EXHIBIT
99.3






















2007
AUDITED ANNUAL FINANCIAL STATEMENTS
































DISCLAIMER





This
document contains forward-looking financial and operational information
including earnings, cash flow, unitholder distributions, debt levels,
production, reserves and capital expenditure projections.  These
projections are based on the Trust’s expectations and are subject to a number of
risks and uncertainties that could materially affect the
results.  These risks include, but are not limited to, future
commodity prices, exchange rates, interest rates, geological risk, reserves
risk, political risk, production demand, transportation restrictions, risks
associated with changes in tax, royalty and regulatory regimes and risks
associated with international activities.  Additional risks and
uncertainties are described in the Trust's Annual Information Form which is
filed on SEDAR at www.sedar.com.





Due to
the risks, uncertainties and assumptions inherent in forward-looking statements,
prospective investors in the Trust's securities should not place undue reliance
on these forward-looking statements.  Forward looking statements
contained in this document are made as of the date hereof and are subject to
change. The Trust assumes no obligation to revise or update forward looking
statements to reflect new circumstances, except as required by
law.  Certain natural gas volumes have been converted on the basis of
six thousand cubic feet of gas to one barrel equivalent of
oil.  Barrels of oil equivalent (boe’s) may be misleading,
particularly if used in isolation.  A boe conversion ratio of six
thousand cubic feet to one barrel of oil is based on an energy equivalency
conversion method primarily applicable at the burner tip and does not represent
a value equivalency at the wellhead.











MANAGEMENT’S
REPORT TO UNITHOLDERS





Management’s
Responsibility for Financial Statements





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 Independent
Registered Chartered Accountants, have conducted an audit of the
consolidated financial statements in accordance with Canadian generally accepted
auditing standards and the standards
of the Public Company Accounting Oversight Board (United States) and have
provided their report.
  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 Deloitte & Touche LLP 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 Independent
Registered Chartered Accountants’ Report before they are presented to the
Board of Directors.
  Management’s
Report on Internal Control Over Financial Reporting
  Management is
responsible for establishing and maintaining an adequate system of internal
control over financial reporting. Management conducted an evaluation of the
effectiveness of the system of internal control over financial reporting based
on the criteria established in “Internal Control – Integrated Framework”
issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
 
 A Company’s
internal control system is designed to provide reasonable assurance that the
financial information is relevant, reliable and accurate and that the Company’s
assets are appropriately accounted for and adequately safeguarded. Based on this
evaluation, management concluded that the Trust’s system of internal control
over financial reporting was effective as of December 31,
2007.
 
 Deloitte & Touche LLP audited
our consolidated
financial statementsas stated in their report which is on page 3
of this Exhibit 99.3 of Form 40-F and has issued an attestation report on our
internal control over financial reporting.





(“Lorenzo
      Donadeo”)
            (“Curtis
      Hicks”)Lorenzo
    Donadeo
            Curtis W.
    HicksPresident & Chief Executive
      Officer
            Executive Vice President &
      Chief Financial OfficerMarch 17,
    2008








2007
      Annual Financial Statements – Exhibit 99.3
            2











REPORT
OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS
 
 To
the Board of Directors of Vermilion Resources Ltd. and Unitholders of Vermilion
Energy Trust:
  We
have audited the accompanying consolidated balance sheets of Vermilion Energy
Trust and subsidiaries (the “Trust”) as at December 31, 2007 and 2006,
and the related consolidated statements of earnings, comprehensive income and
retained 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 and the standards of the Public Company Accounting Oversight Board
(United States).  These standards require that we plan and perform the
audit to obtain reasonable assurance about 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.  We believe
that our audits provide a reasonable basis for our opinion.
  In
our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of Vermilion Energy Trust and
subsidiaries as at December 31, 2007 and 2006, and the results of their
operations and their cash flows for the years then ended in accordance with
Canadian generally accepted accounting principles.
  On
March 17, 2008, we reported separately to the Unitholders of Vermilion Energy
Trust on our audits, conducted in accordance with Canadian generally accepted
auditing standards, of the consolidated financial statements for the same
periods, prepared in accordance with Canadian generally accepted accounting
principles but which did not include Note 22, Differences between Canadian and
United States of America Generally Accepted Accounting Principles.
  We have also
audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Trust's internal control over financial
reporting as of December 31, 2007, based on the criteria established in Internal
Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated March 17, 2008 expressed an
unqualified opinion on the Trust’s internal control over financial
reporting.
  (“Deloitte
& Touche LLP”)
  Independent
Registered Chartered Accountants
 Calgary,
Canada
 March
17, 2008
  Comments
by Independent Registered Chartered Accountants on Canada – United States of
America Reporting Difference
  To
the Board of Directors of Vermilion Resources Ltd. and Unitholders of Vermilion
Energy Trust:
  The
standards of the Public Company Accounting Oversight Board (United States)
require the addition of an explanatory paragraph (following the opinion
paragraph) when there are changes in accounting principles that have a material
effect on the comparability of
the Trust’s consolidated financial statements, such as the changes
described in Note 3 to the consolidated
financial statements.  Our
report to the Board of Directors of Vermilion Resources Ltd. and
Unitholders of Vermilion Energy Trust dated March 17, 2008 is expressed in
accordance with Canadian reporting standards which do not require a reference to
such changes in accounting principles
in the auditors’ report when the changes
are properly accounted for and adequately disclosed in the consolidated
financial statements.
  (“Deloitte
& Touche LLP”)
  Independent
Registered Chartered Accountants
 Calgary,
Canada
 March
17, 2008













2007
      Annual Financial Statements – Exhibit 99.3
            3











REPORT
OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS





To the Board of
Directors of Vermilion Resources Ltd. and Unitholders of Vermilion Energy
Trust:
  We have audited the
internal control over financial reporting of Vermilion Energy Trust and
subsidiaries (the “Trust”) as of December 31, 2007, based on the criteria
established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.  The Trust's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management’s
Report on Internal Control Over Financial Reporting.  Our
responsibility is to express an opinion on the Trust's internal control over
financial reporting based on our audit.
  We conducted our
audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States).  Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects.  Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances.  We
believe that our audit provides a reasonable basis for our opinion.
  A company's
internal control over financial reporting is a process designed by, or under the
supervision of, the company's principal executive and principal financial
officers, or persons performing similar functions, and effected by the company's
board of directors, management, and other personnel to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles.  A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
  Because of the
inherent limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material
misstatements due to error or fraud may not be prevented or detected on a timely
basis.  Also, projections of any evaluation of the effectiveness of
the internal control over financial reporting to future periods are subject to
the risk that the controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
  In our opinion, the
Trust maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2007, based on the criteria established
in Internal
Control - Integrated Frameworkissued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
  We have also audited, in accordance
with Canadian generally accepted auditing standards and the standards of the
Public Company Accounting Oversight Board (United States), the consolidated
financial statements as at and for
the year ended December 31, 2007 of the Trust and our report dated March 17,
2008 expressed an unqualified opinion on those financial statements and included
a separate report titled Comments by Independent Registered Chartered
Accountants on Canada-United States of America Reporting Difference referring to
changes in accounting
principles.
   (“Deloitte &
Touche LLP”)
  Independent
Registered Chartered Accountants
 Calgary,
Canada
 March 17,
2008




2007
      Annual Financial Statements – Exhibit 99.3
              4











Consolidated
      Balance Sheets
              December
      31
              (THOUSANDS
      OF CANADIAN DOLLARS)


2007
            
            
            2006ASSETSCurrentCash and cash
      equivalents (Note 19)
            
            $
            47,868
            
            
            $
            26,950Accounts
      receivable
            
            
            119,645
            
            
            
            120,573Crude oil
      inventory
            
            
            11,033
            
            
            
            4,898Derivative
      instruments (Note 13)
            
            
            37
            
            
            
            1,624Prepaid
      expenses and other (Note 3)
            
            
            7,669
            
            
            
            13,473186,252
            
            
            
            167,518Derivative instruments (Note
      13)
            
            
            9,515
            
            
            
            4,656Long-term investments (Notes 3, 4
      and 16)
            
            
            63,128
            
            
            
            27,152Goodwill
            
            
            19,840
            
            
            
            19,840Reclamation fund (Notes 3 and
      6)
            
            
            57,928
            
            
            
            56,357Capital assets (Note
      5)
            
            
            1,331,460
            
            
            
            1,187,316$
            1,668,123
            
            
            $
            1,462,839LIABILITIESCurrentAccounts
      payable and accrued liabilities
            
            $
            128,858
            
            
            $
            139,672Distributions
      payable to unitholders
            
            
            12,794
            
            
            
            11,000Income taxes
      payable
            
            
            1,518
            
            
            
            13,419Derivative
      instruments (Note 13)
            
            
            7,450
            
            
            
            -150,620
            
            
            
            164,091Long-term debt (Note 3 and
      7)
            
            
            452,490
            
            
            
            358,236Asset retirement obligation (Note
      6)
            
            
            163,374
            
            
            
            127,494Future income taxes (Notes 3 and
      8)
            
            
            205,702
            
            
            
            224,631972,186
            
            
            
            874,452Non-controlling interest -
      exchangeable shares (Note 10)
            
            
            68,576
            
            
            
            51,780UNITHOLDERS’
      EQUITYUnitholders’
      capital (Note 9)
            
            
            380,941
            
            
            
            321,035Contributed
      surplus (Note 9)
            
            
            29,211
            
            
            
            30,513Retained
      earnings
            
            
            217,209
            
            
            
            185,059627,361
            
            
            
            536,607$
            1,668,123
            
            
            $
            1,462,839











APPROVED
BY THE BOARD








(“W. Kenneth
      Davidson”)
            (“Lorenzo
      Donadeo”)W. Kenneth Davidson,
      Director
            Lorenzo Donadeo,
      Director











2007
      Annual Financial Statements – Exhibit 99.3
              5











Consolidated
      Statements of Earnings, Comprehensive Income and Retained
      EarningsYears
      Ended December 31(THOUSANDS
      OF CANADIAN DOLLARS, EXCEPT UNIT AND PER UNIT
  AMOUNTS)


2007
            
            
            2006REVENUEPetroleum and
      natural gas revenue
            
            $
            707,334
            
            
            $
            618,072Royalties
            
            
            (97,518
            )
            
            
            (92,212
            )609,816
            
            
            
            525,860EXPENSES AND OTHER
      INCOMEOperating
            
            
            119,517
            
            
            
            96,492Transportation
            
            
            22,926
            
            
            
            10,504Unit based
      compensation (Note 11)
            
            
            13,985
            
            
            
            24,383Loss (gain) on
      derivative instruments (Note 13)
            
            
            7,013
            
            
            
            (349
            )Interest
            
            
            22,330
            
            
            
            16,781General and
      administration
            
            
            18,726
            
            
            
            15,839Foreign
      exchange (gain) loss
            
            
            (11,533
            )
            
            
            12,997Other
      income
            
            
            (1,106
            )
            
            
            (1,348
            )Depletion,
      depreciation and accretion
            
            
            211,397
            
            
            
            162,254403,255
            
            
            
            337,553EARNINGS BEFORE INCOME TAXES AND
      OTHER ITEMS
            
            
            206,561
            
            
            
            188,307INCOME TAXES (NOTE
      8)Future
            
            
            (9,325
            )
            
            
            (16,349
            )Current
            
            
            34,033
            
            
            
            42,87624,708
            
            
            
            26,527OTHER ITEMSNon-controlling
      interest - exchangeable shares (Note 10)
            
            
            16,813
            
            
            
            14,917Loss (gain)
      related to equity method investment
            
            
            754
            
            
            
            (60
            )17,567
            
            
            
            14,857NET EARNINGS AND COMPREHENSIVE
      INCOME
            
            
            164,286
            
            
            
            146,923Retained earnings, beginning of
      year
            
            
            185,059
            
            
            
            168,774Cumulative effect of adoption of
      new accounting standards (Note 3)
            
            
            5,765
            
            
            
            -Distributions
      declared
            
            
            (136,389
            )
            
            
            (130,638
            )Unit-settled distributions on
      vested unit based awards (Note 9)
            
            
            (1,512
            )
            
            
            -RETAINED EARNINGS, END OF
      YEAR
            
            $
            217,209
            
            
            $
            185,059NET EARNINGS PER TRUST UNIT (NOTE
      12)Basic
            
            $
            2.48
            
            
            $
            2.30Diluted
            
            $
            2.39
            
            
            $
            2.22WEIGHTED AVERAGE TRUST UNITS
      OUTSTANDING (NOTE 12)Basic
            
            
            66,122,423
            
            
            
            63,977,134Diluted
            
            
            75,782,723
            
            
            
            73,059,877











2007
      Annual Financial Statements – Exhibit 99.3
              6











Consolidated
      Statements of Cash FlowsYears
      Ended December 31(THOUSANDS
      OF CANADIAN DOLLARS)


2007
            
            
            2006OPERATINGNet
earnings
            
            $
            164,286
            
            
            $
            146,923Adjustments:Depletion,
      depreciation and accretion
            
            
            211,397
            
            
            
            162,254Change in
      unrealized gains and losses and amounts accrued relating to derivative
      contracts (Note 13)
            
            
            4,178
            
            
            
            (571
            )Unit based
      compensation
            
            
            13,985
            
            
            
            24,383Loss (gain)
      related to equity method investment
            
            
            754
            
            
            
            (60
            )Unrealized
      foreign exchange (gain) loss
            
            
            (16,226
            )
            
            
            12,353Non-controlling
      interest - exchangeable shares
            
            
            16,813
            
            
            
            14,917Change in
      unrealized gains and losses and amounts realized relating to
      investments
            
            
            49
            
            
            
            (1,348
            )Future income
      taxes
            
            
            (9,325
            )
            
            
            (16,349
            )385,911
            
            
            
            342,502Asset retirement costs
      incurred
            
            
            (4,056
            )
            
            
            (4,217
            )Changes in non-cash operating
      working capital (Note 14)
            
            
            (31,965
            )
            
            
            (32,252
            )Cash flows from operating
      activities
            
            
            349,890
            
            
            
            306,033INVESTINGDrilling and
      development of petroleum and natural gas properties
            
            
            (175,639
            )
            
            
            (136,939
            )Acquisition of
      petroleum and natural gas properties (Note 4)
            
            
            (121,294
            )
            
            
            (26,435
            )Long-term
      investment (Note 4)
            
            
            (32,193
            )
            
            
            (7,500
            )Corporate
      acquisition, net of cash acquired (Note 4)
            
            
            -
            
            
            
            (124,604
            )Purchase of
      derivative instrument (Note 13)
            
            
            -
            
            
            
            (4,926
            )Contributions
      to reclamation fund
            
            
            -
            
            
            
            (9,553
            )Changes in
      non-cash investing working capital (Note 14)
            
            
            (4,512
            )
            
            
            548Cash flows used in investing
      activities
            
            
            (333,638
            )
            
            
            (309,409
            )FINANCINGIssue of trust
      units for cash
            
            
            7,045
            
            
            
            11,545Cash
      distributions
            
            
            (134,595
            )
            
            
            (130,264
            )Increase in
      long-term debt
            
            
            99,053
            
            
            
            87,137Issue of trust
      units pursuant to distribution reinvestment plan
            
            
            35,992
            
            
            
            18,811Changes in
      non-cash financing working capital (Note 14)
            
            
            -
            
            
            
            (1,531
            )Cash flows from (used in)
      financing activities
            
            
            7,495
            
            
            
            (14,302
            )Foreign exchange (loss) gain on
      cash held in foreign currencies
            
            
            (2,829
            )
            
            
            1,851Net change in cash and cash
      equivalents
            
            
            20,918
            
            
            
            (15,827
            )Cash and cash equivalents,
      beginning of year
            
            
            26,950
            
            
            
            42,777Cash and cash equivalents, end of
      year
            
            $
            47,868
            
            
            $
            26,950Supplementary information - cash
      paymentsInterest
      paid
            
            $
            26,071
            
            
            $
            20,320Income taxes
      paid
            
            $
            45,934
            
            
            $
            47,523











2007
      Annual Financial Statements – Exhibit 99.3
              7








Notes
to the Consolidated Financial Statements - Years Ended December 31, 2007 and
2006


(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, exchangeable shares of the
Company or a combination thereof, in accordance with the elections made by such
holders, as well as 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 interest
basis, which recognizes the Trust as the successor entity to
Resources.





2.   SIGNIFICANT
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, all of which are wholly owned, on a consolidated
basis.  Inter-company account balances and transactions are eliminated
upon consolidation.





The
Trust currently has no variable interest entities of which it is the primary
beneficiary and accordingly the consolidated financial statements do not include
the accounts of any such entities.





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 on producing and non-producing properties, overhead
costs related to exploration and development 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 20% or
greater change in the rate of depletion and depreciation.





Amortization
of these costs plus future development costs to develop proved reserves is
calculated on a country-by-country basis using 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 one barrel of
oil.





Annually,
the carrying value of the Trust’s petroleum and natural gas properties is
compared 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 assets to the estimated net present value
of future cash flows from proved plus probable reserves.  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.





A
significant portion 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.





2007
      Annual Financial Statements – Exhibit 99.3
              8








2.   SIGNIFICANT
ACCOUNTING POLICIES (Continued)





The
Trust recognizes the estimated liability associated with an asset retirement
obligation in the consolidated financial statements at the time the liability is
incurred.  The estimated fair value of the asset retirement obligation
is recorded as a long term liability, with a corresponding increase in the
carrying amount of the related asset.  The capitalized amount is
depleted using the 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 this accretion is charged to earnings in the
period.  The asset retirement obligation can also increase or decrease
due to changes in the estimated timing of cash flows or changes in the original
estimated undiscounted costs.  Actual costs incurred upon settlement
of the asset retirement obligation are charged against the asset retirement
obligation to the extent of the liability recorded.





The
amounts recorded for depletion and depreciation of property, plant and equipment
are based on estimates.  The recoverability test associated with the
Trust’s petroleum and natural gas properties 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 estimated
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 fair value that have an original maturity date of not more than
90 days.





Furniture
and Equipment


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





Crude
Oil Inventory


Inventories
of crude oil, consisting of production for which title has not yet transferred
to the buyer are valued at the lower of cost or net realizable
value.  Cost is determined on a weighted-average basis.





Long-Term
Investments


Investments
in which the Trust has significant influence are accounted for using the equity
basis of accounting whereby the carrying value of the investment is increased or
decreased for the Trust’s percentage of net earnings or loss and reduced by
dividends paid to the Trust.  In 2007 and 2006 only the Trust’s
investment in Verenex Energy Inc. (“Verenex”) was subject to the equity basis of
accounting.





Long-term
investments over which the Trust does not have significant influence are carried
at fair value.   Dividends received or receivable from the
investments are included in the Trusts net earnings, with no adjustment to the
carrying amount of the investment.





Goodwill


Goodwill
is tested for impairment at least 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 is recognized for the
excess.





Revenue
Recognition


Revenues
associated with the sale of crude oil, natural gas and natural gas liquids are
recorded when title passes to the customer.  For Canadian natural gas
production, legal title transfer occurs at the intersection of major pipelines
(referred to as the “Hub”) whereas the majority of Vermilion’s Canadian oil
production is sold at the well head.  In Australia, oil is sold at the
Wandoo B Platform, in the Netherlands natural gas is sold at the plant gate and
in France oil is sold when delivered to the pipeline or when delivered to the
refinery via tanker.





2007
      Annual Financial Statements – Exhibit 99.3
              9








2.   SIGNIFICANT
ACCOUNTING POLICIES (Continued)





Derivative
Financial Instruments


The
Trust has elected to not designate any of its price risk management activities
as accounting hedges and accounts for derivative financial instruments at fair
value.  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 speculative 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.




Financial
Instruments


Cash
and cash equivalents are classified as held for trading and are measured at
carrying value, which approximates fair value due to the short-term nature of
these instruments.  A gain or loss arising from a change in the fair value
is recognized in net earnings in the current period.




Accounts
receivable are classified as loans and receivables and are initially measured at
fair value and subsequently measured at amortized cost.  The carrying
value approximates the fair value due to the short-term nature of these
instruments.





Accounts
payable and accrued liabilities, distributions payable to unitholders and
long-term debt have been classified as other financial liabilities and are
initially recognized at fair value.  The carrying value approximates the
fair value due to the short-term nature of these instruments. 
 Transaction costs and discounts are now added to the fair value of
long-term debt on initial recognition.





All
derivative, debt and equity security investments not subject to consolidation or
equity method accounting have been classified as held for trading and are
measured at fair value.  Accordingly, gains and losses are reflected in net
income in the period in which they arise.  Gains and losses associated with
the Trust’s investments in debt and equity securities are included in other
income in the consolidated statement of earnings.





The
fair values of derivative instruments, debt securities and equity securities are
determined by reference to published prices in active markets.





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 award at the date of
grant.  Unit compensation expense is deferred and recognized in
earnings over the vesting period of the awards with a corresponding adjustment
to contributed surplus.





Upon
vesting or exercise, the amount previously recognized in contributed surplus
together with any consideration paid is recorded as an increase in unitholders’
capital.   The Trust has not incorporated an estimated forfeiture
rate for awards that will not vest, rather, the Trust accounts for forfeitures
as they occur.





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 aggregate of the
proceeds received from the exercise of “in the money” trust unit rights and the
deemed proceeds related to unrecognized unit based compensation expense are used
to repurchase units at the average market price during the
period.  Trust unit awards outstanding are converted at estimated
performance factors.





2007
      Annual Financial Statements – Exhibit 99.3
              10








2.   SIGNIFICANT
ACCOUNTING POLICIES (Continued)





Foreign
Currency Translation


The
financial position and results of foreign subsidiaries, all of 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.





Income
Taxes


Future
income taxes are calculated using the liability method whereby 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 tax bases
using substantively enacted income tax rates in the respective jurisdictions
that will be in effect when the differences are expected to reverse.  The
effect of a change in income tax rates on future income tax liabilities and
assets is recognized in income in the period in which the related legislation is
substantively enacted.





The
Trust is a taxable entity under the Income Tax Act (Canada) and currently is
only taxable on income that is not distributed to the unitholders.  In
2007, the Government of Canada passed legislation that effectively imposes a tax
on distributions made by entities such as the Trust beginning in 2011.  In
2006 and prior years, as the Trust allocated all of its Canadian taxable income
to the unitholders in accordance with the Trust Indenture and met the
requirements of the Income Tax Act (Canada) applicable to it, a provision for
Canadian income tax expense was only recognized in the Canadian subsidiaries of
the Trust.  As a result of this new legislation, future income taxes
related to temporary differences arising in the Trust which will reverse after
2010 are now recognized in earnings.





The
Trust is subject to current income taxes in France, the Netherlands and
Australia based on the 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, or goodwill as appropriate.





3.   NEW
ACCOUNTING POLICIES





Financial Instruments


On
January 1, 2007 the Trust adopted the Canadian Institute of Chartered
Accountants (“CICA”) Handbook Section 1530 - “Comprehensive Income”, Section
3855 - “Financial Instruments”, Section 3861 -  “Financial Instruments
– Presentation and Disclosure” and Section 3865 - “Hedges”.  These
standards require that entities categorize financial instruments and measure
certain financial instruments at fair value.  In addition, these
standards introduce the concept of comprehensive income within Canadian GAAP and
establish new guidance relating to hedge accounting.





As a
result of adopting Section 3855, the Trust’s investments in marketable
securities are now measured at fair value whereas previously they were carried
at cost.  Gains and losses associated with these securities are
reflected in net earnings in the period in which they
arise.  Transaction costs and discounts are now added to the fair
value of long-term debt on initial recognition whereas previously these amounts
were deferred and amortized using the straight-line method over the term of the
debt.  Unamortized amounts were included in prepaid expenses and other
on the consolidated balance sheet.  The Trust does not currently use
hedge accounting and accordingly risk management related derivatives continue to
be accounted for at fair value with the associated gains and losses reflected in
net earnings.  As the Trust does not have any other comprehensive
income, net earnings equal comprehensive income.








2007
      Annual Financial Statements – Exhibit 99.3
              11









3.   NEW
ACCOUNTING POLICIES (Continued)





In
accordance with the transitional provisions, prior periods have not been
restated as a result of adopting these standards.  The cumulative
effect of the adoption of these new standards had the following impact on the
Trust’s consolidated balance sheet as at January 1, 2007:





Increase
      (Decrease)Prepaid expenses and
      other
            
            $
            (2,431
            )Long-term
      investments
            
            $
            4,704Reclamation
      fund
            
            $
            2,436Long-term
    debt
            
            $
            (2,431
            )Future income
      taxes
            
            $
            1,375Retained
      earnings
            
            $
            5,765





There
was no other material impact on the consolidated financial statements relating
to the adoption of these standards.





Accounting
Changes


Effective
January 1, 2007, the Trust adopted Section 1506 – “Accounting Changes” which
prescribes the criteria for changing accounting policies as well as the
accounting treatment and disclosure of changes in accounting policies, changes
in accounting estimates and corrections of errors.  The adoption of
this amended accounting standard did not impact the financial statements of the
Trust.





4.   INVESTMENTS
AND ACQUISITIONS





a)      Verenex





On
December 21, 2006, Verenex completed a $33.2 million bought-deal financing in
which Vermilion purchased 1,171,875 common shares at a price of $6.40 per share,
representing 23% of the bought-deal financing.  This reduced the
Trust’s equity interest in Verenex to 45% from 49%.





In July
2007, Vermilion purchased 2.1 million shares in Verenex for total consideration
of $30 million as part of a $115 million bought-deal financing announced by
Verenex.





In the
fourth quarter of 2007, Vermilion purchased an additional 0.2 million shares in
Verenex for total consideration of $2.2 million.  After reflecting
these additional shares, Vermilion owns 18.7 million shares representing 42.2%
of the outstanding shares of Verenex.





b)      Australia
Acquisition




On June
20, 2007, the Trust acquired the remaining 40% interest in the Wandoo field in
offshore Australia for cashconsideration of $117.9 million.  The
purchase price allocation was determined as follows:





Capital
    assets
            
            $
            138,596Asset retirement
      obligation
            
            
            (12,405
            )Working
    capital
            
            
            (8,311
            )Total
      consideration
            
            $
            117,880











2007
      Annual Financial Statements – Exhibit 99.3
              12











4.   INVESTMENTS
AND ACQUISITIONS (Continued)





c)   Esso
Rep Acquisition





On July
10, 2006, the Trust, through its France subsidiary, acquired an 89.886% interest
in Esso Rep, from Esso SAF, a subsidiary of Exxon Mobil
Corporation.  On July 12, 2006, the Trust acquired the remaining
10.114% interest in Esso Rep from another party.  The acquisition has
been accounted for using the purchase method of accounting and as no significant
transactions occurred affecting the results of operations or the fair value of
assets acquired and liabilities assumed during the two day period between the
two purchase events, the allocation of the purchase price was determined as at
July 10, 2006.  Results of operations are included in the consolidated
results from that date.  The aggregate purchase price, exclusive of
the acquired working capital deficiency, was $126.6 million consisting of cash
of $123.1 million and a current payable of $3.5 million.  Subsequent
to the date of acquisition, Esso Rep was renamed Vermilion Emeraude Rep
SAS.  The purchase price allocation was determined as
follows:





Capital
    assets
            
            $
            256,320Asset retirement
      obligation
            
            
            (20,636
            )Future income
      taxes
            
            
            (66,239
            )Cash
            
            
            1,996Working capital, excluding
      cash
            
            
            (44,841
            )Total
      consideration
            
            $
            126,600





5.   CAPITAL
ASSETS





Accumulated
      Depletion,Depreciation
      and
            
            
            Net2007
            
            Cost
            
            Amortization
            
            
            Book ValuePetroleum and natural gas
      properties and equipment
            
            $
            2,186,091
            
            
            $
            858,180
            
            
            $
            1,327,911Furniture and
      equipment
            
            
            10,835
            
            
            
            7,286
            
            
            
            3,549$
            2,196,926
            
            
            $
            865,466
            
            
            $
            1,331,460





Accumulated
      Depletion,Depreciation
      and
            
            
            Net2006
            
            Cost
            
            Amortization
            
            
            Book ValuePetroleum and natural gas
      properties and equipment
            
            $
            1,841,854
            
            
            $
            657,988
            
            
            $
            1,183,866Furniture and
      equipment
            
            
            9,598
            
            
            
            6,148
            
            
            
            3,450$
            1,851,452
            
            
            $
            664,136
            
            
            $
            1,187,316





As at
December 31, 2007 and 2006 there were no costs to exclude for undeveloped
properties from the depletion and depreciation calculation.  During
the year, the Trust capitalized $2.1 million (2006 - $0.4 million) of overhead
costs related to exploration and development activities.





The
Trust performed calculations at December 31, 2007 and 2006 to assess whether the
carrying value of petroleum and natural gas properties and equipment is
recoverable.  Based on the calculations, the undiscounted future cash
flows from the Trust’s proved reserves exceeded the carrying values of the
Trust’s petroleum and natural gas properties and equipment at December 31, 2007
and 2006 and therefore the carrying values are considered
recoverable.





The
benchmark prices used in the December 31, 2007 calculation are as
follows:





CDN$/BOE
            
            Canada
            
            
            France
            
            
            Netherlands
            
            
            Australia2008
            
            $
            54.32
            
            
            $
            80.38
            
            
            $
            57.00
            
            
            $
            91.002009
            
            $
            56.94
            
            
            $
            77.01
            
            
            $
            58.59
            
            
            $
            87.002010
            
            $
            55.84
            
            
            $
            73.52
            
            
            $
            55.94
            
            
            $
            80.502011
            
            $
            55.15
            
            
            $
            71.61
            
            
            $
            53.96
            
            
            $
            78.502012
            
            $
            54.86
            
            
            $
            71.47
            
            
            $
            53.31
            
            
            $
            78.50Average increase
      thereafter
            
            
            2.0
            %
            
            
            1.5
            %
            
            
            1.0
            %
            
            
            1.0
            %











2007
      Annual Financial Statements – Exhibit 99.3
              13








6.   ASSET
RETIREMENT OBLIGATION AND RECLAMATION FUND





The
total asset retirement obligation was determined based on the estimated future
costs and timing to reclaim the Trust’s net interest in all wells and
facilities.  The Trust has estimated the net present value of its
asset retirement obligations to be $163.4 million as at December 31, 2007 (2006
- $127.5 million) based on a total undiscounted future liability after inflation
adjustment of $579.4 million (2006 - $502.0 million).  These payments
are expected to be made over the next 48 years with most coming within the time
frame of 15-37 years.  The Trust used a credit adjusted risk free rate
of 8% and inflation rates between 1.5% and 2.0% to calculate the present value
of the asset retirement obligation.





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





2007
            
            
            2006Carrying amount, beginning of
      period
            
            $
            127,494
            
            
            $
            70,214Increase in liabilities in the
      period
            
            
            12,936
            
            
            
            21,297Disposition of liabilities in the
      period
            
            
            (4,055
            )
            
            
            (4,217
            )Change in
      estimate
            
            
            27,240
            
            
            
            24,946Accretion
      expense
            
            
            10,067
            
            
            
            7,380Foreign
      exchange
            
            
            (10,308
            )
            
            
            7,874Carrying amount, end of
      period
            
            $
            163,374
            
            
            $
            127,494





The
Trust has set aside funds for the future payment of its estimated asset
retirement obligations.  In 2007, the Trust contributed nil to the
reclamation fund (2006 - $9.6 million).  Reclamation fund assets are
comprised of cash, debt securities and equity securities which are carried at
fair value.





The
following table reconciles the change in the Trust’s reclamation fund
investments:





2007
            
            
            2006Cash and short term investments,
      at fair value and cost (cost approximates fair
    value)
            
            $
            10,838
            
            
            $
            30,685Equity securities, at cost (fair
      value 2006 - $10.7 million)
            
            
            -
            
            
            
            8,214Equity and debt securities, at
      fair value
            
            
            47,090
            
            
            
            -Debt securities at amortized cost
      (fair value 2006 - $17.4 million)
            
            
            -
            
            
            
            17,458$
            57,928
            
            
            $
            56,357





A
portion of the cash and short term investments as well as all of the equity
securities and debt securities which comprise the reclamation fund are
professionally managed by third parties.





7.   LONG-TERM
DEBT





As at
December 31, 2007, the Trust had an unsecured covenant - based credit facility
consisting of a revolving term loan in the amount of $625
million.  The revolving period under the term loan is expected to
expire in June 2008 and may be extended for an additional period of up to 364
days at the option of the lenders.  If the lenders convert the
revolving credit facility to a non-revolving credit facility, the amounts
outstanding under the facility become repayable 24 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.





2007
      Annual Financial Statements – Exhibit 99.3
              14








8.   INCOME
TAXES





The net
future income tax liability at December 31, 2007 and 2006 is comprised of the
following:





2007
            
            
            2006Future income tax
      liabilities:Capital
      assets
            
            $
            (232,283
            )
            
            $
            (250,282
            )Derivative
      contracts
            
            
            (1,086
            )
            
            
            (2,095
            )Partnership
      income deferral
            
            
            (7,240
            )
            
            
            (5,069
            )Asset
      retirement obligation
            
            
            (5,445
            )
            
            
            -Future income tax
      assets:Non-capital
      losses
            
            
            38,909
            
            
            
            22,920Asset
      retirement obligation
            
            
            -
            
            
            
            8,689Basis
      difference of investments
            
            
            61
            
            
            
            1,176Share issue
      costs
            
            
            129
            
            
            
            30Other
            
            
            392
            
            
            
            -Unrealized
      foreign exchange
            
            
            861
            
            
            
            -Net future income tax
      (liability)
            
            $
            (205,702
            )
            
            $
            (224,631
            )





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 32.12% (2006 – 34.50%), as follows:





2007
            
            
            2006Earnings before income taxes and
      non-controlling interest
            
            $
            205,807
            
            
            $
            188,367Canadian corporate tax
      rate
            
            
            32.12
            %
            
            
            34.50
            %Expected tax
      expense
            
            
            66,105
            
            
            
            64,987Increase (decrease) in taxes
      resulting from:Income
      attributable to the unitholders
            
            
            (43,808
            )
            
            
            (45,069
            )Non-deductible
      Crown payments
            
            
            123
            
            
            
            4,071Resource
      allowance
            
            
            -
            
            
            
            (2,863
            )Foreign tax
      rate differentials*
            
            
            1,528
            
            
            
            (8,563
            )Statutory rate
      changes
            
            
            70
            
            
            
            (9,490
            )Capital
      taxes
            
            
            -
            
            
            
            (179
            )Unit
      compensation expense
            
            
            4,492
            
            
            
            8,539Amended returns
      and pool estimate variances
            
            
            8,830
            
            
            
            4,653Foreign
      exchange
            
            
            (8,018
            )
            
            
            10,064Other
            
            
            (703
            )
            
            
            377One-time tax
      benefit associated with offshore drilling program
            
            
            (8,929
            )
            
            
            -Adjustment to
      provisions for tax positions taken
            
            
            5,213
            
            
            
            -Non-taxable
      portion of capital gains
            
            
            (195
            )
            
            
            -Provision for income
      taxes
            
            $
            24,708
            
            
            $
            26,527


* The corporate
tax rate in France is 34.4%, 45.3% in the Netherlands and 30% in
Australia





In
2007, the Government of Canada passed legislation that effectively imposes a tax
on distributions made by entities such as the Trust beginning in
2011.  As a result of this legislation, future income taxes related to
temporary differences arising in the Trust, which will reverse after 2010, are
now recognized in earnings.  The related impact on the Trust’s
consolidated future income tax provision and future income tax liability related
to this legislation was not material.





2007
      Annual Financial Statements – Exhibit 99.3
              15








9.   UNITHOLDERS’
CAPITAL AND CONTRIBUTED SURPLUS





The
Trust is authorized to issue an unlimited number of units of the
Trust.





The
Trust established a Distribution Reinvestment Plan (“DRIP”) to provide the
option for unitholders to reinvest cash distributions into additional trust
units issued from treasury. In 2007, the Trust issued 1.1 million units for
proceeds of $36.0 million (2006 – 0.6 million units for proceeds of $18.8
million).





Number of
    Units
            
            
            AmountTrust UnitsUnlimited
      number of trust units authorized to be issuedBalance as at December 31,
      2005
            
            
            62,508,214
            
            
            
            274,813Distribution
      reinvestment plan
            
            
            609,907
            
            
            
            18,811Issued on
      conversion of exchangeable shares
            
            
            225,132
            
            
            
            7,430Unit rights
      exercised and issuance of units on vesting of trust unit award plan
      grants
            
            
            1,350,541
            
            
            
            11,116Transfer from
      contributed surplus for unit based awards
            
            
            -
            
            
            
            8,436Trust units
      issued for bonus plan
            
            
            14,400
            
            
            
            429Balance as at December 31,
      2006
            
            
            64,708,194
            
            
            $
            321,035Distribution
      reinvestment plan
            
            
            1,082,868
            
            
            
            35,992Issued on
      conversion of exchangeable shares
            
            
            2,143
            
            
            
            70Unit rights
      exercised and issuance of units on vesting of trust unit award plan
      grants
            
            
            1,477,278
            
            
            
            7,045Transfer from
      contributed surplus for unit based awards
            
            
            -
            
            
            
            14,592Trust units
      issued for bonus plan
            
            
            23,039
            
            
            
            695Unit-settled
      distributions on vested unit based awards
            
            
            41,905
            
            
            
            1,512Balance as at December 31,
      2007
            
            
            67,335,427
            
            
            
            380,941





2007
            
            
            2006Contributed
      SurplusOpening
    balance
            
            $
            30,513
            
            
            $
            14,566Unit
      compensation expense
            
            
            13,290
            
            
            
            24,383Transfer to
      unitholders’ capital for unit based awards
            
            
            (14,592
            )
            
            
            (8,436
            )Ending
    balance
            
            $
            29,211
            
            
            $
            30,513





Cash
distributions declared to unitholders for the year ended December 31, 2007 were
$136.4 (2006 - $130.6).  Cash distributions are determined by the
Board of Directors in accordance with the Trust Indenture and are paid
monthly.





10. NON-CONTROLLING
INTEREST – EXCHANGEABLE SHARES





Upon
conversion to a Trust, 6.0 million exchangeable shares of the Company were
issued.  The exchangeable shares are mandatorily converted into trust
units upon redemption by the shareholder.   The Company holds the
option to redeem all outstanding exchangeable shares for trust units or cash on
or before January 22, 2013 and it is the intention of the Trust that trust units
would be issued upon redemption of the exchangeable shares. On or before January
22, 2013, there will be no remaining non-controlling interest as all
exchangeable shares will have been converted to trust units by that
time.




The
conversion of exchangeable shares occurs based on the exchange ratio which is
adjusted monthly to reflect the distributions paid on trust
units.  Cash distributions are not paid on exchangeable
shares.





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.





2007
      Annual Financial Statements – Exhibit 99.3
              16








10. NON-CONTROLLING
INTEREST – EXCHANGEABLE SHARES (Continued)





2007
            
            
            2006Exchangeable
      sharesOpening number of exchangeable
      shares
            
            
            4,458,919
            
            
            
            4,619,335Exchanged for
      trust units
            
            
            (1,446
            )
            
            
            (160,416
            )Ending
    balance
            
            
            4,457,473
            
            
            
            4,458,919Ending exchange
      ratio
            
            
            1.55595
            
            
            
            1.46741Trust units issuable upon
      conversion
            
            
            6,935,605
            
            
            
            6,543,062





Following
is a summary of the non-controlling interest:





2007
            
            
            2006Non-controlling interest,
      beginning of year
            
            
            51,780
            
            
            $
            38,760Reduction of
      book value for conversion to trust units
            
            
            (17
            )
            
            
            (1,897
            )Current period
      net earnings attributable to non-controlling
    interest
            
            
            16,813
            
            
            
            14,917Non-controlling interest, end of
      year
            
            
            68,576
            
            
            $
            51,780





11. UNIT
COMPENSATION PLANS





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.  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.





Under
the plan, 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 were
equal to the market price for the trust units on the date the unit rights were
issued.  Under certain conditions, the exercise price per unit may be
adjusted 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.





The
Trust used the Black-Scholes option-pricing model to calculate the estimated
fair value of the outstanding rights.  For unit rights issued in 2005,
the following assumptions were used to arrive at the estimate of fair
value:





2005Expected
      volatility
            
            
            22.33
            %Risk-free interest
      rate
            
            
            4.0
            %Expected life of option
      (years)
            
            
            5.0Fair value per
      option
            
            $
            5.28





The
dividend yield is offset by the reducing strike price feature of the plan
resulting in the use of a zero dividend yield in the option-pricing
model.  During the year, $1.1 million of the fair value has been
recorded as compensation expense (2006 - $2.6 million).





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





2007
            
            
            
            
            
            2006Grant Date
            
            
            
            
            Grant DateNumber of
            
            
            Weighted
      Average
            
            
            Number of
            
            Weighted
              AverageUnit Rights
            
            
            Exercise
    Price
            
            
            Unit Rights
            
            Exercise
    PriceOpening
    Balance
            
            
            2,244,258
            
            
            $
            14.12
            
            
            
            3,617,750
            
            
            $
            13.81Granted
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Cancelled
            
            
            (3,900
            )
            
            
            21.55
            
            
            
            (177,800
            )
            
            
            17.85Exercised
            
            
            (1,091,742
            )
            
            
            13.63
            
            
            
            (1,195,692
            )
            
            
            12.63Closing
    balance
            
            
            1,148,616
            
            
            $
            14.55
            
            
            
            2,244,258
            
            
            $
            14.12





2007
      Annual Financial Statements – Exhibit 99.3
              17








11. UNIT
COMPENSATION PLANS (Continued)





A
summary of the plan as at December 31, 2007 is as follows:





Number of
            Remaining
            Number
ofRange of
      Exercise
            Adjusted
            Rights
            Contractual
      Life
            RightsPrice at Grant
      Date
            Exercise
    Price
            Outstanding
            of Right
      (Years)
            Exercisable$11.45
            $1.40
            559,400
            0.08
            559,400$11.46 -
    $15.00
            $1.58 -
    $5.12
            102,400
            0.38
            102,400$15.01 -
    $19.56
            $6.83 -
    $11.38
            486,816
            1.67
            468,149





Trust
Unit Award Incentive Plan


In
2005, the Board of Directors established the Trust Unit Award Incentive Plan
governing the issuance of unvested units of the Trust to directors, officers,
employees and consultants of the Trust and its Affiliates.





Upon
vesting, the grantee receives unrestricted units of the Trust, adjusted for
cumulative distributions during the vesting period.  The number of
units issued upon vesting is dependent upon the performance of the Trust
compared to its peers based on a performance factor that may range from zero to
two times the number of awards originally granted.  In general, awards
granted vest annually.





The
fair value of awards is estimated at the date of grant and is recognized over
the vesting period.





The
following table summarizes information about the Trust Unit Award Incentive
Plan:





Number of
      AwardsBalance December 31,
      2006
            
            
            967,800Granted
            
            
            441,310Vested
            
            
            (193,575
            )Cancelled
            
            
            (113,040
            )Balance December 31,
      2007
            
            
            1,102,495





Compensation
expense of $12.1 million was recorded during the year ended December 31, 2007
(2006 - $21.8 million) related to the Trust Unit Award Incentive
Plan.





Phantom
Award Incentive Plan


In
September 2006, the Board of Directors approved a new long-term incentive plan
for certain employees not eligible to participate in the Trust Unit Award
Incentive Plan which provides for cash payments based on the market value of a
trust unit.  The cash consideration paid upon vesting 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 notional
units originally granted.





Compensation
expense recognized is based on the closing market price of a trust unit and is
remeasured at each reporting date.  The total expense is amortized
over the relevant vesting periods and the amount payable is recorded as a
liability until settlement.





Compensation
expense of $2.0 million has been recorded as general and administration expense
during the year ended December 31, 2007 (2006 - $1.2 million).






2007
      Annual Financial Statements – Exhibit 99.3
              18








12. PER-UNIT
AMOUNTS





Basic and diluted net earnings per unit
have been determined based on the following:





2007
            
            
            2006Net
earnings
            
            $
            164,286
            
            
            $
            146,923Non-controlling interest –
      exchangeable shares
            
            
            16,813
            
            
            
            14,917Net earnings for diluted net
      earnings per trust unit calculation
            
            $
            181,099
            
            
            $
            161,840Weighted average trust units
      outstanding
            
            
            66,122,423
            
            
            
            63,977,134Trust units issuable on conversion
      of exchangeable shares
            
            
            6,935,786
            
            
            
            6,585,887Dilutive impact of unit rights
      incentive and trust unit award plans
            
            
            2,724,514
            
            
            
            2,496,856Diluted weighted average trust
      units outstanding
            
            
            75,782,723
            
            
            
            73,059,877





Basic
net earnings per trust unit has been calculated based on net earnings divided by
the basic weighted average trust units outstanding.  Earnings
attributable to the non-controlling interest related to the exchangeable shares
are added back to net earnings in calculating diluted net earnings per trust
unit.  All outstanding unit rights were dilutive and therefore have
been included in the calculation of the diluted trust units for all periods
presented.





13. DERIVATIVE
INSTRUMENTS





Risk
Management Activities





The
nature of the Trust’s operations results 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 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$/bblCollar –
WTIQ1
      2008
            US$0.50/bbl
            500
            $63.00 -
    $79.05Q2
      2008
            US$0.50/bbl
            500
            $64.30 -
    $76.00Q3
      2008
            US$0.28/bbl
            250
            $70.00 -
    $90.00Q4
      2008
            US$0.50/bbl
            250
            $69.00 -
    $90.00Collar -
    BRENTQ1
      2008
            US$0.25/bbl
            500
            $68.42 -
    $83.00Q1
      2008
            US$0.25/bbl
            500
            $69.25 -
    $82.00Q2
      2008
            US$0.50/bbl
            500
            $64.00 -
    $80.10Q2
      2008
            US$0.25/bbl
            500
            $67.20 -
    $82.00Q3
      2008
            US$0.25/bbl
            500
            $66.40 -
    $82.00Q3
      2008
            US$0.25/bbl
            500
            $66.60 -
    $82.00Q3
      2008
            US$0.19/bbl
            250
            $65.00 -
    $90.00Q4
      2008
            -
            500
            $68.20 -
    $81.00Call Spread -
      BRENT2009 -
      2011
            US$5.73/bbl
            700
            $65.00 -
    $85.00





The
fair values of derivative instruments 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.





2007
      Annual Financial Statements – Exhibit 99.3
              19








13. DERIVATIVE
INSTRUMENTS (Continued)





The
following table reconciles the change in the unrealized amounts related to the
fair value of derivative contracts:





2007
            
            
            2006Fair value of contracts, beginning
      of period
            
            $
            6,280
            
            
            $
            783Opening unrealized (gain) on
      contracts settled during the period
            
            
            (1,624
            )
            
            
            (783
            )Realized (loss) on contracts
      settled during the period
            
            
            (2,835
            )
            
            
            (222
            )Unrealized gain (loss) during the
      period on contracts outstanding at the end of the
      period
            
            
            (2,554
            )
            
            
            1,354Purchase of derivative contracts
      at fair value
            
            
            -
            
            
            
            4,926Net payment to counterparties
      under contract settlements during the period
            
            
            2,835
            
            
            
            222Fair value of contracts, end of
      period
            
            
            2,102
            
            
            
            6,280Comprised
    of:Current
      derivative asset
            
            
            37
            
            
            
            1,624Current
      derivative liability
            
            
            (7,450
            )
            
            
            -Non-current
      derivative asset
            
            
            9,515
            
            
            
            4,656$
            2,102
            
            
            $
            6,280





The
loss (gain) on derivative instruments for the period is comprised of the
following:





2007
            
            
            2006Realized loss on contracts settled
      during the period
            
            $
            2,835
            
            
            $
            222Opening unrealized gain on
      contracts settled during the period
            
            
            1,624
            
            
            
            783Unrealized (gain) loss during the
      period on contracts outstanding at the end of the
      period
            
            
            2,554
            
            
            
            (1,354
            )Loss (gain) on derivative
      instruments for the period
            
            $
            7,013
            
            
            $
            (349
            )





Pursuant
to an acquisition under which the vendor participates in a portion of the net
price received by Vermilion from 2009 to 2011 inclusive, the Trust entered into
a derivative transaction to economically offset a portion of the related
potential future payments.





The
transaction consisted of three dated Brent crude purchased call options at
US$65.00 per barrel and three dated Brent crude written call options at US$85.00
per barrel representing approximately one half of the expected production
subject to the related provision.  The total cost of this derivative
transaction was $4.9 million.





The
Trust has determined that any potential future payments under this provision
would constitute additional consideration.  As the outcome of this
provision could not be determined beyond a reasonable doubt and as the amount of
the potential contingent consideration could not be reasonably estimated, no
amount related to this provision was recognized as part of the purchase price at
the date of acquisition.  If payments are made under this provision in
future periods or if additional information becomes available that allows the
Trust to determine the outcome of this provision beyond a reasonable doubt and
reasonably estimate the amount of contingent consideration that will be paid,
the Trust will recognize an adjustment to the purchase price on a prospective
basis.





During
the normal course of business, the Trust enters into fixed and collared price
arrangements to sell a portion of its production.  The Trust has
elected to exempt these contracts from fair value accounting through the use of
the normal purchase and sales exemption.





2007
      Annual Financial Statements – Exhibit 99.3
              20








14. CASH
FLOW INFORMATION





The
following details the changes in non-cash working capital:





2007
            
            
            2006Accounts
      receivable
            
            $
            3,972
            
            
            $
            10,497Crude oil
      inventory
            
            
            (2,863
            )
            
            
            18,571Prepaid expenses and
      other
            
            
            1,606
            
            
            
            (4,085
            )Accounts payable and accrued
      liabilities
            
            
            (37,943
            )
            
            
            (62,399
            )Foreign
      exchange
            
            
            (1,249
            )
            
            
            4,181Changes in non-cash working
      capital
            
            $
            (36,477
            )
            
            $
            (33,235
            )





15. SEGMENTED
INFORMATION





The
Trust has operations principally in Canada, France, the Netherlands and
Australia. The Trust’s entire operating activities are related to exploration,
development and production of petroleum and natural gas.





2007
            
            
            2006Petroleum and natural gas
      revenueCanada
            
            $
            225,501
            
            
            $
            208,306France
            
            
            240,547
            
            
            
            201,650Netherlands
            
            
            77,367
            
            
            
            92,592Australia
            
            
            163,919
            
            
            
            115,524$
            707,334
            
            
            $
            618,072Net
earningsCanada
            
            $
            9,920
            
            
            $
            26,658France
            
            
            84,712
            
            
            
            60,079Netherlands
            
            
            16,286
            
            
            
            29,660Australia
            
            
            53,368
            
            
            
            30,526$
            164,286
            
            
            $
            146,923Capital
      expendituresCanada
            
            $
            69,713
            
            
            $
            111,216France
            
            
            73,504
            
            
            
            164,523Netherlands
            
            
            22,275
            
            
            
            3,673Australia
            
            
            131,441
            
            
            
            8,566$
            296,933
            
            
            $
            287,978Total
assetsCanada
            
            $
            662,904
            
            
            $
            627,147France
            
            
            604,090
            
            
            
            542,074Netherlands
            
            
            150,533
            
            
            
            148,710Australia
            
            
            250,596
            
            
            
            144,908$
            1,668,123
            
            
            $
            1,462,839





16. LONG-TERM
INVESTMENTS





The
following table reconciles the Trust’s total long-term investments:





2007
            
            
            2006Portfolio investments, at fair
      value
            
            $
            5,032
            
            
            $
            -Portfolio investments, at cost
      (fair value 2006 - $5.2 million)
            
            
            -
            
            
            
            496Investment in Verenex, equity
      method (fair value - $158.8 million, 2006 - $109.6 -
      million)
            
            
            58,096
            
            
            
            26,656$
            63,128
            
            
            $
            27,152






2007
      Annual Financial Statements – Exhibit 99.3
              21








17. 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.





18. COMMITMENTS





The
Trust has various commitments associated with its business operations, none of
which, in managements view, are significant.





19. COMPONENTS
OF CASH AND CASH EQUIVALENTS





The components of cash and cash
equivalents are as follows:





2007
            
            
            2006Monies on deposit with
      banks
            
            $
            44,588
            
            
            $
            26,039Guaranteed short-term
      investments
            
            
            3,280
            
            
            
            911Total cash and cash
      equivalents
            
            $
            47,868
            
            
            $
            26,950





20. RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS





In
December 2006 the CICA issued Section 1535 - “Capital Disclosures” which
establishes disclosure standards about an entity’s capital structure and how it
is managed.  Section 3862 - “Financial Instruments – Disclosures” and
Section 3863 - “Financial Instruments – Presentation” were also issued in
December 2006 and establish standards for the presentation of financial
instruments and non-financial derivatives and require additional disclosure to
enable users to evaluate the significance and risks relating to financial
instruments on an entity’s financial position.  These three sections
are effective for fiscal years beginning on or after October 1,
2007.  The Trust does not anticipate that the adoption of these
standards will have an impact on its results of operations and financial
position.





In June
2007, the CICA issued Section 3031 - “Inventories.”  This section
enhances the guidance relating to the determination of inventory cost and
effectively harmonizes the Canadian standard with the International Financial
Reporting Standards equivalent.  This section applies to interim and
annual financial statements for fiscal years beginning on or after January 1,
2008.  The Trust does not anticipate that the adoption of this
standard will have a material impact on its results of operations and financial
position.





In June
2007, the CICA amended Section 1400 - “General Standards of Financial Statement
Presentation”, to require an assessment and potential disclosure of an entity’s
ability to continue as a going concern.  The new requirements are
effective for interim and annual periods beginning on or after January 1,
2008.  These amendments will not impact the Trust’s consolidated
financial statements.





On
February 13, 2008, the Accounting Standards Board (“AcSB”) confirmed that the
transition date to International Financial Reporting Standards (“IFRS”) from
Canadian GAAP will be January 1, 2011 for publically accountable
enterprises.





In
February 2008, the CICA issued Section 3064 – “Goodwill and Intangible Assets”
to replace Sections 3062 – “Goodwill and Other Intangible Assets” and 3450 –
“Research and Development Costs”.  Section 3064 incorporates guidance
addressing when an internally developed intangible asset meets the criteria for
recognition as an asset.   This Section is effective for fiscal
years beginning on or after October 1, 2008.  The Trust does not
anticipate that the adoption of this standard will have a material impact on its
results of operations and financial position.





2007
      Annual Financial Statements – Exhibit 99.3
              22








21. SUBSEQUENT
EVENTS





On
January 31, 2008 the Trust completed an acquisition of gas producing assets and
gross-overriding royalties on oil producing properties for cash consideration
before final adjustments of approximately $47 million.  The purchase price
allocation relating to this acquisition has not yet been finalized.





22.
            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.





The
application of U.S. GAAP would have the following effect on net
earnings:





2007
            
            
            2006Net earnings as reported under
      Canadian GAAP
            
            $
            164,286
            
            
            $
            146,923Differences having the effect of
      increasing (decreasing) net earningsUnit based
      compensation (a)
            
            
            (22,264
            )
            
            
            (27,291
            )Non-controlling
      interest adjustment (c)
            
            
            16,813
            
            
            
            14,917Gain on
      marketable securities (d)
            
            
            -
            
            
            
            1,973Depletion,
      depreciation and accretion (c, e and f)
            
            
            3,220
            
            
            
            (16,225
            )Equity method
      accounting adjustments (g)
            
            
            (4,361
            )
            
            
            (1,798
            )Dilution gain
      on sale of shares by equity method investee (h)
            
            
            29,082
            
            
            
            9,429Deferred tax
      consequences of U.S. GAAP adjustments
            
            
            (6,469
            )
            
            
            11,825Net earnings under U.S. GAAP
      before cumulative effect of change in accounting
      principle
            
            
            180,307
            
            
            
            139,753Cumulative effect of change in
      accounting principle (a)
            
            
            -
            
            
            
            (49,276
            )Net earnings under U.S.
      GAAP
            
            
            180,307
            
            
            
            90,477Retained deficit, beginning of
      year, under U.S. GAAP
            
            
            (1,536,381
            )
            
            
            (1,629,426
            )Distributions declared (Canadian
      and U.S. GAAP)
            
            
            (136,389
            )
            
            
            (130,638
            )Temporary equity adjustment to
      retained deficit (b)
            
            
            (205,192
            )
            
            
            133,206Retained deficit, end of period,
      under U.S. GAAP
            
            $
            (1,697,655
            )
            
            $
            (1,536,381
            )




Earnings per trust unit under U.S.
      GAAP before cumulative effect of change in accounting
      principleBasic
            
            $
            2.47
            
            
            $
            1.98Diluted
            
            $
            2.38
            
            
            $
            1.90Cumulative effect of change in
      accounting principle (a)Basic
            
            $
            -
            
            
            $
            (0.70
            )Diluted
            
            $
            -
            
            
            $
            (0.67
            )Earnings per trust unit under U.S.
      GAAPBasic
            
            $
            2.47
            
            
            $
            1.28Diluted
            
            $
            2.38
            
            
            $
            1.23Weighted average trust units
      outstandingBasic
      (c)
            
            
            73,058,209
            
            
            
            70,563,021Diluted
      (c)
            
            
            75,772,059
            
            
            
            73,409,726





2007
      Annual Financial Statements – Exhibit 99.3
              23







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





The
application of U.S. GAAP would have the following effect on the consolidated
balance sheets:





2007
            
            
            2007
            
            
            2006
            
            
            2006CDN GAAP
            
            
            U.S. GAAP
            
            
            CDN GAAP
            
            
            U.S. GAAPASSETSCurrentCash and cash
      equivalents
            
            $
            47,868
            
            
            $
            47,868
            
            
            $
            26,950
            
            
            $
            26,950Accounts
      receivable
            
            
            119,645
            
            
            
            119,645
            
            
            
            120,573
            
            
            
            120,573Crude oil
      inventory
            
            
            11,033
            
            
            
            11,033
            
            
            
            4,898
            
            
            
            4,898Derivative
      instruments
            
            
            37
            
            
            
            37
            
            
            
            1,624
            
            
            
            1,624Prepaid
      expenses and other
            
            
            7,669
            
            
            
            7,669
            
            
            
            13,473
            
            
            
            13,473186,252
            
            
            
            186,252
            
            
            
            167,518
            
            
            
            167,518Derivative
      instruments
            
            
            9,515
            
            
            
            9,515
            
            
            
            4,656
            
            
            
            4,656Long-term investments (d, g and
      h)
            
            
            63,128
            
            
            
            91,762
            
            
            
            27,152
            
            
            
            35,769Goodwill
            
            
            19,840
            
            
            
            19,840
            
            
            
            19,840
            
            
            
            19,840Reclamation fund
      (d)
            
            
            57,928
            
            
            
            57,928
            
            
            
            56,357
            
            
            
            58,793Capital assets (c, e and
      f)
            
            
            1,331,460
            
            
            
            1,311,639
            
            
            
            1,187,316
            
            
            
            1,164,328$
            1,668,123
            
            
            $
            1,676,936
            
            
            $
            1,462,839
            
            
            $
            1,450,904LIABILITIESCurrentAccounts
      payable and accrued liabilities
            
            $
            128,858
            
            
            $
            128,858
            
            
            $
            139,672
            
            
            $
            139,672Unit based
      compensation liability (a)
            
            
            -
            
            
            
            71,627
            
            
            
            -
            
            
            
            75,833Distributions
      payable to unitholders
            
            
            12,794
            
            
            
            12,794
            
            
            
            11,000
            
            
            
            11,000Income taxes
      payable
            
            
            1,518
            
            
            
            1,518
            
            
            
            13,419
            
            
            
            13,419Derivative
      instruments
            
            
            7,450
            
            
            
            7,450
            
            
            
            -
            
            
            
            -150,620
            
            
            
            222,247
            
            
            
            164,091
            
            
            
            239,924Long-term
    debt
            
            
            452,490
            
            
            
            452,490
            
            
            
            358,236
            
            
            
            358,236Asset retirement
      obligation
            
            
            163,374
            
            
            
            163,374
            
            
            
            127,494
            
            
            
            127,494Unit based compensation liability
      (a)
            
            
            -
            
            
            
            15,641
            
            
            
            -
            
            
            
            15,348Future income
      taxes
            
            
            205,702
            
            
            
            206,594
            
            
            
            224,631
            
            
            
            220,429972,186
            
            
            
            1,060,346
            
            
            
            874,452
            
            
            
            961,431Non-controlling interest –
      exchangeable shares (c)
            
            
            68,576
            
            
            
            -
            
            
            
            51,780
            
            
            
            -Temporary equity (a, b and
      c)
            
            
            -
            
            
            
            2,314,245
            
            
            
            -
            
            
            
            2,025,854UNITHOLDERS’
      EQUITYUnitholders’
      capital (b)
            
            
            380,941
            
            
            
            -
            
            
            
            321,035
            
            
            
            -Contributed
      surplus
            
            
            29,211
            
            
            
            -
            
            
            
            30,513
            
            
            
            -Retained
      earnings (deficit)
            
            
            217,209
            
            
            
            (1,697,655
            )
            
            
            185,059
            
            
            
            (1,536,381
            )627,361
            
            
            
            (1,697,655
            )
            
            
            536,607
            
            
            
            (1,536,381
            )$
            1,668,123
            
            
            $
            1,676,936
            
            
            $
            1,462,839
            
            
            $
            1,450,904








2007
      Annual Financial Statements – Exhibit 99.3
              24


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





a)
            Unit
      based compensation





On
      January 1, 2006 the Trust adopted Statement of Financial Accounting
      Standards (“SFAS”) No. 123(R), “Share-Based Payment” using the modified
      prospective application method.  As a result of adopting this
      standard, the Trust’s unit based compensation plans are now accounted for
      as liability plans whereas under Canadian GAAP and the previous U.S.
      standard, SFAS No. 123 “Accounting for Stock-Based Compensation” the plans
      are considered equity plans.  Under equity plan accounting, a
      fair value is determined for a unit based compensation award at the date
      of grant.  This fair value is recognized as an expense over the
      relevant vesting period with a corresponding increase in temporary
      equity.  Liability plan accounting requires that the fair value
      associated with a unit based award be remeasured at each reporting date
      until settlement with the corresponding changes in fair value reflected in
      net earnings.  In the case of unit rights incentive plan awards,
      the Trust considers that settlement has occurred after the employee has
      been subject to the risks and rewards of trust unit ownership for a
      reasonable period of time after the unit right has been
      exercised.  For trust unit awards, settlement is considered to
      have occurred after the employee has been subject to the risks and rewards
      of trust unit ownership for a reasonable period of time after the trust
      unit has vested.  Upon settlement, the fair value of the award
      is reclassified to temporary
equity.





The
      adoption of SFAS No. 123(R) on January 1, 2006 resulted in the recording
      of a unit based compensation liability of $63,842, a decrease to temporary
      equity of $14,566 and a corresponding expense of $49,276 representing the
      cumulative effect of a change in accounting principle.  As
      required by the transitional provisions of SFAS 123(R) associated with the
      modified prospective application method, prior periods have not been
      restated.





The
      fair value of trust unit awards is determined using a Monte Carlo
      simulation model incorporating current and historical market performance
      data in relation to the Trust and certain peer entities.  The
      fair value of unexercised unit rights incentive plan awards was determined
      using the Black-Scholes model incorporating management’s estimates as
      follows:





December
31,
            
            
            December
31,2007
            
            
            2006Expected
      volatility
            
            
            19.46
            %
            
            
            20.80
            %Risk-free interest
      rate
            
            
            3.17
            %
            
            
            3.97
            %Expected life of option
      (years)
            
            
            0.78
            
            
            
            1.4Fair value per
      option
            
            $
            24.31
            
            
            $
            24.89





b)
            Temporary
      equity





As
      trust units are redeemable on demand for cash under the terms of the Trust
      Indenture, U.S. GAAP requires that trust units be carried at their
      redemption value outside of permanent equity.  Changes in the
      redemption value are reflected as adjustments to retained
      earnings.  Under Canadian GAAP, the trust units are considered
      permanent equity.





c)
            Non-controlling
      interest adjustment





Under
      Canadian GAAP exchangeable shares are classified as non-controlling
      interest to reflect a minority ownership in a subsidiary of the
      Trust.  As these exchangeable shares are ultimately to be
      converted into trust units (see Note 10), they are classified as temporary
      equity under U.S. GAAP.  Accordingly, non-controlling interest
      net income as recorded under Canadian GAAP is
      eliminated.  Increases to capital assets recorded during the
      year ended December 31, 2007 of $53 (2006 - $5,533) related to the
      conversion of exchangeable shares, as well as the related depletion and
      depreciation effects, have been
eliminated.





Under
      U.S. GAAP, the exchangeable shares are included in the calculation of
      basic weighted average trust units outstanding whereas under Canadian GAAP
      they are only incorporated into diluted weighted average trust units
      outstanding.





2007
      Annual Financial Statements – Exhibit 99.3
              25








22.
            DIFFERENCES
      BETWEEN CANADIAN AND UNITED STATES OF AMERICA GENERALLY ACCEPTED
      ACCOUNTING PRINCIPLES (Continued)





d)
            Gain
      on marketable securities





On
      January 1, 2007, the Trust adopted CICA Handbook Section 3855, “Financial
      Instruments”.  As a result of adopting Section 3855, the Trust’s
      investments in equity securities are now measured at fair value whereas
      previously they were carried at cost.   This change in
      Canadian GAAP eliminated a difference between Canadian and U.S. GAAP as
      these equity investments must be carried at fair value under U.S.
      GAAP.  The Trust has elected to reflect gains and losses
      associated with changes in fair value of these securities under Canadian
      GAAP and U.S. GAAP in net earnings.





e)
            Liability
      method of accounting for income
taxes





In
      2000, the Trust adopted the liability method of accounting for income
      taxes for Canadian GAAP.  The change to the liability method
      eliminated a difference between Canadian and U.S. GAAP, however, 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 would have been reflected in capital assets.  As a
      result of the difference in implementation method, depletion and
      depreciation expense differs between U.S. and Canadian GAAP due to the
      additional amounts reflected as capital assets under U.S.
      GAAP.  During the year ended December 31, 2007 additional
      depletion and depreciation of $1,480 (2006 - $1,321) was recorded under
      U.S. GAAP.





f)
            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 undiscounted future net cash flows
      associated with the Trust’s proved reserves and if an impairment loss is
      determined to have occurred, 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 at December 31, 2006
      resulted in a write-down of capitalized costs of $17,039 on a before-tax
      basis.  This write-down is reflected as additional depletion
      expense.  The application of the impairment test under U.S. GAAP
      did not result in a write-down of capitalized costs for the year ended
      December 31, 2007.





g)
            Equity
      method accounting adjustments





Under
      Canadian GAAP, entities that use the full-cost method of accounting adjust
      depletion reported by equity method investees to result in the investor’s
      reported net income being the same as if the investee had been
      consolidated.  Accordingly, depletion and ceiling test
      calculations are recalculated using reporting-entity cost-centres which
      include figures related to the equity method investee.  Under
      U.S. GAAP no such adjustments are recorded in relation to equity method
      investees.





h)
            Dilution
      gain on sale of shares by equity method
investee





Under
      Canadian GAAP, entities that use the full-cost method of accounting only
      recognize dilution gains on sales of shares by equity method investees if
      the sale is, in substance, a sale of oil and gas properties, in situations
      where crediting the proceeds to the relevant cost-centres results in a
      change of at least 20% to the related depletion, depreciation and
      amortization rates.  Under U.S. GAAP there is no similar
      guidance which would preclude the recognition of a dilution gain related
      to equity method investees and accordingly, the Trust has recorded gains
      related to Verenex’s 2007 and 2006 share
  offerings.





2007
      Annual Financial Statements – Exhibit 99.3
              26








22.
            DIFFERENCES
      BETWEEN CANADIAN AND UNITED STATES OF AMERICA GENERALLY ACCEPTED
      ACCOUNTING PRINCIPLES (Continued)





i)
            Uncertain
      Tax Positions





On
      January 1, 2007 the Trust adopted FASB Interpretation No. 48 (“FIN 48”),
      “Accounting for Uncertainty in Income Taxes, an interpretation of FASB
      Statement No. 109”.  FIN 48 clarifies the accounting for
      uncertainty in income taxes recognized in a company’s financial statements
      in accordance with SFAS No. 109, “Accounting for Income
      Taxes.”  It prescribes a recognition threshold and measurement
      attribute for the financial statement recognition and measurement of a tax
      position taken or expected to be taken in a tax return.  The
      interpretation also provides guidance on derecognition, classification,
      interest and penalties, accounting in interim periods, disclosure and
      transition.  The adoption of FIN 48 did not have a material
      impact on the Trust’s consolidated financial
  statements.





j)
            Recent
      U.S. Accounting Standards





·
            The
      FASB introduced SFAS No. 157, “Fair Value Measurements”, which
      establishes a single authoritative definition of fair value based upon the
      assumptions market participants would use when pricing an asset or
      liability and creates a fair value hierarchy that prioritizes the
      information used to develop those assumptions.  Under the
      standard, additional disclosures are required, including disclosures of
      fair value measurements by level within the fair value
      hierarchy.  SFAS 157 is effective for fair value measures
      already required or permitted by other standards for fiscal years
      beginning after November 15, 2007 and interim periods within those
      fiscal years.  The Trust does not believe that the adoption of
      SFAS 157 will have a material impact on its results of operations and
      financial position.





·
            In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities”.  SFAS 159 provides
      companies with an option to report selected financial assets and
      liabilities at fair value. SFAS 159 is effective as of the beginning of an
      entity’s first fiscal year beginning after November 15,
      2007.  The Trust is currently evaluating the provisions of SFAS
      159 and assessing the impact the standard may have on its financial
      position and results of operations.





·
            In
      December 2007, the FASB issued SFAS No. 141R, “Business
      Combinations”, which establishes principles and requirements for how an
      acquirer in a business combination recognizes and measures in its
      financial statements the identifiable assets acquired, the liabilities
      assumed, and any non-controlling interest; recognizes and measures the
      goodwill acquired in the business combination or a gain from a bargain
      purchase; and determines what information to disclose to enable users of
      the financial statements to evaluate the nature and financial effects of
      the business combination. SFAS No. 141R is to be applied
      prospectively to business combinations for which the acquisition date is
      on or after the beginning of an entity's fiscal year that begins on or
      after Dec. 15, 2008.





·
            In
      December 2007, the FASB issued SFAS No. 160, “Accounting and
      Reporting of Non-controlling Interest in Consolidated Financial
      Statements, an amendment of ARB No. 51”, which establishes accounting
      and reporting standards that require the ownership interest in
      subsidiaries held by parties other than the parent be clearly identified
      and presented in the consolidated balance sheets within equity, but
      separate from the parent's equity; the amount of consolidated net income
      attributable to the parent and the non-controlling interest be clearly
      identified and presented on the face of the consolidated statement of
      earnings; and changes in a parent's ownership interest while the parent
      retains its controlling financial interest in its subsidiary be accounted
      for consistently. This statement is effective for fiscal years beginning
      on or after December 15, 2008. The Trust is evaluating the impact of SFAS
      No. 160 on its consolidated financial statements.














2007
      Annual Financial Statements – Exhibit 99.3
              27








TRUST
INFORMATION





DIRECTORS
              
              Larry
      J. Macdonald 1, 2, 3, 4,
      5
              Chairman
      & CEO, Point Energy Ltd.
              Calgary,
      Alberta
              
              W.
      Kenneth Davidson 2,3
              Toronto,
      Ontario
              
              Lorenzo
      Donadeo
              Calgary,
      Alberta
              
              Claudio
      A. Ghersinich
              Executive
      Director, Carrera Investments Corp.
              Calgary,
      Alberta
              
              Joseph
      F. Killi 2,
      3
              Chairman,
              Parkbridge
      Lifestyle Communities Inc.
              Vice
      Chairman, Realex Properties Corp.
              Calgary,
      Alberta
              
              William
      F. Madison 2, 4,
      5
              Sugar
      Land, Texas
              
              1 Chairman
      of the Board
              2 Audit
      Committee
              3
      Governance and Human Resources Committee
              4 Health,
      Safety and Environment Committee
              5
      Independent Reserves Committee
              
              ANNUAL
      AND SPECIAL MEETING
              Friday,
      May 2, 2008, 10:00 a.m.
              The
      Grand Lecture Theatre
              Metropolitan
      Centre
              333
      – 4th
      Avenue S.W.
              Calgary,
      Alberta
            OFFICERS
      & KEY PERSONNEL
              FirstQuarterReportMarch 31, 2003
              CANADA
              Lorenzo
      Donadeo, P.Eng.
              President
      & Chief Executive Officer
              
              John
      D. Donovan, F.C.A.
              Executive
      Vice President Business Development
              
              Curtis
      W. Hicks, C.A.
              Executive
      Vice President & CFO
              
              G.
      R. (Bob) Mac Dougall, P.Eng.
              Executive
      Vice President & COO
              
              Keith
      D. Hartman, P.Eng.
              Vice
      President Exploitation
              
              Raj
      C. Patel, P.Eng.
              Vice
      President Marketing
              
              Paul
      L. Beique
              Director
      Investor Relations
              
              Daniel
      Goulet, P.Eng.
              Director
      Production and Operations
              
              Cheryl
      M. Kinzie
              Director
      Human Resources & Administration
              
              Charles
      W. Berard, B.Eng., L.LL., LL.B.
              Partner,
      Macleod Dixon LLP
              Corporate
      Secretary
              
              FRANCE
              Peter
      Sider, P.Eng.
              Regional
      General Manager, European Operations
              Vermilion
      REP SAS
              
              NETHERLANDS
              Scott
      Ferguson, P.Eng.
              General
      Manager
              Vermilion
      Oil & Gas Netherlands B.V.
              
              AUSTRALIA
              Bruce
      D. Lake, P.Eng.
              Managing
      Director
              Vermilion
      Oil & Gas Australia Pty Ltd.
              
              
              
              
              
              
              vermilion energy trust small logo
            AUDITORS
              Deloitte
      & Touche LLP
              Calgary,
      Alberta
              
              BANKERS
              The
      Toronto-Dominion Bank
              Calgary,
      Alberta
              
              Bank
      of Montreal
              Calgary,
      Alberta
              
              BNP
      Paribas (Canada)
              Toronto,
      Ontario
              
              Royal
      Bank of Canada
              Calgary,
      Alberta
              
              The
      Bank of Nova Scotia
              Calgary,
      Alberta
              
              Alberta
      Treasury Branches
              Calgary,
      Alberta
              
              Fortis
      Capital (Canada) Ltd.
              Calgary,
      Alberta
              
              Société
      Générale (Canada Branch)
              Calgary,
      Alberta
              
              Citibank
      Canada
              Calgary,
      Alberta
              
              EVALUATION
      ENGINEERS
              GLJ
      Petroleum Consultants Ltd.
              Calgary,
      Alberta
              
              LEGAL
      COUNSEL
              Macleod
      Dixon LLP
              Calgary,
      Alberta
              
              TRANSFER
      AGENT
              Computershare
      Trust Company of Canada
              
              STOCK
      EXCHANGE LISTING
              The
      Toronto Stock Exchange
              Symbol:
      VET.UN
              
              INVESTOR
      RELATIONS CONTACT
              Paul
      L. Beique
              Director
      Investor Relations
              
              HEAD
      OFFICE
              2800,
      400 – 4TH
      Avenue S.W.
              Calgary,
      Alberta  T2P 0J4
              403.269.4884
      TEL
              403.264.6306
      FAX
              1.866.895.8101
      TOLL FREE
              investor_relations@vermilionenergy.com
              www.vermilionenergy.com





2007
      Annual Financial Statements – Exhibit 99.3
              28