong relative to the difficult market conditions in which it is competing. The large backlog of applications from builders for residential building permits in the Greater Toronto Area (GTA) is expected to be processed over the next several months and the company expects contractor sales will improve as a result. Don Park's fire protection division is experiencing growth due to new volume contracts. Margins, which have been challenged by competitive activities and steel pricing, are expected to improve.

- At Ezee-On, management's focus on expanding its presence in the United States has resulted in the addition of several new dealers. The increase in the sales volume for tillage equipment in the United States is a direct result. Sales in western Canada continue to be soft due to adverse harvest conditions and the combination of lower commodity prices and higher input costs for farmers in the region. Ezee-On completed the sale of its Australian distributor and expects improved sales due to the expanded dealer network provided by the purchaser of the operation.

"We are pleased with the results of the Fund's four investments, and look forward to the future contribution of Diamond Energy," said Mr. Laniuk. "The Fund's growth and the acquisition of Diamond allowed our independent trustees to increase the cash distribution to Unitholders, effective with the distribution to be paid on November 15, 2005 to Unitholders of record on October 31, 2005."

"This is the third increase in the annual distribution since the Fund was established. At $1.33, the current annual distribution is 25% higher than it was when the Fund began operations last year."

TerraVest's trustees and management are concerned about the current uncertainty that exists in the income trust marketplace following the announcement by the federal government that it is reviewing taxation policies for income trusts in Canada. This uncertainty is believed to have significantly contributed to a reduction in the Fund's Unit price since mid-September.

TerraVest will be communicating with the federal government regarding the benefits that income trusts are bringing to Canada in the form of lower capital costs, more efficient capital markets, greater investment spending, and the improved productivity which ultimately drives greater economic activity in Canada.

The Fund believes the federal government should maintain policies that encourage the growth of income trusts in the Canadian marketplace.

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.

The Fund's mandate is to grow its cash flow both through organic growth of its existing investments and through acquisitions of additional 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.

As of September 30, 2005, there were 12,803,960 Units issued and outstanding and 1,494,032 Exchangeable Shares - Series 1 and 1,404,000 Exchangeable Shares - Series 2 issued and outstanding. The exchangeable shares 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.terravestincomefund.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 1-877-323-2093 (or (416) 695-9714 in Toronto) to listen to a presentation by Management.

MANAGEMENT'S DISCUSSION AND ANALYSIS

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

Dated: November 10, 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, natural gas well completions and natural gas prices)

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 five operating divisions, RJV, Stylus, Don Park, Diamond, which it acquired on October 3, 2005, and Ezee-On (the "underlying businesses"). 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. Diamond provides well servicing to the oil and natural gas industry in southwestern Saskatchewan and Alberta. 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 and the Fund's unique growth strategy. The Fund intends to grow its cash flow both through organic growth of its underlying businesses, 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 typically have:

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

- demonstrated track records of generating stable cash flow,

- durable competitive advantages in attractive industries,

- 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 a variety of 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 Atlantic Furniture Ltd. and its wholly owned subsidiary 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 Fund's operating facility of $27,000 and issuance of term debt totaling $5,000. The excess amount drawn of $1,113 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.

Subsequent to September 30, 2005, the Fund acquired an 87% interest in the assets of Diamond Energy Services, Inc. ("Diamond"), a well servicing company providing service to the oil and natural gas industries in southwestern Saskatchewan and Alberta, for $33,700. To close the transaction, a draw of $34,500 was made on the operating loan. The excess proceeds were used to pay certain transaction costs. The results of operations for the nine month period ended September 30, 2005 do not include results for Diamond.

RESULTS OF OPERATIONS

Because the Fund commenced active operations on July 9, 2004, no figures exist for the nine-month 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 Furniture Ltd. ("Stylus") and Ezee-On Manufacturing ("Ezee-On"), for the period January 1, 2005 to September 30, 2005 and Don Park for the period April 1, 2005 to September 30, 2005. For the purposes of this Management's Discussion and Analysis, comparative figures, for the nine months ended September 30, 2004, are provided for illustrative purposes only and include operations for the predecessor companies, Laniuk Industries Inc. (Laniuk, RJV and Ezee-On), for the period January 1, 2004 to July 8, 2004 and from commencement of operations of the Fund July 9, 2004, to September 30, 2004 (the "comparative period"). The comparative numbers for Stylus are for the period January 1, 2004 to September 30, 2004 and for Don Park for the period April 1, 2004 to September 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

Three Three Nine Nine
months months months months
ended ended ended ended
September September September September
30, 2005 30, 2004 Change 30, 2005 30, 2004 (1) Change
------------------------------------------------------------------------
RJV $ 13,464 $ 7,863 +71% $ 46,488 $ 33,133 +40%
Stylus 10,310 8,610 +20% 28,481 25,429 +12%
Ezee-On 5,241 2,323 +126% 13,300 11,553 +15%
Don Park 24,447 23,848 +3% 46,130 43,409 +6%
------------------------------------------------------------------------
$ 53,462 $ 42,644 +25% $ 134,399 $ 113,524 +18%
------------------------------------------------------------------------
------------------------------------------------------------------------
(1) Sales for Don Park are for the period April 1, 2004 through
September 30, 2004


Consolidated sales of the Fund in the third quarter of 2005 were $53,462 as compared to combined sales for RJV, Don Park, Stylus and Ezee-On of $42,644 in the three months ended September 30, 2004 (the "comparative quarter"). Year-to-date, consolidated sales were $134,399 as compared to $113,524 in the comparative period. Consolidated sales in the quarter increased 25% when compared to the combined sales in the comparative quarter. Year-to-date, consolidated sales increased approximately 18% as compared to the combined sales in the comparative period. Sales increased across all lines of the Fund's business units in both the quarter and year-to-date periods compared to the comparative quarter and comparative period, respectively.

During the quarter, the average NYMEX price per MMBTU ("NYMEX price") for natural gas was $9.72 as compared to $5.57 in the comparative quarter. During the nine months ended September 30, 2005, the average NYMEX price was $7.74 as compared to $5.82 in the comparative period. The strength in natural gas prices led to continued strong drilling and completion activity in the natural gas sector. As a result, sales at RJV in the third quarter increased 71% as compared to the comparative quarter and reached a record $13,464 for the quarter. Year-to-date sales at RJV increased 40% during the nine months ended September 30, 2005 compared to the comparative period and reached a record $46,488 for the period.

Sales at Stylus increased by $1,700 (20%) in the quarter compared to the comparative quarter and by $3,052 (12%) in the nine month period, compared to the comparative period. Sales of leather furniture and contract sales continued to be strong and offset reduced sales in upholstered furniture during the period. Sales of leather furniture accounted for approximately 37% of total sales in the quarter as compared to 10% in the comparative quarter. Year-to-date, sales of leather furniture accounted for approximately 30% of total sales as compared to 5% in the comparative period.

During the quarter, Ezee-On's sales increased $2,819 (126%), compared to the comparative quarter. Year-to-date, sales increased 15% to $13,300 as compared to sales in the comparative period. The increase in sales during the quarter was primarily the result of selling 100% of the inventory of Ezee-On (Australia) Pty Ltd. to an independent third party distributor in Australia for approximately AUS $3,200. Sales to the customers in the U.S. remained relatively stable despite the relative increase in the Canadian dollar against the U.S. dollar in the period. In addition, the sales mix in the U.S. changed to more of an emphasis on discs and less emphasis on front end loaders, air seeders and air drills.

Don Park sales are from the date of acquisition, April 1, 2005, to September 30, 2005. Sales at Don Park, in the quarter, were impacted by competitive pressures as the market responded to lower steel prices after very strong increases in 2004. As a result, selling prices declined by 12% in the quarter versus the comparative quarter. Sales through Don Park's retail outlets during the quarter were flat, as delays in issuances of residential construction permits in the greater Toronto area continued. Sales in the U.S. declined during the quarter largely due to the strength in the Canadian dollar versus the U.S. dollar. Sales for the year-to-date period were impacted by cooler than expected weather in Don Park's primary Ontario market in April and May, as well as competitive pressures resulting from new entrants into the market and lower steel prices. Despite the difficulties encountered in the quarter and year-to-date periods, Don Park was able to increase its volume of sales and increase overall revenues.

Cost of sales

Costs of sales for the quarter were $40,530 (76% of consolidated sales), compared to $31,425 (74% of combined sales), on a combined basis for RJV, Don Park, Stylus and Ezee-On in the comparative quarter. Costs of sales for the nine-month period were $100,836 (75% of consolidated sales), compared to $82,054 (72% of combined sales), on a combined basis in the comparative period. The increase reflects the usage of raw materials, primarily steel and steel components, that were inventoried at higher prices than a year ago.

During the fourth quarter of 2004, when supply of steel was an issue, Don Park entered into several longer term steel purchase arrangements to ensure the business had sufficient supply to meet its manufacturing requirements in the coming year. Though Don Park had entered into new supply arrangements at significantly lower prices, the company continued to work through its higher priced supply of steel in the third quarter. In addition, new branches added by Don Park in August of 2004 resulted in higher costs of sales in the period as compared to the prior period.

Ezee-On also experienced an increase in costs of sales, as a percentage of sales, due to higher steel prices in the period. The impact of higher steel prices on Stylus' costs of sales have been negligible.

Gross margin

Gross margins for the quarter were $12,932, or 24% of consolidated sales, compared to $11,318, or 26% of the combined sales of RJV, Don Park, Stylus and Ezee-On, in the comparative quarter. Year-to-date gross margins were $33,563, or 25% of consolidated sales, compared to $31,469, or 28% of combined sales.

Gross margins at Don Park were lower as a result of reduced selling prices due to competitive pressures and higher costs of sales as a result of the higher cost inventoried steel being used in the quarter and period to date. In addition, the product mix shifted towards resale products (air conditioners and related products), which have a lower margin, from higher margin manufactured goods.

Gross margins at Stylus in the quarter and the period were higher than in the comparative quarter and comparative period, respectively, due to changes in product mix and customer mix.

Gross margins at RJV during the quarter and period remained consistent with margins in the comparative quarter and comparative period, respectively.

Gross margins at Ezee-On declined in the quarter and the period, as compared to the comparative quarter and comparative period, primarily as a result of the bulk sale of the consignment inventory of Ezee-On (Australia) Pty Ltd.

Administration expenses

Administration expenses for the quarter were $3,659 compared to $2,453 on a combined basis for Laniuk, RJV, Don Park, Stylus, Ezee-On and the Fund for the comparative quarter. Year-to-date administration expenses were $8,774 compared to $6,873 on a combined basis for the comparative period. The increases in the quarter and the period were due to the pursuit of additional investment opportunities, accounting, legal, governance and management costs. The Fund continues to incur significant expenses in terms of the increased overhead necessary to continue its growth through acquisitions strategy.

Selling expenses

Selling expenses in the quarter were $4,036 compared to $2,480 in the comparative quarter. Year-to-date selling expenses were $8,305 compared to $6,909 in the same period last year. Selling expenses increased slightly as a percentage of sales from 6.1% to 6.2%.

Amortization expenses

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 $736 in the quarter and $1,829 in the period reflects utilization of these assets during the quarter and year-to-date. In the year-to-date, the Fund also incurred $380 in costs related to its operating loan facility. These costs are amortized over the one-year life of the related debt. Amortization of $68 in the quarter and $224 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 $597 and $3,138 in the nine-month period ended September 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 September 30, 2005 and a 364-day term loan totaling $5,000 for total debt capacity of $55,000. 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 $171 and year-to-date interest was $797 as compared to $108 for the comparative quarter and $108 for the period, from inception of the Fund, July 9, 2004, to September 30, 2004.

SELECTED CONSOLIDATED FINANCIAL INFORMATION

Quarterly Information



SELECTED CONSOLIDATED FINANCIAL INFORMATION
Quarterly Information

TerraVest fiscal year ended December 31
------------------------------------------------------------------------
Quarter ended
------------------------------------------------------------------------
July 9,
2004 to
September 30, June 30, March 31, December 31, September 30,
2005 2005 2005 2004 2004
------------------------------------------------------------------------
Sales (2) $53,462 $48,961 $31,976 $16,533 $ 9,260
Net earnings $ 2,357 $ 1,646 $ 2,878 $ 665 $ 572
Earnings per
Unit/ share
Basic (1) $ 0.19 $ 0.16 $ 0.28 $ 0.09 $ 0.08
Diluted (1) $ 0.19 $ 0.16 $ 0.28 $ 0.09 $ 0.08
------------------------------------------------------------------------
------------------------------------------------------------------------


Laniuk Industries fiscal year ended August 31
------------------------------------------------------------------------
Quarter ended
------------------------------------------------------------------------
May 31, February 29, November 30,
2004 2004 2003
------------------------------------------------------------------------
Sales (2) $16,649 $18,141 $11,836
Net earnings $ 2,085 $ 2,441 $ 1,197
Earnings per Unit/ share
Basic (1) $ 0.06 $ 0.06 $ 0.03
Diluted (1) $ 0.04 $ 0.05 $ 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 September 30, 2005, as compared to the June 30, 2005 quarter, results from increases in sales of leather goods at Stylus, an increase in sales at Don Park during the summer air conditioning season, and the bulk sale of the inventory of Ezee-On (Australia) Pty Ltd for AUS $3,200. Net earnings for the quarter increased as compared to the quarter ended June 30, 2005, which is consistent with the increased level of sales in the quarter.

The increase in sales in the quarter ended September 30, 2005, as compared to the March 31, 2005 quarter, results primarily from the inclusion of Don Park for the full third quarter. Net earnings in the third 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 continued 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 were able to fully pass on higher steel costs to their customers in the first quarter of 2005, which they were not fully 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 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 are 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.

Ezee-On's performance has been impacted by the cases of BSE 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 higher than normal 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 September 30, 2005 were $187,434 compared to $136,852 at December 31, 2004. The increase was 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 $ 12,854 $ 876 $ 9,670 $ 2,308
------------------------------------------------------------------------
------------------------------------------------------------------------


As at September 30, 2005, the Fund had outstanding documentary letters of credit totaling US $461 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, 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 $111 was earned in the quarter ended September 30, 2005, (year-to-date - $204) and has been accrued as an expense of the Fund. The unpaid amount is recorded in contributed surplus at September 30, 2005 and will be reclassified to Units once the Units have been issued.

LIQUIDITY AND CAPITAL RESOURCES

Consolidated working capital at September 30, 2005 was $57,280 compared to $32,398 as at December 31, 2004. The increase in working capital was accomplished through a public offering of Units on July 8, 2005 that raised net proceeds of $33,017 which were used to pay down debt. Total debt capacity for the Fund was $55,000 at September 30, 2005, compared to $20,000 at December 31, 2004.

Short-term borrowings under the operating loan provide flexibility for managing seasonal fluctuations in working capital. During the third quarter of 2005, the Fund had an operating loan, which had a maximum authorized limit of $50,000 less any outstanding letters of credit. 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 September 30, 2005, the Fund met all of its financial covenants.

As at September 30, 2005, the Fund had an outstanding operating loan balance of $8,122 and an outstanding term loan balance of $5,000.

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 September 30, 2005 consist of documentary letters of credit totaling US $461 for the purchase of raw materials and a standby letter of credit for US $350 as security on an operating loan for its U.S. operations, both as described above.

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 September 30, 2005, there were 12,803,960 Units issued and outstanding and 1,494,032 Exchangeable Shares - Series 1 and 1,404,000 Exchangeable Shares - Series 2 issued and outstanding. As at November 10, 2005, there are 12,803,960 Units issued and outstanding, and 1,494,032 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. Each Exchangeable Share carries one Special Voting Unit which entitles the holder of Exchangeable Shares to one vote at all meetings of Unitholders for each Exchangeable Share held. The Special Voting Unit does not carry any right to distributions of any nature whatsoever from the Fund.

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 continue at current levels.

If Don Park does not maintain its reputation for high quality service and manufacturing or its level 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 equipment 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 equipment manufactured.

Don Park is party to a number of collective agreements. Failure to renegotiate these collective agreements as they expire may result in work stoppages at Don Park. If prolonged, such work stoppages may have an adverse effect on Don Park's 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 may 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 Canadian Auto Workers Union. Negotiations of the first collective agreement are in the preliminary stages. 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 may 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 the need for sufficient inventory of finished products on-hand at Ezee-On and its dealers. If Ezee-On and its dealers fail to maintain sufficient inventory, Ezee-On may lose sales due to unavailability of product- 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 higher levels of inventory carried by Ezee-On over an extended period of time, which 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. 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 that 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 heating, ventilation and air conditioning ("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 that 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, Diamond and Ezee-On and other acquired businesses to maintain their productivity and profitability. The productivity and profitability of the underlying businesses may be limited by their ability to employ, train and retain the skilled personnel necessary to meet their respective requirements. None of the underlying businesses can be certain that they will be able to maintain the adequate skilled labour force necessary to operate efficiently and to support their growth strategies. As well, none of the underlying businesses can be certain that their labour expenses will not increase as a result of a shortage in the supply of these skilled personnel. Labour shortages or increased labour costs could impair the ability of the underlying businesses 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 Industries 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; to make capital expenditures; to pay dividends or make certain other payments, investments, loans and guarantees;, and to sell or otherwise dispose of assets. In addition, the Credit Facility includes covenants restricting a change of control of the borrower (excluding the effect of any sales of securities by Dale H. Laniuk or Lee Lan Holdings Ltd.). The Credit Facility also contains financial covenants requiring the borrower to satisfy financial ratios and tests. A failure of the borrower to comply with its obligations under the Credit Facility could result in an event of default which, if not cured or waived, could permit the acceleration of the relevant indebtedness. The Credit Facility is secured by customary security for 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).

UPDATE TO RISK FACTORS

On September 8, 2005, the Department of Finance released a paper initiating a consultation process with regard to business income trusts and other flow through entities and requesting submissions by December 31, 2005. Any further initiatives in this area, if any, will be taken following the completion of such consultations. On September 19, 2005, the Minister of Finance announced that he had requested that the Canada Revenue Agency postpone providing advance income tax rulings respecting flow through entity structures effective immediately, that the Department of Finance is closely monitoring developments in the flow through entity market with a view to proposing measures in response to the consultations, and that consideration would be given to what, if any, transitional measures are appropriate. Given that the consultation process is ongoing, it is not possible for the Fund to assess what impact, if any, this process will have on the Fund.

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, that 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 $4,392, and the Fund declared distributions in the quarter of $4,098 for payment to its Unitholders. Distributable cash for the nine-months ended September 30, 2005 was $14,506 and the Fund declared distributions totaling $10,352 in the period for payment to its Unitholders. The following table shows the calculation of distributable cash for the quarter and nine-month period ended September 30, 2005:



Three months Nine months
ended ended
September 30, September 30,
------------------------------------------------------------------------
2005 2005
------------------------------------------------------------------------
Cash flow from operations before
working capital changes $ 5,150 $ 15,912
Less: maintenance capital expenditures (758) (1,406)
------------------------------------------------------------------------
Distributable cash $ 4,392 $ 14,506
------------------------------------------------------------------------
------------------------------------------------------------------------

Distributions declared
(excludes exchangeable shares) $ 4,098 $ 10,352
Distributions declared
(includes exchangeable shares) $ 5,121 $ 13,196
Payout ratio
(excludes exchangeable shares) 93% 71%
Distributions declared per Unit $ 0.32001 $ 0.93003
------------------------------------------------------------------------
------------------------------------------------------------------------

The calculation of distributions declared (includes exchangeable shares)
uses the exchange ratio in effect at the beginning of the quarter and
nine-month period respectively.


Details of the cash distributions declared by the Fund in the nine
months ended September 30, 2005 are as follows:
------------------------------------------------------------------------
Period Record Date Payment Date Per Unit Total
------------------------------------------------------------------------
January January 31 February 15 $0.09667 $ 990
February February 28 March 15 0.09667 991
March March 31 April 15 0.09667 991
April April 29 May 16 0.10667 1,094
May May 31 June 15 0.10667 1,094
June June 30 July 15 0.10667 1,094
July July 29 August 15 0.10667 1,365
August August 31 September 15 0.10667 1,366
September September 30 October 17 0.10667 1,367
------------------------------------------------------------------------
Total $0.93003 $ 10,352
------------------------------------------------------------------------
------------------------------------------------------------------------


EXCHANGEABLE SHARES

The Series 1 and Series 2 Exchangeable Shares can only be exchanged for Units of the Fund. The holders of Series 1 and Series 2 Exchangeable shares are not entitled to cash distributions but are entitled to an economic equivalent of a cash distribution through an adjustment in the number of exchangeable shares. Each month an exchange ratio adjustment is determined to reflect the economic equivalent of a cash distribution. During the period, holders of Series 1 Exchangeable Shares exchanged 3,760 originally issued Exchangeable Shares multiplied by the weighted average exchange ratio of 1.0638 for 4,000 Units. The exchange ratio, giving effect to the September 30, 2005 distribution declared, was 1.13030 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 nine-month 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 $535. During the period, TMP became entitled to receive an incentive payment pursuant to the terms of the contract. The incentive payment for the period totaled $204 and is included in contributed surplus. The Fund also paid $148 for expenses incurred by TMP. In addition, the Fund advanced funds to the TMP as prepayment for expenses in the amount of $136. This amount is included in prepaid expenses. The amounts were recorded at the exchange amount under normal business conditions.

During the quarter, the Fund, through Stylus Limited Partnership, paid rent of $115, for the Stylus manufacturing facility, to a company owned by the retractable non-controlling interest holders of Stylus Limited Partnership. During the nine-month period the rent paid was $345. 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, the Fund, through Don Park (USA) Limited Partnership, paid rent of US $77 for operating facilities to a company owned by the retractable non-controlling interest holders of Don Park (USA) Limited Partnership. During the nine-month period the rent paid was US $154. The amount paid is pursuant to a lease agreement and is based upon fair market value for a similar facility.

During the quarter, the Fund, through Don Park Limited Partnership, paid rent of $452 for several operating facilities to a company owned by the retractable non-controlling interest holders of Don Park Limited Partnership. During the nine-month period the rent paid was $913. 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, natural gas prices are forecasted to remain at or above current levels into the foreseeable future. Industry groups continue to forecast record natural gas drilling in 2005 and 2006. The latest forecast issued by the Canadian Association of Drilling Contractors estimates 24,099 well completions in 2005 and 28,266 in 2006, with an emphasis on natural gas. It is estimated by First Energy Capital that gas well completions will increase by 12%, from 17,458 wells in 2005 to 19,539 wells in 2006. Management has taken steps over the past several months to build up its raw materials inventory and inventory of its sub-assemblies and, as a result, 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 and into 2006.

The outlook for Don Park is strong relative to its difficult market conditions. The market continues to be faced with a large backlog of applications from builders for residential building permits in the Greater Toronto Area. These permits are expected to be processed over the next several months and Management expects contractor sales to improve as a result. In addition, Management expects improved sales and operating results from its commercial and fire divisions due to new volume contracts obtained by these divisions. Margins are also expected to improve as Don Park works its way through its high priced inventoried steel. 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 third quarter of 2004, and Management expects strong year on year performance. The core custom products are also positioned for growth. Over the last few quarters, Stylus has re-focused its efforts on its more profitable small format retail customers, many of whom purchase both leather and upholstered products. Stylus' addition of a new show room in Las Vegas and attendance at the first ever Las Vegas Market at the World Market Center held July 25-30 in Las Vegas, Nevada, where Stylus' products were well received, have allowed Stylus to increase its active dealer base in the United States. As a result, Management expects improved sales in the U.S. market across all product lines.

Stylus, like all upholstery manufacturers, is experiencing increased input costs for raw materials but expects it will be able to pass on the increased costs to its customers. During the quarter, the CAW Union was certified to represent Stylus' production floor staff. Management is currently in negotiations with the Union for a collective bargaining agreement, however bargaining is in its early stages and it is not clear what impact, if any, such an agreement will have on the operations of Stylus.

Ezee-On's outlook is relatively stable year on year performance with continued growth in some markets and difficult trading conditions in others. Management remains focused on expanding Ezee-On's presence in the U.S. and Eastern Europe. The business has successfully added new dealers during the period and expects to sign several new independent sales representatives in key U.S. markets before the end of the year. Management remains optimistic that Ezee-On can generate additional sales of tillage equipment in the U.S. in the fourth quarter. In western Canada, Management expects the fourth quarter to continue to be challenging as producers have suffered through difficult harvest conditions. Ezee-On continues to explore opportunities in eastern European countries such as Kazakhstan, Russia and most recently the Ukraine. Further, Management expects improved sales in the Australian market due to the recent distributorship agreement signed with an established distributor of JCB tractors in that country.

Management believes the acquisition of Diamond, which closed on October 3, 2005, will add significant revenues and operating cash flows to the Fund. Diamond is expected to benefit from the strong market conditions in the oil and natural gas sectors.

Additionally, Fund Management is actively evaluating acquisition opportunities that will continue to increase the diversification and size of the Fund. The Fund has a stated objective of being a multi-business, diversified income trust. Acquisitions are being pursued across multiple industries.

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.

Trust Unit Incentive Compensation Plan

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

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

IMPACT OF NEW ACCOUNTING STANDARDS

Financial Instruments - recognition and measurement

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

The Fund has invested in five companies:

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

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

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

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

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

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