**Exhibit
      99.3**























**2005
      ANNUAL****FINANCIAL
      STATEMENTS**









**MANAGEMENT’S
      REPORT TO UNITHOLDERS**




The
      accompanying
      consolidated financial statements of Vermilion Energy Trust are the
      responsibility of management and have been approved by the Board of Directors
      of
      Vermilion Resources Ltd., on behalf of the Trust. The financial statements
      have
      been prepared in accordance with accounting policies detailed in the notes
      to
      the financial statements and are in accordance with accounting principles
      generally accepted in Canada. Where necessary, management has made informed
      judgments and estimates of transactions that were not complete at the balance
      sheet date. Financial information throughout the Annual Report is consistent
      with the financial statements.





Management
      ensures
      the integrity of the financial statements by maintaining high-quality systems
      of
      internal control. Procedures and policies are designed to provide reasonable
      assurance that assets are safeguarded and transactions are properly recorded,
      and that the financial records are reliable for preparation of the financial
      statements.





Deloitte
&
      Touche LLP, the Trust’s external auditors, have conducted an examination of the
      consolidated financial statements in accordance with generally accepted auditing
      standards in Canada and have provided an independent opinion.





The
      Board of
      Directors is responsible for ensuring that management fulfills its
      responsibility for financial reporting and internal control. The Board carries
      out this responsibility principally through the Audit Committee, which is
      appointed by the Board and is comprised entirely of independent Directors.
      The
      Committee meets periodically with management and the external auditors to
      satisfy itself that each party is properly discharging its responsibilities
      and
      to review the consolidated financial statements, the Management’s Discussion and
      Analysis and the external Auditors’ Report before they are presented to the
      Board of Directors.













Lorenzo
                Donadeo
            
            Curtis
                W.
                HicksPresident
                & Chief Executive Officer
            
            Executive
                Vice President &February
                21,
                2006
            
            Chief
                Financial Officer




*2005
          Annual Financial Statements - Vermilion Energy Trust*
 2


**REPORT
      OF
      INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS TO THE
      UNITHOLDERS**




We
      have audited the
      consolidated balance sheets of Vermilion Energy Trust (the “Trust”) as at
      December 31, 2005 and 2004 and the consolidated statements of earnings and
      accumulated earnings and cash flows for the years then ended. These financial
      statements are the responsibility of the Trust’s management. Our responsibility
      is to express an opinion on these financial statements based on our
      audits.





We
      conducted our
      audits in accordance with Canadian generally accepted auditing standards. Those
      standards require that we plan and perform an audit to obtain reasonable
      assurance whether the financial statements are free of material misstatement.
      An
      audit includes examining, on a test basis, evidence supporting the amounts
      and
      disclosures in the financial statements. An audit also includes assessing the
      accounting principles used and significant estimates made by management, as
      well
      as evaluating the overall financial statement presentation.





In
      our opinion,
      these consolidated financial statements present fairly, in all material
      respects, the financial position of the Trust as at December 31, 2005 and 2004
      and the results of its operations and its cash flows for the years then ended
      in
      accordance with Canadian generally accepted accounting principles.





The
      Trust is not
      required to have, nor were we engaged to perform, an audit of its internal
      control over financial reporting. Our audit included consideration of internal
      control over financial reporting as a basis for designing audit procedures
      that
      are appropriate in the circumstances, but not for the purpose of expressing
      an
      opinion on the effectiveness of the Trust’s internal control over financial
      reporting. Accordingly, we express no such opinion.







Deloitte
&
      Touche LLP


Independent
      Registered Chartered Accountants


Calgary,
      Alberta


February
      21,
      2006








**COMMENTS
      BY
      INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS ON CANADA-UNITED STATES OF AMERICA
      REPORTING DIFFERENCE**




The
      standards of
      the Public Company Accounting Oversight Board (United States) require the
      addition of an explanatory paragraph (following the opinion paragraph) when
      there has been a restatement of the financial statements as described in Note
      11
      to the consolidated financial statements of Vermilion Energy Trust. Our report
      to the unitholders dated February 21, 2006 is expressed in accordance with
      Canadian reporting standards, which do not require a reference to such changes
      in the Report of Independent Registered Chartered Accountants when the changes
      are properly accounted for and adequately disclosed in the financial
      statements.










Deloitte
&
      Touche LLP


Independent
      Registered Chartered Accountants


Calgary,
      Alberta


February
      21,
      2006




*2005
          Annual Financial Statements - Vermilion Energy Trust*
 3


**Consolidated
      Balance Sheets**


**December
      31**


**(THOUSANDS
      OF CANADIAN DOLLARS)**


**2005**
            
            **2004**(Restated
                Note 11)**ASSETS**CURRENTCash
                and cash
                equivalents
            
            **$**
            **42,777**
            
            $
            65,031Accounts
                receivable
            
            
            **75,639**
            
            
            54,044Crude
                oil
                inventory
            
            
            **10,279**
            
            
            4,468Fair
                value of
                derivative instruments (Note 13)
            
            
            **1,166**
            
            
            68Prepaid
                expenses and other
            
            
            **9,387**
            
            
            5,022**139,248**
            
            
            128,633Deferred
                charges for derivative instruments (Note 13)
            
            
            **-**
            
            
            4,718Long-term
                investment (Note 4)
            
            
            **19,096**
            
            
            5,398Reclamation
                fund (Note 6)
            
            
            **42,198**
            
            
            17,016Goodwill
                (Note 4)
            
            
            **19,840**Capital
                assets (Note 5)
            
            
            **891,357**
            
            
            688,837**$**
            **1,111,739**
            
            $
            844,602**LIABILITIES**CURRENTAccounts
                payable and accrued liabilities
            
            **$**
            **90,422**
            
            $
            85,837Distributions
                payable to unitholders
            
            
            **10,626**
            
            
            10,320Income
                taxes
                payable
            
            
            **11,607**
            
            
            23,798Fair
                value of
                derivative instruments (Note 13)
            
            
            **383**
            
            
            21,678**113,038**
            
            
            141,633Long-term
                debt (Note 7)
            
            
            **271,099**
            
            
            75,014Asset
                retirement obligation (Note 6)
            
            
            **70,214**
            
            
            51,688Future
                income
                taxes (Note 8)
            
            
            **160,475**
            
            
            145,680**614,826**
            
            
            414,015NON-CONTROLLING
                INTEREST (Note 4)
            
            
            **-**
            
            
            16,257NON-CONTROLLING
                INTEREST - Exchangeable Shares (Note 10)
            
            
            **38,760**
            
            
            24,686**UNITHOLDERS’
                EQUITY**Unitholders’
                capital (Note 9)
            
            
            **274,813**
            
            
            244,015Contributed
                surplus (Note 9)
            
            
            **14,566**
            
            
            9,136Accumulated
                earnings
            
            
            **516,514**
            
            
            358,043Accumulated
                cash distributions
            
            
            **(347,740**
            **)**
            
            (221,550
            )**458,153**
            
            
            389,644**$**
            **1,111,739**
            
            $
            844,602







**APPROVED
      BY
      THE BOARD**




Joseph
                F.
                Killi, Director
            
            Lorenzo
                Donadeo, Director


*2005
          Annual Financial Statements - Vermilion Energy Trust*
 4


**Consolidated
      Statements of Earnings and Accumulated Earnings**


**Years
      Ended
      December 31**


**(THOUSANDS
      OF CANADIAN DOLLARS, EXCEPT UNIT AND PER UNIT AMOUNTS)**


**2005**
            
            **2004**(Restated
                Note 11)**REVENUE**Petroleum
                and
                natural gas revenue (Note 13)
            
            **$**
            **529,938**
            
            $
            354,525Royalties
                (net)
            
            
            **88,001**
            
            
            63,555**441,937**
            
            
            290,970**EXPENSES**Production
            
            
            **72,856**
            
            
            55,917Transportation
            
            
            **9,136**
            
            
            9,865Unit
                compensation (Note 11)
            
            
            **14,000**
            
            
            6,738Loss
                on
                derivative instruments (Note 13)
            
            
            **18,787**
            
            
            38,597Interest
                on
                long-term debt
            
            
            **6,331**
            
            
            3,086General
                and
                administration
            
            
            **13,241**
            
            
            13,410Foreign
                exchange loss (gain)
            
            
            **1,083**
            
            
            (1,285
            )Depletion,
                depreciation and accretion
            
            
            **122,098**
            
            
            97,540**257,532**
            
            
            223,868**EARNINGS
                BEFORE INCOME TAXES, OTHER ITEMS AND DISCONTINUED
                OPERATIONS**
            
            
            **184,405**
            
            
            67,102**INCOME
                TAXES (RECOVERY) (NOTE 8)**Future
            
            
            **(12,050**
            **)**
            
            (21,033
            )Current
                and
                capital
            
            
            **25,007**
            
            
            17,108**12,957**
            
            
            (3,925
            )**OTHER
                ITEMS**Non-controlling
                interest - exchangeable shares (Note 10)
            
            
            **14,399**
            
            
            5,314Non-controlling
                interest (Note 4)
            
            
            **(1,159**
            **)**
            
            (338
            )Equity
                in
                (gain) losses of affiliates (Note 4)
            
            
            **(263**
            **)**
            
            41**12,977**
            
            
            5,017**NET
                EARNINGS FROM CONTINUING OPERATIONS**
            
            
            **158,471**
            
            
            66,010Net
                earnings
                from discontinued operations (Note 3)
            
            
            **-**
            
            
            66,286Non-controlling
                interest - exchangeable shares (Note 10)
            
            
            **-**
            
            
            4,783**NET
                EARNINGS**
            
            
            **158,471**
            
            
            127,513**ACCUMULATED
                EARNINGS, BEGINNING OF YEAR, AS PREVIOUSLY
                REPORTED**
            
            
            **337,186**
            
            
            228,269Prior
                period
                adjustment (Note 11)
            
            
            **20,857**
            
            
            2,261Accumulated
                earnings, beginning of year, as restated
            
            
            **358,043**
            
            
            230,530**ACCUMULATED
                EARNINGS, END OF YEAR**
            
            **$**
            **516,514**
            
            $
            358,043**NET
                EARNINGS FROM CONTINUING OPERATIONS PER TRUST UNIT (NOTE
                12)**Basic
            
            **$**
            **2.57**
            
            $
            1.10Diluted
            
            **$**
            **2.49**
            
            $
            1.07**NET
                EARNINGS PER TRUST UNIT (NOTE 12)**Basic
            
            **$**
            **2.57**
            
            $
            2.12Diluted
            
            **$**
            **2.49**
            
            $
            2.07**WEIGHTED-AVERAGE
                TRUST UNITS OUTSTANDING (NOTE 12)**Basic
            
            
            **61,755,432**
            
            
            60,166,163Diluted
            
            
            **69,395,074**
            
            
            66,375,229


*2005
          Annual Financial Statements - Vermilion Energy Trust*
 5


**Consolidated
      Statements of Cash Flows**


**Years
      Ended
      December 31**


**(THOUSANDS
      OF CANADIAN DOLLARS)**


**2005**
            
            **2004**(Restated
                Note 11)**CASH
                AND CASH EQUIVALENTS PROVIDED BY (USED IN):****OPERATING**Net
                earnings
            
            **$**
            **158,471**
            
            $
            127,513Items
                not
                affecting cash:Depletion,
                depreciation and accretion
            
            
            **122,098**
            
            
            97,540Amortization
                of deferred charges for derivative instruments
            
            
            **4,718**
            
            
            9,709Unrealized
                (gain) loss on derivative instruments
            
            
            **(22,393**
            **)**
            
            7,183Unit
                compensation
            
            
            **14,000**
            
            
            6,738Equity
                in
                (gain) losses of affiliates
            
            
            **(263**
            **)**
            
            41Unrealized
                foreign exchange loss (gain)
            
            
            **344**
            
            
            (985
            )Non-controlling
                interest
            
            
            **(1,159**
            **)**
            
            (338
            )Non-controlling
                interest - exchangeable shares
            
            
            **14,399**
            
            
            10,097Earnings
                from
                discontinued operations
            
            
            **-**
            
            
            (66,286
            )Future
                income
                taxes recovery
            
            
            **(12,050**
            **)**
            
            (21,033
            )Funds
                from
                operations
            
            
            **278,165**
            
            
            170,179Asset
                retirement costs incurred
            
            
            **(948**
            **)**
            
            (1,281
            )Changes
                in
                non-cash operating working capital (Note 14)
            
            
            **(32,101**
            **)**
            
            22,479**245,116**
            
            
            191,377**INVESTING**Proceeds
                on
                sale of Aventura (Note 3)
            
            
            **-**
            
            
            164,585Drilling
                and
                development of petroleum and natural gas properties
            
            
            **(113,530**
            **)**
            
            (67,259
            )Cash
                acquired
                through acquisition of subsidiary
            
            
            **-**
            
            
            62Acquisition
                of petroleum and natural gas properties (Note 4)
            
            
            **(90,318**
            **)**
            
            (72,985
            )Corporate
                acquisition (Note 4)
            
            
            **(87,036**
            **)**
            
            **-**Long-term
                investment (Note 4)
            
            
            **(12,299**
            **)**
            
            **-**Contributions
                to reclamation fund
            
            
            **(25,183**
            **)**
            
            (15,338
            )Changes
                in
                non-cash investing working capital (Note 14)
            
            
            **(7,068**
            **)**
            
            (37,131
            )**(335,434**
            **)**
            
            (28,066
            )**FINANCING**Issue
                of
                trust units for cash, net of unit issue costs
            
            
            **9,147**
            
            
            8,836Cash
                distributions
            
            
            **(125,884**
            **)**
            
            (122,366
            )Increase
                (decrease) in long-term debt
            
            
            **196,084**
            
            
            (60,544
            )Issue
                of
                trust units pursuant to distribution reinvestment plan
            
            
            **15,850**
            
            
            6,662Cash
                acquired
                on shares issued by subsidiary, net of share issue costs
            
            
            **424**
            
            
            24,206Changes
                in
                non-cash financing working capital (Note 14)
            
            
            **(584**
            **)**
            
            104**95,037**
            
            
            (143,102
            )Foreign
                exchange (loss) gain on cash held in foreign currencies
            
            
            **(9,062**
            **)**
            
            502NET
                CHANGE IN
                CASH AND CASH EQUIVALENTS
            
            
            **(4,343**
            **)**
            
            20,711IMPACT
                ON
                CASH RESULTING FROM DE-CONSOLIDATION OF VERENEX (NOTE 4)
            
            
            **(17,911**
            **)**
            
            -CASH
                AND CASH
                EQUIVALENTS, BEGINNING OF YEAR
            
            
            **65,031**
            
            
            44,320CASH
                AND CASH
                EQUIVALENTS, END OF YEAR
            
            **$**
            **42,777**
            
            $
            65,031SUPPLEMENTARY
                INFORMATION - CASH PAYMENTSInterest
                paid
            
            **$**
            **8,612**
            
            $
            3,512Income
                taxes
                paid
            
            **$**
            **26,190**
            
            $
            14,208




*2005
          Annual Financial Statements - Vermilion Energy Trust*
 6


**Notes
      to
      the Consolidated Financial Statements - Years Ended December 31**


**(TABULAR
      AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT UNIT AND PER UNIT
      AMOUNTS)**





**1.**
            **BASIS
                OF PRESENTATION**





Vermilion
      Energy
      Trust (the “Trust” or “Vermilion”) was established on January 22, 2003, under a
      Plan of Arrangement entered into by the Trust, Vermilion Resources Ltd.
      (“Resources” or the “Company”), Clear Energy Inc. (“Clear”) and Vermilion
      Acquisition Ltd. The Trust is an open-end unincorporated investment trust
      governed by the laws of the Province of Alberta and created pursuant to a trust
      indenture (“Trust Indenture”). Computershare Trust Company of Canada has been
      appointed trustee under the Trust Indenture. The beneficiaries of the Trust
      are
      the holders of trust units.





As
      a result of the
      completion of the Plan of Arrangement, former holders of common shares of the
      Company received units of the Trust or exchangeable shares of the Company or
      a
      combination thereof, in accordance with the elections made by such holders,
      and
      common shares of Clear. The Company became a subsidiary of the Trust. The
      Company is actively engaged in the business of oil and natural gas development,
      acquisition and production.





Prior
      to the Plan
      of Arrangement on January 22, 2003, the consolidated financial statements
      included the accounts of the Company and its subsidiaries. After giving effect
      to the Plan of Arrangement, the consolidated financial statements have been
      prepared on a continuity of interests basis, which recognizes the Trust as
      the
      successor entity to Resources.





**2.**
            **S****IGNIFICANT
                ACCOUNTING POLICIES**





***Principles
      of Consolidation***


The
      consolidated
      financial statements have been prepared in accordance with Canadian generally
      accepted accounting principles and include the accounts of the Trust and its
      subsidiaries on a consolidated basis, all of which are wholly owned.
      Inter-company account balances and transactions are eliminated upon
      consolidation. Verenex Energy Inc. (“Verenex”) (Note 4) is accounted for on the
      equity basis since December 15, 2005.





***Petroleum
      and Natural Gas Operations***


The
      Trust uses the
      full-cost method of accounting for petroleum and natural gas operations and
      capitalizes all exploration and development costs on a country-by-country basis.
      These costs include land acquisition, geological and geophysical costs, drilling
      (including related overhead) on producing and non-producing properties and
      other
      carrying charges on unproven properties. Proceeds of disposition are applied
      against the cost pools with no gain or loss recognized except where the
      disposition results in a greater than 20% change in the rate of depletion and
      depreciation.





Amortization
      of
      these costs plus future development costs to develop proved reserves is done
      on
      a country-by-country basis and is calculated on the unit-of-production method
      based on estimated proved reserves, before royalties, as determined by
      independent engineers. The cost of significant unevaluated properties is
      excluded from the depletion and depreciation base. For purposes of depletion
      and
      depreciation calculations, oil and gas reserves are converted to a common unit
      of measure on the basis of their relative energy content based on a conversion
      ratio of six thousand cubic feet of natural gas to a barrel of oil.





The
      carrying value
      of the Trust’s petroleum and natural gas properties is limited to the sum of the
      undiscounted cash flows expected to result from the Trust’s proved reserves on a
      country by country basis. If the carrying value is not fully recoverable, the
      amount of impairment is measured by comparing the carrying amounts of the
      capital assets to an amount equal to the estimated net present value of future
      cash flows from proved plus probable reserves (the “ceiling test”). This
      calculation incorporates risks and uncertainties in the expected future cash
      flows which are discounted using a risk-free rate. Any excess carrying value
      above the net present value of the future cash flows would be recorded as a
      permanent impairment charged to earnings.





Substantially
      all
      of the exploration, development and production activities of the Trust are
      conducted jointly with others and, accordingly, the consolidated financial
      statements reflect only the Trust’s proportionate interest in such
      activities.





The
      Trust
      recognizes the estimated liability associated with an asset retirement
      obligation (“ARO”) in the consolidated financial statements at the time the
      liability is incurred. The estimated fair value of the ARO is recorded as a
      long
      term liability, with a corresponding increase in the carrying amount of the
      related asset. The capitalized amount is depleted on a unit-of-production method
      over the life of the proved reserves. The liability amount is increased each
      reporting period due to the passage of time and the amount of accretion is
      charged to earnings in the period. The ARO can also increase or decrease due
      to
      changes in the estimates of timing of cash flows or changes in the original
      estimated undiscounted cost. Actual costs incurred upon settlement of the ARO
      are charged against the ARO to the extent of the liability
      recorded.


*2005
          Annual Financial Statements - Vermilion Energy Trust*
 7


**2.**
            **SIGNIFICANT
                ACCOUNTING POLICIES
                (Continued)**





The
      amounts
      recorded for depletion and depreciation of property, plant and equipment are
      based on estimates. The ceiling test calculation is based on the sum of the
      undiscounted cash flows expected to result from the Trust’s proved reserves. The
      asset retirement obligation is based on liabilities related to legal obligations
      associated with future retirement of property, plant and equipment. By their
      nature, these estimates are subject to measurement uncertainty, and the effect
      on the consolidated financial statements from changes in such estimates in
      future years could be significant.





***Cash
      and Cash Equivalents***


Cash
      and cash
      equivalents include monies on deposit and short-term investments accounted
      for
      at cost that have an original maturity date of not more than 90
      days.





***Furniture
      and Equipment***


Furniture
      and
      equipment are recorded at cost and are being amortized on a declining-balance
      basis at rates of 20% to 50% per year.





***Crude
      Oil Inventories***


Inventories
      of
      crude oil, consisting of production awaiting shipment at the Ambès Shipping
      Terminal in France and the Wandoo B platform in Australia, are valued at the
      lower of cost or net realizable value. Cost is determined on a weighted-average
      basis.





***Long-Term
      Investment***


Investments
      in
      which the Trust has significant influence are accounted for using the equity
      basis of accounting whereby the investment cost is increased or decreased for
      the Trust’s ownership percentage of net earnings or loss and reduced by
      dividends paid to the Trust.





The
      Trust reviews
      and evaluates the carrying value of its investment annually. More frequent
      reviews are conducted as conditions necessitate. In the event a decrease in
      the
      value of the investment is other than a temporary decline, the investment is
      written down to recognize the loss.





***Goodwill***


Goodwill
      is tested
      for impairment annually by comparing the fair value of the reporting unit with
      its carrying amount. If the carrying amount exceeds the fair value, an
      impairment loss will be recognized for the excess.





***Revenue
      Recognition***


Revenues
      associated
      with the sale of crude oil, natural gas and liquids are recorded when title
      passes to the customer.





***Deferred
      Charges for Derivative Financial Instruments***


Deferred
      charges
      for derivative financial instruments is the fair value of all outstanding
      derivative financial instruments at January 1, 2004 that were recorded on the
      consolidated balance sheet with an offsetting amount to deferred charges. The
      deferred charge was recognized into revenue over the life of the associated
      contracts.





***Derivative
      Financial Instruments***


The
      Trust has not
      elected to designate any of its price risk management activities as accounting
      hedges under Accounting Guideline 13, Hedging Relationships (“AcG-13”) and is
      accounting for all these derivative financial instruments using the fair value
      method. The Trust uses derivative financial instruments to manage exposures
      to
      fluctuations in commodity prices, interest rates and foreign currency exchange
      rates. All transactions of this nature entered into by the Trust are related
      to
      an underlying financial position or to future petroleum and natural gas
      production. The Trust does not use derivative financial instruments for trading
      purposes. The fair value of derivative financial instruments are recorded in
      the
      consolidated balance sheets with changes in fair value of derivative financial
      instruments recognized in earnings during the period.





***Unit
      Compensation***


The
      Trust has
      unit-based long-term compensation plans for directors, officers and employees
      of
      the Trust and its subsidiaries. Unit compensation expense is measured based
      on
      the fair value of the rights at the date of grant (see Note 11 for details
      of a
      change in the valuation used to determine unit based compensation expense).
      Unit
      compensation expense associated with rights granted is deferred and recognized
      in earnings over the vesting period of the Plans with a corresponding increase
      or decrease in contributed surplus.




*2005
          Annual Financial Statements - Vermilion Energy Trust*
 8


**2.**
            **SIGNIFICANT
                ACCOUNTING POLICIES
                (Continued)**





Consideration
      paid
      upon the exercise of the rights together with the amount previously recognized
      in contributed surplus is recorded as an increase in unitholders’ capital. The
      Trust has not incorporated an estimated forfeiture rate for rights that will
      not
      vest, rather, the Trust accounts for forfeitures as they occur. See Note 11
      for
      a description of the long-term unit compensation plans.





***Per-unit
      Amounts***


Net
      earnings per
      unit are calculated using the weighted-average number of units outstanding
      during the period. Diluted net earnings per unit are calculated using the
      treasury stock method to determine the dilutive effect of unit-based
      compensation and include the weighted-average number of exchangeable shares
      outstanding converted at the exchange ratio at the end of each period. The
      treasury stock method assumes that the proceeds received from the exercise
      of
“in the money” trust unit rights are used to repurchase units at the average
      market price during the period and include trust unit awards outstanding
      converted at a performance factor of one.





***Foreign
      Currency Translation***


Foreign
      currency
      balances of foreign subsidiaries, which are considered to be integrated, are
      translated on the following basis:





-
            Monetary
                assets and liabilities are translated at the rates of exchange prevailing
                at the balance sheet dates;


-
            Non-monetary
                assets, liabilities and related depreciation and depletion expense
                are
                translated at historical rates; and


-
            Sales,
                other
                revenues, royalties and all other expenses are translated at the
                average
                rate of exchange during the month in which they are
                recognized.





Any
      resulting
      foreign exchange gains and losses are included in earnings.





***Reclamation
      Fund***


A
      reclamation fund
      has been set up by the Trust to ensure that cash is available to carry out
      future abandonment and reclamation work on wells, plants and facilities.
      Contributions are currently made on a barrel of oil equivalent of production
      basis in Canada, France, the Netherlands and Australia and are occasionally
      supplemented with lump sum contributions.





***Income
      Taxes***


The
      Trust is a
      taxable entity under the Income Tax Act (Canada) and is taxable only on income
      that is not distributed or distributable to the unitholders. As the Trust
      allocates all of its Canadian taxable income to the unitholders in accordance
      with the Trust Indenture, and meets the requirements of the Income Tax Act
      (Canada) applicable to the Trust, no provision for Canadian income tax expense
      has been made in the Trust.





In
      the Trust
      structure, payments are made between the Company and the Trust that result
      in
      the transferring of taxable income from the Company to individual unitholders.
      These payments may reduce future income tax liabilities previously recorded
      by
      the Company that would be recognized as a recovery of income tax in the period
      incurred.





Income
      taxes are
      calculated in the subsidiary companies using the liability method of accounting
      for income taxes. Under this method, income tax liabilities and assets are
      recognized for the estimated tax consequences attributable to temporary
      differences between the amounts reported in the consolidated financial
      statements of the Trust and their respective underlying tax base, using
      substantively enacted income tax rates in the respective tax jurisdictions
      that
      will be in effect when the differences are expected to reverse. The effect
      of a
      change in income tax rates on future tax liabilities and assets is recognized
      in
      income in the period in which a change occurs.





The
      Trust is
      subject to current income taxes in France, the Netherlands and Australia based
      on the enacted tax legislation of each respective country.





***Exchangeable
      Shares - Non-controlling Interest***


The
      exchangeable
      shares issued pursuant to the Plan of Arrangement were initially recorded at
      their pro-rata percentage of the carrying value of Resources equity. When the
      exchangeable shares are converted into trust units, the conversion is recorded
      as an acquisition of the non-controlling interest at fair value and is accounted
      for as a step acquisition. Upon conversion of the exchangeable shares, the
      fair
      value of the trust units issued is recorded in unitholders’ capital, and the
      difference between the carrying value of the non-controlling interest and the
      fair value of the trust units is recorded as capital assets.





*2005
          Annual Financial Statements - Vermilion Energy Trust*
 9


**2.**
            **SIGNIFICANT
                ACCOUNTING POLICIES
                (Continued)**





***Distributions***


The
      Trust makes
      monthly distributions of its distributable cash to unitholders of record on
      the
      last day of each calendar month. Pursuant to the Trust’s policy, it will pay
      distributions to its unitholders subject to satisfying its financing covenants,
      making loan repayments and, if applicable, funding future asset retirement
      obligations.





***Variable
      Interest Entities***


The
      Trust has
      applied Accounting Guideline 15, Consolidation of Variable Interest Entities.
      The guideline addresses consolidation of variable interest entities to which
      the
      usual condition for consolidation does not apply. This guideline does not impact
      the Trust’s consolidated financial statements.





***Discontinued
      Operations***


On
      May 6, 2004, the
      Trust completed the sale of its subsidiary, Aventura. Accordingly, these
      consolidated financial statements include the accounts of the Trust and its
      remaining subsidiaries. The results of operations of Aventura previously
      reported in the Trust’s annual audited consolidated financial statements for the
      year ended December 31, 2004 have been restated and are now reported as
      discontinued operations (Note 3).





**3.**
            **DISCONTINUED
                OPERATIONS**





On
      May 6, 2004, the
      Trust completed the sale of the shares of its subsidiary, Aventura, for gross
      proceeds of $164.6 million which was accounted for as follows:





Gross
                sale
                proceeds
            
            $
            164,585Carrying
                value of investment in Aventura
            
            
            82,388Gain
                on sale
                of Aventura
            
            
            82,197Future
                income
                taxes
            
            
            14,233Net
                gain on
                sale of Aventura
            
            $
            67,964





The
      Trust restated
      its prior period financial statements to reflect Aventura’s assets and
      liabilities as discontinued operations and to separately classify the operating
      results of Aventura from the operating results of continuing
      operations.





The
      net earnings
      (loss) from discontinued operations disclosed in the Consolidated Statements
      of
      Earnings and Accumulated Earnings includes the following:





**2004**Revenue
            
            $
            4,121Loss
                before
                income taxes
            
            $
            (1,938
            )Income
                taxes
                (recovery)
            
            
            (260
            )Loss
                from
                discontinued operations
            
            
            (1,678
            )Net
                gain on
                sale
            
            
            67,964$
            66,286





**4.**
            **INVESTMENTS
                AND ACQUISITIONS**





***a)***
            ***Verenex
                Energy Inc.***


On
      June 29, 2004
      Verenex Energy Inc. (“Private Verenex”), a subsidiary of the Trust, amalgamated
      with Prairie Fire Oil & Gas Ltd. (“Prairie Fire”). The common shares of
      Prairie Fire were exchanged for common shares of the resulting issuer, Verenex
      Energy Inc. (“Verenex”) on the basis of one Verenex share for every 25 Prairie
      Fire shares, and each Private Verenex share was exchanged for one common share
      of Verenex. As a result of the share exchange control passed to Verenex as
      it
      owns the majority of the issued and outstanding shares of the combined entity.
      Accounting principles applicable to reverse takeovers have been applied to
      record this acquisition. Net assets of Prairie Fire were deemed to have been
      purchased by Verenex, at fair value, through the exchange of
      capital.





In
      conjunction with
      the transaction described above, Vermilion sold to Verenex exploration interests
      in France and a royalty on producing oil and gas assets in Alberta in exchange
      for 10 million common shares. The sale of assets were recorded at the underlying
      cost of the assets to the Trust due to the related party nature of the
      transaction. The Trust also subscribed for 2 million of common shares at a
      price
      of $2.50 per share through Verenex’s $32.6 million private placement on June 29,
      2004.





*2005
          Annual Financial Statements - Vermilion Energy Trust*
 10




**4.**
            **INVESTMENTS
                AND ACQUISITIONS
                (Continued)**





On
      December 15,
      2005 Verenex completed a $26 million private placement in which Vermilion
      subscribed for 3.1 million shares at a price of $3.20 per share, representing
      38% of the private placement. The Trust’s equity interest in Verenex was then
      reduced to 49% from 53%.





Effective
      December
      15, 2005, the Trust discontinued consolidating the financial results of Verenex,
      as the Trust was no longer considered to control Verenex. The investment in
      Verenex has since been accounted for following the equity basis of accounting.
      Comparative figures have not been restated.





The
      impact of no
      longer consolidating Verenex had the following effect on the Trust’s December
      31, 2005 balance sheet:





**(000’s)**
            
            **Increase
                (Decrease)**Current
                assets
            
            $
            (36,344
            )Capital
                assets
            
            
            (15,951
            )Current
                liabilities
            
            
            (2,716
            )Non-controlling
                interest
            
            
            (26,948
            )Contributed
                surplus
            
            
            (3,591
            )Initial
                investment in Verenex
            
            
            19,040Equity
                in
                income of affiliate from December 15 to December 31, 2005
            
            
            56Investment
                in
                Verenex at December 31, 2005
            
            $
            19,096





***b)***
            ***Glacier
                Energy Limited (“Glacier”)***


On
      June 16, 2004,
      the Trust acquired 5.4 million shares of Glacier for consideration of 50% of
      the
      Trust’s working interest in the coalbed methane and shallow gas rights over
      certain of its lands. On June 20, 2005, the Trust acquired an additional 0.9
      million shares of Glacier at a price of $2.50 per share as part of a private
      placement completed by Glacier.





On
      December 7,
      2005, the Trust acquired the outstanding shares of Glacier, not already owned
      by
      the Trust, for total cash consideration of $87.0 million. Equity income of
      affliate of $0.2 million has been recorded by the Trust up to December 7, 2005.
      The acquisition has been accounted for using the purchase method of accounting,
      effective from December 7, 2005 as follows:





**Allocation
                of purchase price:**
            
            **First
                Purchase**
            
            **Second
                Purchase**
            
            **Total**Capital
                assets
            
            $
            7,903
            
            $
            98,918
            
            $
            106,821Goodwill
            
            
            -
            
            
            19,840
            
            
            19,840Future
                income
                taxes
            
            
            -
            
            
            (26,845
            )
            
            (26,845
            )Asset
                retirement obligation
            
            
            -
            
            
            (300
            )
            
            (300
            )$
            7,903
            
            
            91,613
            
            
            99,516Investment
                in
                Glacier
            
            
            (7,903
            )
            
            -
            
            
            (7,903
            )-
            
            
            91,613
            
            
            91,613Working
                capital
            
            
            -
            
            
            (4,577
            )
            
            (4,577
            )Cash
                paid
            
            $
            -
            
            $
            87,036
            
            $
            87,036





***c)***
            ***Australia
                Acquisition***


On
      March 31, 2005,
      the Trust acquired $95.0 million of producing properties in Australia. Details
      are as follows:




Petroleum
                and
                natural gas assets and equipment
            
            $
            113,840Asset
                retirement obligation
            
            
            (18,873
            )94,967Accounts
                payable and accrued liabilities
            
            
            (4,649
            )Cash
                paid
            
            $
            90,318




*2005
          Annual Financial Statements - Vermilion Energy Trust*
 11


**4.**
            **INVESTMENTS
                AND ACQUISITIONS
                (Continued)**





***d)***
            ***Netherlands
                Acquisition***


On
      May 19, 2004,
      the Trust acquired producing properties in the Netherlands. The closing cost,
      after adjustments, on May 19, 2004 was $64.5 million. Details are as follows:





Petroleum
                and
                natural gas assets and equipment
            
            $
            119,355Asset
                retirement obligation
            
            
            (33,876
            )85,479Accounts
                payable and accrued liabilities
            
            
            (21,005
            )Cash
                paid
            
            $
            64,474





**5.**
            **CAPITAL
                ASSETS**




**2005**
            
            **Cost**
            
            **Accumulated
                Depletion, Depreciation and Amortization**
            
            **Net
                Book Value**Petroleum
                and
                natural gas properties and equipment
            
            **$**
            **1,393,053**
            
            **$**
            **504,094**
            
            **$**
            **888,959**Furniture
                and
                equipment
            
            
            **7,566**
            
            
            **5,168**
            
            
            **2,398****$**
            **1,400,619**
            
            **$**
            **509,262**
            
            **$**
            **891,357**





**2004**
            
            **Cost**
            
            **Accumulated
                Depletion, Depreciation and Amortization**
            
            **Net
                Book Value**Petroleum
                and
                natural gas properties and equipment
            
            $
            1,079,692
            
            $
            393,372
            
            $
            686,320Furniture
                and
                equipment
            
            
            6,855
            
            
            4,338
            
            
            2,517$
            1,086,547
            
            $
            397,710
            
            $
            688,837





As
      at December 31,
      2005 and 2004, no costs for undeveloped properties have been excluded from
      the
      depletion and depreciation calculation. During the year, the Trust capitalized
      $0.3 million (2004-$1.7 million) of overhead costs related to exploration and
      development activities.





The
      Trust performed
      a ceiling test calculation at December 31, 2005 to assess the recoverable value
      of petroleum and natural gas properties and equipment. Based on the calculation,
      the present value of future net revenues from the Trust’s proved reserves
      exceeded the carrying value of the Trust’s petroleum and natural gas properties
      and equipment at December 31, 2005.





The
      benchmark
      prices used in the calculation are as follows:





**CDN$/BOE**
            
            **Canada**
            
            **France**
            
            **Netherlands**
            
            **Australia**2006
            
            $
            59.79
            
            $
            59.65
            
            $
            48.90
            
            $
            60.922007
            
            $
            56.39
            
            $
            57.71
            
            $
            48.11
            
            $
            58.792008
            
            $
            51.31
            
            $
            53.18
            
            $
            45.46
            
            $
            54.512009
            
            $
            48.09
            
            $
            49.78
            
            $
            42.40
            
            $
            51.302010
            
            $
            46.40
            
            $
            48.04
            
            $
            40.42
            
            $
            49.70Average
                remainder
            
            $
            48.59
            
            $
            50.23
            
            $
            40.84
            
            $
            50.92





**6.**
            **ASSET
                RETIREMENT OBLIGATION**





The
      total future
      asset retirement obligation was estimated by management based on the Trust’s net
      ownership interest in all wells and facilities, estimated costs to abandon
      and
      reclaim the wells and facilities and the estimated timing of the costs to be
      incurred in future periods. The Trust has estimated the net present value of
      its
      asset retirement obligations to be $70.2 million as at December 31, 2005 (2004
      -
      $51.7 million) based on a total undiscounted future liability of $236.7 million.
      These payments are expected to be made over the next 49 years with most coming
      within the time frame of 25-30 years. The Trust used a credit adjusted risk
      free
      rate of 8% and an inflation rate of 1.5% to calculate the present value of
      the
      asset retirement obligation.




*2005
          Annual Financial Statements - Vermilion Energy Trust*
 12


**6.**
            **ASSET
                RETIREMENT OBLIGATION
                (Continued)**





The
      following table
      reconciles the Trust’s total asset retirement obligation:





**2005**
            
            **2004**Carrying
                amount, beginning of period
            
            **$**
            **51,688**
            
            $
            15,570Increase
                in
                liabilities in the period
            
            
            **19,656**
            
            
            35,653Disposition
                of liabilities in the period
            
            
            **(948**
            **)**
            
            (1,281
            )Change
                in
                estimate
            
            
            **3,089**
            
            
            -Accretion
                expense
            
            
            **4,935**
            
            
            2,261Foreign
                exchange
            
            
            **(8,206**
            **)**
            
            (515
            )Carrying
                amount, end of period
            
            **$**
            **70,214**
            
            $
            51,688





The
      Trust has set
      aside funds for the future payment of its estimated asset retirement
      obligations. In 2005, the Trust contributed $25.2 million (2004 - $15.3 million)
      to the reclamation fund, including earnings on the fund balance.





**7.**
            **LONG-TERM
                DEBT**





As
      at December 31,
      2005, the Trust had an unsecured covenant based credit facility consisting
      of a
      revolving term loan in the amount of $410 million. The revolving period under
      the term loan is expected to expire in July 2006 and may be extended for an
      additional period of up to 364 days at the option of the lender. If the lenders
      convert the revolving credit facility to a non-revolving credit facility, the
      amounts outstanding under the facility become repayable 12 months after the
      end
      of the revolving period. Various borrowing options are available under the
      facility including prime rate based advances and bankers’ acceptance
      loans.





**8.**
            **FUTURE
                INCOME TAXES**





The
      components of
      the future income tax liability at December 31, 2005 and 2004 are as
      follows:




**2005**
            
            **2004**Capital
                assets
            
            **$**
            **185,954**
            
            $
            163,619Asset
                retirement obligation
            
            
            **(25,409**
            **)**
            
            (17,626
            )Share
                issue
                costs
            
            
            **(70**
            **)**
            
            (313
            )**$**
            **160,475**
            
            $
            145,680





The
      provision for
      income tax differs from the amount that would have been expected if the reported
      earnings had been subject only to the statutory Canadian income tax rate of
      37.62% (2004 - 38.87%), as follows:





**2005**
            
            **2004**(Restated)Earnings
                before income taxes, other items and discontinued
                operations
            
            **$**
            **184,405**
            
            $
            67,102Canadian
                corporate tax rate
            
            
            **37.62**
            **%**
            
            38.87
            %Expected
                tax
                expense
            
            
            **69,373**
            
            
            26,083Increase
                (decrease) in taxes resulting from:Income
                attributable to the unitholders
            
            
            **(40,971**
            **)**
            
            (40,272
            )Non-deductible
                Crown payments
            
            
            **10,344**
            
            
            12,628Resource
                allowance
            
            
            **(8,244**
            **)**
            
            (8,378
            )Foreign
                tax
                rate differentials*
            
            
            **(2,689**
            **)**
            
            861Statutory
                rate changes
            
            
            **-**
            
            
            (5,836
            )Capital
                taxes
            
            
            **901**
            
            
            525Unit
                compensation expense
            
            
            **3,792**
            
            
            2,248France
                tax
                assessments
            
            
            **-**
            
            
            7,090Pool
                variances
            
            
            **(3,781**
            **)**
            
            1,206Foreign
                exchange
            
            
            **(16,539**
            **)**
            
            (789
            )Other
            
            
            **771**
            
            
            709Provision
                for
                (recovery of) income taxes
            
            **$**
            **12,957**
            
            $
            (3,925
            )


*
            The
                corporate
                tax rate in France is 34.8%, 41% in the Netherlands and 30% in
                Australia





At
      December 31,
      2005, the Trust had approximately $202.3 million (2004 - $178.9 million) of
      tax
      deductions for Canadian income tax purposes, approximately $73.6 million (2004
      -
      $56.5 million) of tax deductions for income tax purposes in France,
      approximately $61.5 million (2004 - $71.4 million) of tax deductions for income
      tax purposes in the Netherlands and approximately $68.4 million of tax
      deductions for income tax purposes in Australia.




*2005
          Annual Financial Statements - Vermilion Energy Trust*
 13


**9.**
            **UNITHOLDERS’
                CAPITAL AND CONTRIBUTED
                SURPLUS**





The
      Trust is
      authorized to issue an unlimited number of units of the Trust. Upon conversion
      to a Trust, 6.0 million exchangeable shares of the Company were
      issued.





The
      exchangeable
      shares are convertible into trust units based on the exchange ratio, which
      is
      adjusted monthly to reflect the distribution paid on the trust units. Cash
      distributions are not paid on the exchangeable shares. On the 10th anniversary
      of the issuance of the exchangeable shares, subject to extension of such date
      by
      the Board of Directors of the Company, the exchangeable shares will be redeemed
      for trust units on the basis of an exchange ratio as at the last business day
      prior to the redemption date (see Note 10).





The
      Trust
      established a Distribution Reinvestment Plan (“DRIP”) in conjunction with the
      Trust’s transfer agent to provide the option for unitholders to reinvest cash
      distributions into additional trust units issued from treasury. In 2005, the
      Trust issued 0.7 million units for proceeds of $15.9 million (2004 - 0.4 million
      units for proceeds of $6.7 million).





**Number
                of Units**
            
            **Amount**TRUST
                UNITS
            
            
            
            (Restated
                Note 11)Balance
                as at
                December 31, 2003
            
            
            59,208,592
            
            $
            221,858Distribution
                reinvestment plan
            
            
            382,692
            
            
            6,662Issued
                on
                conversion of exchangeable shares
            
            
            209,846
            
            
            3,204Transfer
                from
                contributed surplus on unit right exercise (restated Note
                11)
            
            
            -
            
            
            3,456Trust
                units
                issued for bonus plan
            
            
            49,630
            
            
            825Unit
                rights
                exercised
            
            
            856,900
            
            
            8,010Balance
                as at
                December 31, 2004 (restated Note 11)
            
            
            60,707,660
            
            
            244,015Distribution
                reinvestment plan
            
            
            674,766
            
            
            15,850Issued
                on
                conversion of exchangeable shares
            
            
            73,692
            
            
            1,623Transfer
                from
                contributed surplus on unit right exercise
            
            
            -
            
            
            4,178Trust
                units
                issued for bonus plan
            
            
            40,246
            
            
            827Unit
                rights
                exercised
            
            
            1,011,850
            
            
            8,320Balance
                as at
                December 31, 2005
            
            
            62,508,214
            
            $
            274,813**2005**
            
            
            **2004**CONTRIBUTED
                SURPLUS
            
            
            
            
            
            (Restated
              Note 11)Opening
                balance
            
            **$**
            **9,136**
            
            $
            7,654Discontinued
                operations
            
            
            **-**
            
            
            (1,800
            )Unit
                compensation expense (Note 11)
            
            
            **13,199**
            
            
            6,738Transfer
                to
                unitholders’ capital on unit option exercise
            
            
            **(4,178**
            **)**
            
            (3,456
            )De-consolidation
                of Verenex (Note 4)
            
            
            **(3,591**
            **)**
            
            -Ending
                balance
            
            **$**
            **14,566**
            
            $
            9,136





**10.**
            **NON-CONTROLLING
                INTEREST**





The
      non-controlling
      interest on the consolidated balance sheets consists of the book value of the
      exchangeable shares upon issuance plus the accumulated earnings attributable
      to
      the non-controlling interest. The net earnings attributable to the
      non-controlling interest on the consolidated statement of earnings represents
      the share of net earnings attributable to the non-controlling interest based
      on
      the Trust units issuable for exchangeable shares in proportion to total trust
      units issued and issuable at each period end. When all of the exchangeable
      shares are converted to trust units, there will be no remaining non-controlling
      interest.




**2005**
            
            **2004**EXCHANGEABLE
                SHARESOpening
                number of exchangeable shares
            
            
            **4,675,961**
            
            
            4,848,029Exchanged
                for
                trust units
            
            
            **(56,626**
            **)**
            
            (172,068
            )Ending
                Balance
            
            
            **4,619,335**
            
            
            4,675,961Ending
                exchange ratio
            
            
            **1.37836**
            
            
            1.26626Trust
                units
                issuable upon conversion
            
            
            **6,367,107**
            
            
            5,920,982




*2005
          Annual Financial Statements - Vermilion Energy Trust*
 14


**10.**
            **NON-CONTROLLING
                INTEREST (Continued)**





Following
      is a
      summary of the non-controlling interest:


**2005**
            
            2004(Restated
                Note 11)Non-controlling
                interest, beginning of year
            
            **$**
            **24,686**
            
            $
            15,129Prior
                period
                adjustment (Note 11)
            
            
            **-**
            
            
            185Reduction
                of
                book value for conversion to trust units
            
            
            **(325**
            **)**
            
            (725
            )Current
                period net earnings attributable to non-controlling
                interest
            
            
            **14,399**
            
            
            10,097Non-controlling
                interest, end of year
            
            **$**
            **38,760**
            
            $
            24,686





**11.**
            **UNIT
                COMPENSATION PLANS AND
                RESTATEMENT**





***Unit
      Rights Incentive Plan***


The
      Trust has a
      unit rights incentive plan that allows the Trust to issue rights to acquire
      trust units to directors, officers and employees. The Trust is authorized to
      issue up to 6.0 million unit rights; however, the number of trust units reserved
      for issuance upon exercise of the rights shall not at any time exceed 10% of
      the
      aggregate number of issued and outstanding trust units of the Trust. Unit right
      exercise prices are equal to the market price for the trust units on the date
      the unit rights are issued. If certain conditions are met, the exercise price
      per unit may be calculated by deducting from the grant price the aggregate
      of
      all distributions, on a per-unit basis, made by the Trust after the grant date.
      Rights granted under the plan vest over a three-year period and expire five
      years after the grant date. No future rights are expected to be issued as the
      unit rights incentive plan was replaced with a Trust Unit Award Plan in 2005.
      The existing rights plan will be in place until all issued and outstanding
      rights are exercised or cancelled.





***Restatement
      of Unit Compensation Expense***


From
      inception of
      the unit rights incentive plan until January 1, 2005, the Trust applied the
      intrinsic value methodology based on the initial asessment that the number
      of
      uncertainties regarding the reduction in the strike price of the rights
      precluded a reasonable estimate of the fair value of the rights on the date
      of
      grant.





Effective
      on
      January 1, 2005, the Trust prospectively applied the fair value based method
      of
      accounting for the rights plan.





In
      the fourth
      quarter of 2005 however, it has been determined that, in the circumstances,
      the
      fair value methodology could be applied since inception of the plan rather
      than
      the intrinsic value methodology. The Trust has therefore computed a fair value
      estimate of the rights at the respective dates of grant and has retroactively
      restated its unit compensation expense back to the inception of the plan in
      2003.





The
      Trust has
      restated the 2003 and 2004 unit compensation expense. The effect is an increase
      to net earnings before non-controlling interest in 2004 and 2003 of $20.0
      million and $2.4 million respectively. The change in expense also impacted
      the
      amount of net earnings attributable to non-controlling interest resulting in
      an
      increase to the amount of net earnings allocated to non-controlling interest
      and
      an increased non-controlling interest on the balance sheet by $1.4 million
      in
      2004 and $0.2 million in 2003. Contributed surplus was reduced by $16.1 million
      in 2004 ($2.4 million in 2003) and unitholders’ capital was reduced by $3.9
      million in 2004 ($NIL in 2003). Net earnings increased by $18.6 million ($0.31
      per unit) in 2004 and $2.2 million ($0.04 per unit) in 2003.





The
      Trust used the
      Black-Scholes option-pricing model to calculate the estimated fair value of
      the
      outstanding rights. The following assumptions were used to arrive at the
      estimate of fair value:




**2004**
            
            **2003**Expected
                volatility
            
            
            22.33
            %
            
            31.47
            %Risk-free
                interest rate
            
            
            4.0
            %
            
            4.0
            %Expected
                life
                of option (years)
            
            
            5.0
            
            
            5.0Fair
                value
                per option
            
            
            $4.16
                - $5.52
            
            
            $3.99
                - $5.15





The
      dividend yield
      is offset by the reducing strike price feature of the plan resulting in using
      a
      zero dividend yield in the option-pricing model. The remaining future fair
      value
      of the rights will be recognized in earnings over the remaining vesting period
      of the rights outstanding. During the year, $6.8 million of the fair value
      has
      been recorded as compensation expense (2004 - $6.3 million). Any consideration
      paid upon exercise together with the amount previously recognized in contributed
      surplus is recorded as an increase to unitholders’ capital.


*2005
            Annual Financial Statements - Vermilion Energy Trust*
 15




**11.**
            **UNIT
                COMPENSATION PLANS AND RESTATEMENT
                (Continued)**





The
      following table
      summarizes information about the Trust’s unit rights:




**2005**
            
            
            
            **2004****Number
                of Unit Rights**
            
            **Weighted
                Average Exercise Price**
            
            **Number
                of Unit Rights**
            
            **Weighted
                Average Exercise Price**Opening
                Balance
            
            
            **4,744,100**
            
            **$**
            **13.99**
            
            
            4,543,000
            
            $
            11.59Granted
            
            
            **48,600**
            
            
            **20.20**
            
            
            1,471,100
            
            
            18.10Cancelled
            
            
            **(163,100**
            **)**
            
            **16.79**
            
            
            (413,100
            )
            
            11.81Exercised
            
            
            **(1,011,850**
            **)**
            
            **12.13**
            
            
            (856,900
            )
            
            9.35Closing
                balance
            
            
            **3,617,750**
            
            **$**
            **14.47**
            
            
            4,744,100
            
            $
            13.99




A
      summary of the
      plan as at December 31, 2005 is as follows:




**Range
                of Exercise Price at Grant Date**
            
            **Adjusted
                Exercise Price**
            
            **Number
                of Rights Outstanding**
            
            **Remaining
                Contractual Life of Right Years)**
            
            **Number
                of Rights Exercisable**$11.45
            
            
            $5.50
            
            
            2,116,100
            
            
            2.1
            
            
            1,410,733$11.46
                - $15.00
            
            
            $5.68
                - $9.22
            
            
            222,850
            
            
            2.2
                - 3.0
            
            
            121,200$15.01
                - $19.56
            
            
            $10.93
                - $15.48
            
            
            1,278,800
            
            
            3.0
                - 4.2
            
            
            381,600





***Trust
      Unit Award Incentive Plan***


In
      2005, the Board
      of Directors established a new Trust Unit Award Incentive Plan (the “Award
      Plan”) governing the issuance of restricted units of the Trust to directors,
      officers, employees and consultants of the Trust and its Affiliates. The Award
      Plan consists of units that will be designated as either a Restricted Time
      Based
      Award (“RTBA’s”) for which the number of awards is fixed or a Performance Based
      Award (“PBA’s”) for which the number of awards is variable.





Upon
      vesting, the
      grantee will be delivered units of the Trust, adjusted for cumulative
      distributions of the Trust during the period that the restricted units are
      outstanding. The number of units issued upon vesting of the PBA’s is dependent
      upon the future performance of the Trust compared to its peers based on a
      performance factor that may range from zero to two times the number of PBA’s
      originally granted. The vesting date for all restricted units shall be on the
      date that is the third anniversary of the date of the Unit Award. Awards granted
      in which 2005 is the grantee’s first year of service, will vest over three
      years.





The
      following table
      summarizes information about the Award Plan:




**Number
                of Awards**Balance
                December 31, 2004
            
            
            -Granted
            
            
            740,675Cancelled
            
            
            (85,125
            )Balance
                December 31, 2005
            
            
            655,550





A
      compensation
      expense of $3.3 million has been recorded at December 31, 2005. The fair value
      of unexercised rights is determined using the Black-Scholes model and
      management’s estimate of the number of Restricted Units to be issued on
      maturity. The value is deferred and recognized as an expense over the vesting
      period of the Awards. The dividend yield is offset by the cumulative
      distributions resulting in using a zero dividend yield in the
      model.





**2005**Expected
                volatility
            
            
            18.0
            %Risk-free
                interest rate
            
            
            3.5
            %Expected
                life
                of option (years)
            
            
            3.0Fair
                value
                per unit
            
            
            $15.57
                - $20.59





***Verenex
      Energy Inc. Compensation Plans***


Effective
      December
      15, 2005, Verenex is not considered to be controlled by the Trust (Note 4).
      Operations to December 15, 2005 have been consolidated with the Trust. Verenex
      has a stock option plan and performance warrants outstanding. The Trust has
      recognized $3.1 million in stock compensation expense for the options and
      warrants of Verenex up to December 15, 2005 (2004 - $0.5 million).




*2005
          Annual Financial Statements - Vermilion Energy Trust*
 16


**12.**
            **PER-UNIT
                AMOUNTS**





The
      following table
      shows the effect of dilutive securities on the weighted average trust units
      outstanding:





**2005**
            
            **2004**BASIC
            
            
            
            (Restated)Net
                earnings
                from continuing operations per unit
            
            **$**
            **2.57**
            
            $
            1.10Net
                earnings
                per unit
            
            **$**
            **2.57**
            
            $
            2.12Weighted-average
                number of units outstanding (thousands)
            
            
            **61,755**
            
            
            60,166DILUTEDNet
                earnings
                from continuing operations per unit
            
            **$**
            **2.49**
            
            $
            1.07Net
                earnings
                per unit
            
            **$**
            **2.49**
            
            $
            2.07Weighted-average
                number of units outstanding (thousands)
            
            
            **69,395**
            
            
            66,375





The
      number of units
      used to calculate diluted earnings per unit for the year ended December 31,
      2005, of 69.4 million (2004 - 66.4 million) included the weighted-average number
      of units outstanding of 61.8 million (2004 - 60.2 million) plus 1.2 million
      (2004 - 0.3 million) units related to the dilutive effect of unit rights and
      6.4
      million for outstanding exchangeable shares at the period end exchange ratio
      (2004 - 5.9 million).





The
      determination
      of diluted net earnings per unit was not affected by (2004 -990,800) unit rights
      that would be anti-dilutive because the respective exercise prices exceeded
      the
      average market price of the units. Net earnings attributable to the
      non-controlling interest-exchangeable shares were added back to net earnings
      from operations in calculating dilutive per unit amounts.





The
      unrecognized
      compensation cost is considered to be part of the assumed proceeds to purchase
      trust units under the treasury stock method.





**13.**
            **DERIVATIVE
                INSTRUMENTS**





***Risk
      Management Activities***





The
      nature of the
      Trust’s operations result in exposure to fluctuations in commodity prices,
      interest rates and foreign currency exchange rates. The Trust monitors and,
      when
      appropriate, uses derivative financial instruments to manage its exposure to
      these risks. The Trust is exposed to credit-related losses in the event of
      non-performance by counterparties to the financial instruments.





The
      Trust uses
      power swap agreements to manage the risk associated with fluctuating electricity
      costs. The Trust has entered into swaps for 2.0 mw/h at $48.50 per mwh and
      2.0
      mw/h at $65.17 per mwh in 2006 to 2008.





The
      Trust uses a
      variety of options including funded and costless collars and puts to manage
      the
      risk associated with fluctuating commodity prices on the sale of crude oil
      and
      natural gas. The Trust does not obtain collateral or other security to support
      its collars as the majority of these instruments are with the Trust’s banking
      syndicate.




**Risk
                Management: Oil**
            
            **Funded
                Cost**
            
            **bbls/d**
            
            **US$/bbl**Collar
                - WTIQ1
                2006
            
            
            US$0.50-$1.00/bbl
            
            
            1,250
            
            
            $53.00
                - $72.75Q2
                2006
            
            
            US$1.50/bbl
            
            
            250
            
            
            $53.00
                - $73.90Collar
                -
                BRENT2006
            
            
            US$1.00/bbl
            
            
            1,000
            
            
            $53.00
                - $67.70Q3
                2006
            
            
            US$1.00/bbl
            
            
            250
            
            
            $52.00
                - $68.50Q4
                2006
            
            
            US$1.50/bbl
            
            
            250
            
            
            $53.00
                - $69.80**Risk
                Management: Natural Gas**
            
            
            **Funded
                Cost**
            
            
            **GJ/d**
            
            
            **C$/GJ**CollarQ1
                2006
            
            $
            0.25/GJ
            
            
            2,500
            
            
            $9.50
                - $16.00Feb-Mar
                2006
            
            
            costless
            
            
            2,500
            
            
            $11.00
                - $20.74Apr-Oct
                2006
            
            $
            0.25/GJ
            
            
            2,500
            
            
            $8.00
                - $15.00PutQ1
                2006
            
            $
            0.23/GJ
            
            
            5,000
            
            
            $10.50




*2005
          Annual Financial Statements - Vermilion Energy Trust*
 17


**13.**
            **DERIVATIVE
                INSTRUMENTS (Continued)**





As
      discussed in
      Note 2, on January 1, 2004 the fair value of all outstanding derivative
      financial instruments that are not recorded as accounting hedges were recorded
      on the consolidated balance sheets with an offsetting amount to deferred
      charges. The deferred charge was recognized into revenue over the life of the
      associated contracts. Of the total deferred charge of $14,427 recorded at
      January 1, 2004, $9,709 was recognized as a charge to revenue in the year ended
      December 31, 2004 and $4,718 was recognized in 2005.





Changes
      in fair
      value after January 1, 2004 are recorded on the consolidated balance sheets
      with
      the associated unrealized gain or loss recorded in net earnings. The estimated
      fair value of all derivative financial instruments is based on quoted market
      prices or, in their absence, third party market indications and forecasts.
      Unrealized gains or losses and realized gains or losses are recorded as a
      separate element of earnings.





The
      following table
      presents a reconciliation of the change in the unrealized amounts from January
      1, 2005 to December 31, 2005 and the related total gain or loss during the
      year:





**Fair
                Value**
            
            **Total
                Gain (Loss)**Fair
                value of
                contracts, January 1, 2005
            
            $
            (21,610
            )
            $
            -Change
                in
                fair value of contracts still outstanding at January 1,
                2005
            
            
            21,610
            
            
            21,610Contract
                settlements realized during the year
            
            
            -
            
            
            (41,180
            )Fair
                value of
                contracts entered into during the year
            
            
            783
            
            
            783$
            783
            
            $
            (18,787
            )





The
      following table
      presents a reconciliation of the change in the unrealized amounts from January
      1, 2004 to December 31, 2004:





**Fair
                Value**
            
            **Total
                Gain (Loss)**Fair
                value of
                contracts, January 1, 2004
            
            $
            (14,427
            )
            $
            -Change
                in
                fair value of contracts still outstanding at December 31,
                2004
            
            
            (7,183
            )
            
            (7,183
            )Contract
                settlements realized during the period
            
            
            -
            
            
            (31,414
            )Fair
                value of
                contracts entered into during the period
            
            
            -
            
            
            -Fair
                value of
                contracts outstanding, end of period
            
            $
            (21,610
            )
            $
            (38,597
            )





The
      fair value
      amounts are recorded on the consolidated balance sheets as follows:





**2005**
            
            **2004**Fair
                value of
                derivative instrumentsCurrent
                asset
            
            **$**
            **1,166**
            
            $
            68Current
                liability
            
            
            **(383**
            **)**
            
            (21,678
            )Total
                fair
                value of derivative instruments
            
            **$**
            **783**
            
            $
            (21,610
            )





***Fair
      Values***





The
      carrying values
      of cash and cash equivalents, accounts receivable, accounts payable and accrued
      liabilities and long-term debt approximated their fair values as at December
      31,
      2005 and 2004 as a result of the short-term nature of these instruments and,
      in
      the case of long-term debt, having variable interest rates which approximate
      market value.





**14.**
            **CASH
                FLOW INFORMATION**





The
      following
      amounts represent the changes in non-cash working capital per balance sheet
      accounts:





**2005**
            
            **2004**Accounts
                receivable
            
            **$**
            **(13,087**
            **)**
            $
            (16,843
            )Crude
                oil
                inventory
            
            
            **(5,811**
            **)**
            
            (991
            )Prepaid
                expenses and other
            
            
            **(4,369**
            **)**
            
            (2,073
            )Accounts
                payable and accrued liabilities
            
            
            **(17,017**
            **)**
            
            5,140Foreign
                exchange
            
            
            **531**
            
            
            219Changes
                in
                non-cash working capital
            
            **$**
            **(39,753**
            **)**
            $
            (14,548
            )


*2005
          Annual Financial Statements - Vermilion Energy Trust*
 18


**15.**
            **SEGMENTED
                INFORMATION**





The
      Trust has
      operations principally in Canada, France, the Netherlands and Australia. The
      Netherlands assets were acquired effective May 19, 2004 and the Australia
      operations were acquired effective March 31, 2005. The Trust’s entire operating
      activities are related to exploration, development and production of petroleum
      and natural gas.





**2005**
            
            **2004**PETROLEUM
                AND
                NATURAL GAS REVENUECanada
            
            **$**
            **243,199**
            
            $
            212,567France
            
            
            **133,729**
            
            
            99,829Netherlands
            
            
            **72,525**
            
            
            42,129Australia
            
            
            **80,485**
            
            
            -**$**
            **529,938**
            
            $
            354,525NET
                EARNINGS
            
            
            
            
            
            (Restated
            )Canada
            
            **$**
            **57,383**
            
            $
            108,889France
            
            
            **47,652**
            
            
            7,987Netherlands
            
            
            **24,038**
            
            
            10,637Australia
            
            
            **29,398**
            
            
            -**$**
            **158,471**
            
            $
            127,513FUNDS
                FROM
                OPERATIONSCanada
            
            **$**
            **130,023**
            
            $
            107,187France
            
            
            **62,145**
            
            
            31,458Netherlands
            
            
            **50,940**
            
            
            31,534Australia
            
            
            **35,057**
            
            
            -**$**
            **278,165**
            
            $
            170,179CAPITAL
                EXPENDITURESCanada
            
            **$**
            **141,022**
            
            $
            31,722France
            
            
            **50,649**
            
            
            35,028Netherlands
            
            
            **12,434**
            
            
            94,499Australia
            
            
            **96,005**
            
            
            -**$**
            **300,110**
            
            $
            161,249TOTAL
                ASSETSCanada
            
            **$**
            **588,462**
            
            $
            433,949France
            
            
            **255,816**
            
            
            268,801Netherlands
            
            
            **121,296**
            
            
            141,852Australia
            
            
            **146,165**
            
            
            -**$**
            **1,111,739**
            
            $
            844,602





**16.**
            **RELATED
                PARTY TRANSACTIONS**





During
      the period,
      Vermilion initially paid for various expenditures on behalf of Verenex and
      then
      recovered such amounts from Verenex. These transactions were measured at the
      exchange amount, which is the amount of consideration established and agreed
      to
      by the related parties. These transactions were undertaken under the same terms
      and conditions as transactions with non-related parties.





**17.**
            **COMMITMENTS
                AND CONTINGENCIES**





The
      Trust has
      various commitments and guarantees in the normal course of business, none of
      which, in managements view, are significant.





**18.**
            **GUARANTEES**





In
      the normal
      course of operations, the Trust executes agreements that provide for
      indemnification and guarantees to counter-parties in transactions such as the
      sale of assets and operating leases.





These
      indemnifications and guarantees may require compensation to counterparties
      for
      costs and losses incurred as a result of various events, including breaches
      of
      representations and warranties, loss of or damages to property, environmental
      liabilities or as a result of litigation that may be suffered by the
      counterparties.




*2005
          Annual Financial Statements - Vermilion Energy Trust*
 19


**18.**
            **GUARANTEES
                (Continued)**





Certain
      indemnifications can extend for an unlimited period and generally do not provide
      for any limit on the maximum potential amount. The nature of substantially
      all
      of the indemnifications prevents the Trust from making a reasonable estimate
      of
      the maximum potential amount that might be required to pay counterparties as
      the
      agreements do not specify a maximum amount, and the amounts depend on the
      outcome of future contingent events, the nature and likelihood of which cannot
      be determined at this time.





**19.**
            **COMPARATIVE
                FIGURES**





Certain
      of the
      prior-period numbers have been reclassified to conform with the current period
      presentation.





**20.**
            **SUBSEQUENT
                EVENTS**





On
      October 18,
      2005, Vermilion announced that a wholly-owned subsidiary entered into an
      exclusive arrangement with a French subsidiary of Exxon Mobil Corporation,
      to
      negotiate the purchase of its 89.89% shareholding in Esso REP. Any transaction
      would be subject to the parties entering into a definitive purchase and sale
      agreement which would be subject to the satisfaction of all conditions
      precedent, including due diligence and the receipt of all necessary regulatory
      approvals and which will require consultation with appropriate employee
      representative groups.





**21.**
            **DIFFERENCES
                BETWEEN CANADIAN AND UNITED STATES OF AMERICA GENERALLY ACCEPTED
                ACCOUNTING PRINCIPLES**





The
      consolidated
      financial statements of the Trust have been prepared in accordance with
      accounting principles generally accepted in Canada (“Canadian GAAP”) which in
      most respects, conform to accounting principles generally accepted in the United
      States of America (“U.S. GAAP”). The significant differences, as they apply to
      the Trust are shown below.





**Consolidated
      statements of earnings in accordance with U.S. GAAP is as
      follows:**




**2005**
            
            **2004**(Restated
                Note 11)Net
                earnings
                from continuing operations - Canadian GAAP
            
            **$**
            **158,471**
            
            $
            66,010Depreciation,
                depletion and accretion (Note 21-1,3,4)
            
            
            **628**
            
            
            553Gain
                (loss)
                on derivative instruments (Note 21-2)
            
            
            **4,718**
            
            
            9,709Deferred
                income taxes (Note 21-1)
            
            
            **(201**
            **)**
            
            1,572Non-controlling
                interest - exchangeable shares (Note 21-4)
            
            
            **14,399**
            
            
            5,314Net
                earnings
                from continuing operations - U.S. GAAP
            
            
            **178,015**
            
            
            83,158Net
                earnings
                from discontinued operations
            
            
            -
            
            
            61,503Non-controlling
                interest - exchangeable shares (Note 21-4)
            
            
            -
            
            
            4,783Net
                earnings
                - U.S. GAAP
            
            **$**
            **178,015**
            
            $
            149,444Earnings
                from
                continuing operations per trust unit for U.S. GAAPBasic
            
            **$**
            **2.61**
            
            $
            1.26Diluted
            
            **$**
            **2.57**
            
            
            1.25Earnings
                per
                trust unit for U.S. GAAPBasic
            
            **$**
            **2.61**
            
            $
            2.26Diluted
            
            **$**
            **2.57**
            
            $
            2.25Weighted
                average trust units outstandingBasic
            
            
            **68,122,539**
            
            
            66,087,146Diluted
            
            
            **69,395,074**
            
            
            66,375,229


*2005
          Annual Financial Statements - Vermilion Energy Trust*
 20


**21.**
            **DIFFERENCES
                BETWEEN CANADIAN AND UNITED STATES OF AMERICA GENERALLY ACCEPTED
                ACCOUNTING PRINCIPLES
                (Continued)**





**Consolidated
      balance sheets in accordance with U.S. GAAP is as follows:**




**2005**
            
            **2005**
            
            2004
            
            2004**CDN
                GAAP**
            
            **U.S.
                GAAP**
            
            CDN
                GAAP
            
            U.S.
                GAAP**ASSETS**
            
            
            
            
            
            (Restated
                Note 11)CURRENTCash
                and cash
                equivalents
            
            **$**
            **42,777**
            
            **$**
            **42,777**
            
            $
            65,031
            
            $
            65,031Accounts
                receivable
            
            
            **75,639**
            
            
            **75,639**
            
            
            54,044
            
            
            54,044Crude
                oil
                inventory
            
            
            **10,279**
            
            
            **10,279**
            
            
            4,468
            
            
            4,468Fair
                value of
                derivative instruments (Note 21-2)
            
            
            **1,166**
            
            
            **1,166**
            
            
            68
            
            
            68Prepaid
                expenses and other
            
            
            **9,387**
            
            
            **9,387**
            
            
            5,022
            
            
            5,022**139,248**
            
            
            **139,248**
            
            
            128,633
            
            
            128,633Deferred
                charges for derivative instruments (Note 21-2)
            
            
            **-**
            
            
            **-**
            
            
            4,718
            
            
            -Long-term
                investment
            
            
            **19,096**
            
            
            **19,096**
            
            
            5,398
            
            
            5,398Reclamation
                fund
            
            
            **42,198**
            
            
            **42,198**
            
            
            17,016
            
            
            17,016Goodwill
            
            
            **19,840**
            
            
            **19,840**
            
            
            -
            
            
            -Capital
                assets (Note 21-1,3,4)
            
            
            **891,357**
            
            
            **890,127**
            
            
            688,837
            
            
            685,299**$**
            **1,111,739**
            
            **$**
            **1,110,509**
            
            $
            844,602
            
            $
            836,346**LIABILITIES**CURRENTAccounts
                payable and accrued liabilities
            
            **$**
            **90,422**
            
            **$**
            **90,422**
            
            $
            85,837
            
            $
            85,837Distributions
                payable to unitholders
            
            
            **10,626**
            
            
            **10,626**
            
            
            10,320
            
            
            10,320Income
                taxes
                payable
            
            
            **11,607**
            
            
            **11,607**
            
            
            23,798
            
            
            23,798Fair
                value of
                derivative instruments (Note 21-2)
            
            
            **383**
            
            
            **383**
            
            
            21,678
            
            
            21,678**113,038**
            
            
            **113,038**
            
            
            141,633
            
            
            141,633Long-term
                debt
            
            
            **271,099**
            
            
            **271,099**
            
            
            75,014
            
            
            75,014Asset
                retirement obligation
            
            
            **70,214**
            
            
            **70,214**
            
            
            51,688
            
            
            51,688Future
                income
                taxes (Note 21-1)
            
            
            **160,475**
            
            
            **167,778**
            
            
            145,680
            
            
            150,950**614,826**
            
            
            **622,129**
            
            
            414,015
            
            
            419,285Non-controlling
                interest
            
            
            **-**
            
            
            **-**
            
            
            16,257
            
            
            16,257Non-controlling
                interest - exchangeable shares (Note 21-4)
            
            
            **38,760**
            
            
            **-**
            
            
            24,686
            
            
            -Temporary
                equity
            
            
            **-**
            
            
            **2,118,935**
            
            
            -
            
            
            1,368,932**UNITHOLDERS’
                EQUITY**Unitholders’
                capital (Note 21-4)
            
            
            **274,813**
            
            
            **-**
            
            
            244,015
            
            
            -Contributed
                surplus
            
            
            **14,566**
            
            
            **-**
            
            
            9,136
            
            
            -Accumulated
                earnings
            
            
            **516,514**
            
            
            **(1,282,815**
            **)**
            
            358,043
            
            
            (746,578
            )Accumulated
                cash distributions
            
            
            **(347,740**
            **)**
            
            **(347,740**
            **)**
            
            (221,550
            )
            
            (221,550
            )**458,153**
            
            
            **(1,630,555**
            **)**
            
            389,644
            
            
            (968,128
            )**$**
            **1,111,739**
            
            **$**
            **1,110,509**
            
            $
            844,602
            
            $
            836,346





1)
            Income
                Tax
                and Related Depreciation, Depletion and Accretion





In
      2000, the Trust
      adopted the liability method to account for income taxes for Canadian GAAP.
      The
      change to the liability method eliminated a difference between Canadian and
      U.S.
      GAAP, however, in accordance with the recommendations of the CICA the effect
      of
      the adoption under Canadian GAAP resulted in a charge to retained earnings,
      whereas, under U.S. GAAP the deferred income taxes that resulted in the Canadian
      GAAP retained earnings adjustment would have been reflected in capital assets.
      As a result of the difference in implementation method, depreciation and
      depletion expense will differ between U.S. and Canadian GAAP in subsequent
      years
      due to the additional amounts capitalized under U.S. GAAP.





The
      adjustment
      related to the U.S. GAAP difference described above is as follows:





Increase
                (decrease)
            
            **2005**
            
            2004Depreciation,
                depletion and accretion
            
            **$**
            **1,603**
            
            $
            1,943Deferred
                income tax expense
            
            
            **(603**
            **)**
            
            (755
            )Property,
                plant and equipment
            
            
            **(1,603**
            **)**
            
            (1,943
            )Deferred
                tax
                liability
            
            **$**
            **(603**
            **)**
            $
            (755
            )





*2005
          Annual Financial Statements - Vermilion Energy Trust*
 21




**21.**
            **DIFFERENCES
                BETWEEN CANADIAN AND UNITED STATES OF AMERICA GENERALLY ACCEPTED
                ACCOUNTING PRINCIPLES
                (Continued)**





2)
            Derivative
                and Other Financial Instruments





Statement
      of
      Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative
      Instruments and Hedging Activities” (“SFAS 133”), as modified by SFAS No. 138
“Accounting for Certain Derivative Instruments and Certain Hedging Activities”,
      establishes accounting and reporting standards requiring that every derivative
      instrument be recorded in the balance sheet as either an asset or liability
      measured at its fair value, and that change in the fair value be recognized
      currently in earnings unless specific hedge accounting criteria are met. This
      statement requires an entity to establish, at the inception of a hedge, the
      method it will use for assessing the effectiveness of the hedging derivative
      and
      the measurement approach for determining the ineffective aspects of the hedge.
      Those methods must be consistent with the entity’s approach to managing risk.





Prior
      to January 1,
      2004 the Trust had designated, for Canadian GAAP purposes, its derivative
      financial instruments as hedges of anticipated revenue and expenses. In
      accordance with Canadian GAAP, payments or receipts on these contracts were
      recognized in earnings concurrently with the hedged transactions. The fair
      values of the contracts accounted for as hedges were not reflected in the
      consolidated financial statements under Canadian GAAP.





Effective
      January
      1, 2004, the Trust prospectively adopted CICA Accounting Guideline - 13 “Hedging
      Relationships” (“AcG-13”). This effectively eliminates U.S. GAAP differences
      relating to financial instruments that do not qualify for hedge accounting
      for
      future periods.




Upon
      adoption of
      AcG-13, deferred credits for derivative instruments of $14,427 were recognized
      representing the fair market value of derivative financial instruments in place
      as of January 1, 2004. The deferred charges are amortized over the life of
      the
      derivative financial instruments for Canadian GAAP and were equal to the
      aggregate of U.S. GAAP gains and losses incurred on these instruments, prior
      to
      January 1, 2004. During 2005, the remaining deferred charges of $4,718 were
      amortized to income under AcG-13 ($9,709 in 2004). Because this amount was
      previously recognized and reversed against accumulated earnings for U.S. GAAP,
      the amount has been reversed in the current period for U.S. GAAP.





Increase
                (decrease)
            
            **2005**
            
            2004(Gain)
                loss
                on derivative instruments
            
            **$**
            **-**
            
            $
            -Deferred
                income tax expense
            
            
            **-**
            
            
            (1,883
            )Deferred
                income tax liability
            
            
            **-**
            
            
            (1,883
            )Revenue
            
            
            **4,718**
            
            
            9,709Accumulated
                earnings
            
            
            **(4,718**
            **)**
            
            (14,427
            )Deferred
                charges for derivative financial instruments
            
            **$**
            **-**
            
            $
            (4,718
            )







3)
            Business
                Combinations Effected by Issuance of
                Shares





For
      both Canadian
      and U.S. GAAP, the quoted market price of the shares issued in a business
      combination is used to estimate the fair value of the acquired enterprise after
      recognizing possible effects of price fluctuations, quantities traded, issue
      costs, and similar items. The value of the shares is based on their market
      price
      over a reasonable period before and after the date the terms of the business
      combination are agreed to and announced. Under SFAS 141, business combination
      under U.S. GAAP, the period of time determined to be reasonable for assessing
      the market value of the shares, is considered to be two days before and two
      days
      after the date of announcement. The resulting change in the carrying value
      of
      the acquired assets as prescribed under U.S. GAAP resulted in changes to the
      related depreciation and depletion expense in the current and prior
      years.





The
      adjustment
      related to the U.S. GAAP difference described above, is related to business
      combinations that occurred prior to 2002:





Increase
                (decrease)
            
            **2005**
            
            2004Depreciation,
                depletion and accretion
            
            **$**
            **134**
            
            $
            482Property,
                plant and equipment
            
            **$**
            **(134**
            **)**
            $
            (482
            )




*2005
          Annual Financial Statements - Vermilion Energy Trust*
 22


**21.**
            **DIFFERENCES
                BETWEEN CANADIAN AND UNITED STATES OF AMERICA GENERALLY ACCEPTED
                ACCOUNTING PRINCIPLES
                (Continued)**





4)
            Unitholders’
                Capital





Under
      adoption of
      EITF D-98 “Classification and Measurement of Redeemable Securities”, the Trust
      records the redemption value of all outstanding trust units and exchangeable
      shares as temporary equity on the consolidated balance sheets. The amount
      included for Unitholders' Equity is reduced by an amount equal to the redemption
      value of the trust units as at the balance sheet date.  The redemption
      value of the trust units is determined with respect to the trading value of
      the
      trust units and the trust unit equivalent of the exchangeable shares at each
      balance sheet date, and the amount of the redemption value is classified as
      temporary equity.  Under Canadian GAAP, all trust units are classified as
      unitholders’ equity and exchangeable shares as non-controlling interest. 
As at December 31, 2005 and 2004, the Trust has classified $2,118,935 and
      $1,368,932 respectively, as temporary equity in accordance with US GAAP.





Under
      Canadian
      GAAP, the Company's exchangeable shares are classified as non-controlling
      interest to reflect a minority ownership in one of the Trust's
      subsidiaries.  As these exchangeable shares are ultimately to be converted
      into trust units, the exchangeable shares are classified as temporary equity
      along with the trust units (see Note 10) under U.S. GAAP. As a result,
      non-controlling interest is eliminated for the determination of earnings for
      U.S. GAAP purposes.





The
      adjustment
      related to the U.S. GAAP difference described above is as follows:




Increase
                (decrease)
            
            **2005**
            
            2004(Restated
                Note 11)Unitholders’
                capital
            
            **$**
            **(273,901**
            **)**
            $
            (243,103
            )Contributed
                surplus
            
            
            **(14,566**
            **)**
            
            (9,136
            )Non-controlling
                interest - exchangeable shares
            
            
            **(38,760**
            **)**
            
            (24,686
            )Capital
                assets
            
            
            **(13,310**
            **)**
            
            (17,355
            )Future
                income
                taxes
            
            
            **(5,114**
            **)**
            
            (5,918
            )Non-controlling
                interest - exchangeable shares
            
            
            **(14,399**
            **)**
            
            (10,097
            )Depletion
            
            
            **(2,365**
            **)**
            
            (2,978
            )Future
                income
                taxes
            
            
            **804**
            
            
            1,016Accumulated
                earnings
            
            
            **(1,815,864**
            **)**
            
            (1,115,503
            )Temporary
                equity
            
            **$**
            **2,118,935**
            
            $
            1,368,932




5)
            Ceiling
                Test





Under
      U.S. GAAP
      full cost accounting, the carrying value of petroleum and natural gas properties
      and related facilities, net of deferred income taxes, is limited to the present
      value of after tax future net revenue from proven reserves, discounted at 10%
      (based on unescalated prices and costs at the balance sheet date), plus the
      lower of cost and fair value of unproven properties. Under Canadian GAAP, an
      impairment loss occurs when the carrying amount of the Trust’s property plant
      and equipment exceeds the estimated un-discounted future net cash flows
      associated with the Trust’s proved reserves. If an impairment loss is determined
      to occur, the costs carried on the balance sheet in excess of the discounted
      future net cash flows associated with the Trust’s proved and probable reserves
      are charged to income. The application of the impairment test under U.S. GAAP
      did not result in a write-down of capitalized costs in either 2005 or
      2004.





6)
            Stock-based
                Compensation





Prior
      to 2005, the
      Trust was accounting for Stock-based Compensation using the intrinsic value
      method. On January 1, 2005, the Trust prospectively applied the fair value
      method, and restated compensation expense for 2003 and 2004. Now that the fair
      value method is being used and the compensation expense is deferred and
      recognized in income over the vesting period of the rights, there is no
      difference between Canadian and U.S. GAAP.





7)
            Effects
                on
                Cash Flow





i)
            The
                Trust
                presents funds from operations before changes in non-cash working
                capital
                as a subtotal in the consolidated statement of cash flows. This line
                item
                would not be presented in a cash flow statement prepared in accordance
                with U.S. GAAP.




*2005
          Annual Financial Statements - Vermilion Energy Trust*
 23


**21.**
            **DIFFERENCES
                BETWEEN CANADIAN AND UNITED STATES OF AMERICA GENERALLY ACCEPTED
                ACCOUNTING PRINCIPLES
                (Continued)**





ii)
            Under
                Canadian GAAP, the Trust recorded cash flows related to derivative
                instruments of $41.2 million (for the 12 month period ended December
                31,
                2005, $31.4 million for the same period in 2004) which flowed through
                the
                consolidated statements of cash flows as an operating activity. Under
                U.S.
                GAAP, cash flow related to derivative instruments are classified
                as
                investing activities. The result is a classification difference on
                the
                consolidated statements of cash flows with no change in the cash
                balance
                at the end of the period.





8)
            Recent
                U.S.
                Accounting Standards





i)
            In
                November
                2004, the Financial Accounting Standards Board (FASB) issued Statement
                151, Inventory Costs. This statement amends ARB 43 to clarify
                that:





§
            abnormal
                amounts of idle facility expense, freight, handling costs and wasted
                material (spoilage) should be recognized as current-period charges;
                and


§
            requires
                the
                allocation of fixed production overhead to inventory based on the
                normal
                capacity of the production
                facilities.




The
      provisions of
      this statement are effective for inventory costs incurred during fiscal years
      beginning after June 15, 2005. We do not expect the adoption of this statement
      to have any material impact on our results of operation or financial
      position.





ii)
            In
                December
                2004, the FASB issued FAS No. 123 (revised 2004) (“FAS 123R”),
                “Share-Based Payment”, which is a revision of FAS No. 123, “Accounting for
                Stock-based Compensation”. FAS 123R requires all share-based payments to
                employees, including grants of employee stock options, to be recognized
                in
                the financial statements based on their fair values and does not
                allow the
                previously permitted pro forma disclosure as an alternative to financial
                statement recognition. Liability classified awards are re-measured
                to fair
                value at each balance sheet date until the award is settled. FAS
                123R
                supersedes Accounting Principles Board (“APB”) Opinion No. 25 “Accounting
                for Stock Issued to Employees”, and related interpretations and amends FAS
                No. 95 “Statement of Cash Flows”. FAS 123R is scheduled to be effective
                beginning fiscal 2006. On August 31, 2005, the FASB issued FSP FAS
                123R-1
                to defer the requirement that a freestanding financial instrument
                originally subject to FAS 123R becomes subject to the recognition
                and
                measurement requirements of other applicable generally accepted accounting
                principles when the rights conveyed by the instrument to the holder
                are no
                longer dependent on the holder being an employee of the entity. On
                October
                18, 2005, the FASB issued FSP FAS 123R-2 to provide further guidance
                on
                the application of grant date as defined in FAS 123R. The Trust is
                currently assessing the impact of FAS 123R and related FSPs on its
                consolidated financial statements.





iii)
            In
                December
                2004, the FASB issued Statement 153, Exchanges of Non-monetary Assets,
                an
                amendment of APB Opinion 29, Accounting for Non-monetary Transactions.
                This amendment eliminates the exception for non-monetary exchanges
                of
                similar productive assets and replaces it with a general exception
                for
                exchanges of non-monetary assets that do not have commercial substance.
                Under Statement 153, if a non-monetary exchange of similar productive
                assets meets a commercial-substance criterion and fair value is
                determinable, the transaction must be accounted for at fair value
                resulting in recognition of any gain or loss. This statement is effective
                for non-monetary transactions in fiscal periods that begin after
                June 15,
                2005. The adoption of this statement is not anticipated to have any
                material impact on our results of operation or financial
                position.





iv)
            In
                May 2005,
                the FASB issued FAS No. 154 “Accounting Changes and Error Corrections - a
                replacement of APB Opinion No. 20 and FAS Statement No. 3”. FAS 154
                requires an entity to account for the adoption of a new accounting
                policy
                by applying the new principle to prior accounting periods as if the
                principle had always been adopted, or “retrospective application”. Under
                existing GAAP, a new principle is not applied to prior periods; rather,
                the cumulative effect of the change is recognized in earnings in
                the
                period of the change. FAS 154 also carries forward without change
                the
                guidance from Opinion No. 20 for reporting the correction of an error
                in
                previously issued financial statements and the accounting for changes
                in
                estimate. The provisions of FAS 154 will be effective for accounting
                changes and corrections of errors made in fiscal years beginning
                after
                December 15, 2005.




*2005
      Annual Financial Statements - Vermilion Energy Trust*


24