EXHIBIT
99.3
  2008
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, general
economic risks and uncertainties, 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 Report of Independent Registered Chartered Accountants 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,
2008.
 
 Deloitte
& Touche LLP audited our consolidated financial statements as 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
      W. Hicks”)Lorenzo
      Donadeo
                Curtis
      W. HicksPresident
      & Chief Executive Officer
                Executive
      Vice President & Chief Financial OfficerMarch
      16, 2009






2008
      Audited 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, 2008 and 2007, 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, 2008 and 2007, and the results of their operations and their
cash flows for the years then ended in accordance with Canadian 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, 2008, 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 16, 2009 expressed an
unqualified opinion on the Trust’s internal control over financial
reporting.








(“Deloitte
& Touche LLP”)





Independent
Registered Chartered Accountants


Calgary,
Canada


March 16,
2009





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 financial statements, such as the
changes described in Note 3  to the consolidated financial
statements.  Although we conducted our audits in accordance with both
Canadian generally accepted auditing standards and the standards of the Public
Company Accounting Oversight Board (United States), our report to the Board of
Directors of Vermilion Resources Ltd. and Unitholders of Vermilion Energy Trust,
dated March 16, 2009, 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 financial statements.








(“Deloitte
& Touche LLP”)





Independent
Registered Chartered Accountants


Calgary,
Canada


March 16,
2009






2008
      Audited 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, 2008, 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, 2008, based on the criteria
established in Internal Control — Integrated Framework issued 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 of and for the year ended
December 31, 2008 of the Trust and our report dated March 16, 2009 expressed an
unqualified opinion on these consolidated 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 that have a material effect on the comparability of the
consolidated financial statements.








(“Deloitte
& Touche LLP”)





Independent
Registered Chartered Accountants


Calgary,
Canada


March 16,
2009






2008
      Audited Annual Financial Statements – Exhibit 99.3
            4


Consolidated
      Balance SheetsDecember
      31(Thousands
      of Canadian dollars)2008
                    
                    
                    2007ASSETSCurrentCash
      and cash equivalents (Notes 2 and 19)
                    
                    $
                    67,231
                    
                    
                    
                    47,868Short-term
      investments (Note 2)
                    
                    
                    9,491
                    
                    
                    
                    -Accounts
      receivable
                    
                    
                    123,794
                    
                    
                    
                    119,645Crude
      oil inventory
                    
                    
                    12,167
                    
                    
                    
                    11,033Derivative
      instruments (Note 13)
                    
                    
                    11,638
                    
                    
                    
                    37Prepaid expenses and other
                    
                    
                    15,852
                    
                    
                    
                    7,669240,173
                    
                    
                    
                    186,252Derivative
      instruments (Note 13)
                    
                    
                    3,566
                    
                    
                    
                    9,515Long-term
      investments (Note 16)
                    
                    
                    63,752
                    
                    
                    
                    63,128Goodwill
                    
                    
                    19,840
                    
                    
                    
                    19,840Reclamation
      fund (Note 6)
                    
                    
                    63,399
                    
                    
                    
                    57,928Capital assets (Note 5)
                    
                    
                    1,407,629
                    
                    
                    
                    1,331,460$
                    1,798,359
                    
                    
                    
                    1,668,123LIABILITIESCurrentAccounts
      payable and accrued liabilities
                    
                    $
                    179,312
                    
                    
                    
                    128,858Distributions
      payable to unitholders
                    
                    
                    13,340
                    
                    
                    
                    12,794Derivative
      instruments (Note 13)
                    
                    
                    -
                    
                    
                    
                    7,450Income taxes payable
                    
                    
                    57,623
                    
                    
                    
                    1,518250,275
                    
                    
                    
                    150,620Long-term
      debt (Note 7)
                    
                    
                    197,651
                    
                    
                    
                    452,490Asset
      retirement obligations (Note 6)
                    
                    
                    265,101
                    
                    
                    
                    163,374Future income taxes (Note
8)
                    
                    
                    245,799
                    
                    
                    
                    205,702958,826
                    
                    
                    
                    972,186Non-controlling interest - exchangeable shares
      (Note 10)
                    
                    
                    84,523
                    
                    
                    
                    68,576UNITHOLDERS’
      EQUITYUnitholders’
      capital (Note 9)
                    
                    
                    444,353
                    
                    
                    
                    380,941Contributed
      surplus (Note 9)
                    
                    
                    29,698
                    
                    
                    
                    29,211Retained earnings
                    
                    
                    280,959
                    
                    
                    
                    217,209755,010
                    
                    
                    
                    627,361$
                    1,798,359
                    
                    
                    
                    1,668,123




APPROVED
      BY THE BOARD(“W.
      Kenneth Davidson”)
                (“Lorenzo
      Donadeo”)W.
      Kenneth Davidson, Director
                Lorenzo
      Donadeo, Director






2008
      Audited 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)2008
                
                
                2007REVENUEPetroleum
      and natural gas revenue
                
                $
                1,001,905
                
                
                $
                707,334Royalties
                
                
                (130,828
                )
                
                
                (97,518
                )871,077
                
                
                
                609,816EXPENSES
      AND OTHER EXPENSE OR  INCOMEOperating
                
                
                143,538
                
                
                
                119,517Transportation
                
                
                23,545
                
                
                
                22,926Unit
      based compensation (Note 11)
                
                
                18,388
                
                
                
                13,985Loss
      (gain) on derivative instruments (Note 13)
                
                
                (2,477
                )
                
                
                7,013Interest
                
                
                16,331
                
                
                
                22,330General
      and administration
                
                
                24,837
                
                
                
                18,726Foreign
      exchange loss (gain)
                
                
                47,110
                
                
                
                (11,533
                )Other
      expense (income)
                
                
                5,261
                
                
                
                (1,106
                )Depletion, depreciation and
      accretion
                
                
                255,473
                
                
                
                211,397532,006
                
                
                
                403,255EARNINGS BEFORE INCOME TAXES AND OTHER
      ITEMS
                
                
                339,071
                
                
                
                206,561INCOME
      TAXES (NOTE 8)Future
                
                
                4,003
                
                
                
                (9,325
                )Current
                
                
                83,804
                
                
                
                34,03387,807
                
                
                
                24,708OTHER
      ITEMSNon-controlling
      interest - exchangeable shares (Note 10)
                
                
                22,526
                
                
                
                16,813Loss (gain) related to equity method
      investment
                
                
                (451
                )
                
                
                75422,075
                
                
                
                17,567NET EARNINGS AND COMPREHENSIVE
      INCOME
                
                
                229,189
                
                
                
                164,286Retained
      earnings, beginning of year
                
                
                217,209
                
                
                
                190,824Distributions
      declared (Note 9)
                
                
                (158,674
                )
                
                
                (136,389
                )Repurchase
      of units (Note 9)
                
                
                (931
                )
                
                
                -Unit-settled distributions on vested unit based
      awards (Note 9)
                
                
                (5,834
                )
                
                
                (1,512
                )RETAINED EARNINGS, END OF
    YEAR
                
                $
                280,959
                
                
                $
                217,209NET
      EARNINGS PER TRUST UNIT (NOTE 12)Basic
                
                $
                3.30
                
                
                $
                2.48Diluted
                
                $
                3.23
                
                
                $
                2.39WEIGHTED
      AVERAGE TRUST UNITS OUTSTANDING (NOTE 12)Basic
                
                
                69,548,183
                
                
                
                66,122,423Diluted
                
                
                78,018,769
                
                
                
                75,782,723






2008
      Audited Annual Financial Statements – Exhibit 99.3
            6







Consolidated
      Statements of Cash FlowsYears
      Ended December 31(Thousands
      of Canadian dollars)2008
                        
                        
                        2007OPERATINGNet
      earnings
                        
                        $
                        229,189
                        
                        
                        $
                        164,286Adjustments:Depletion,
      depreciation and accretion
                        
                        
                        255,473
                        
                        
                        
                        211,397Change
      in unrealized gains and losses and accruals relating to derivative
      contracts (Note 13)
                        
                        
                        (13,102
                        )
                        
                        
                        4,178Unit
      based compensation
                        
                        
                        18,388
                        
                        
                        
                        13,985Loss
      (gain) related to equity method investment
                        
                        
                        (451
                        )
                        
                        
                        754Unrealized
      foreign exchange loss (gain)
                        
                        
                        52,579
                        
                        
                        
                        (16,226
                        )Non-controlling
      interest - exchangeable shares
                        
                        
                        22,526
                        
                        
                        
                        16,813Change
      in unrealized gains and losses and accruals included in other expense or
      incomerelating
      to investments
                        
                        
                        5,361
                        
                        
                        
                        49Future income taxes
                        
                        
                        4,003
                        
                        
                        
                        (9,325
                        )573,966
                        
                        
                        
                        385,911Asset
      retirement costs incurred (Note 6)
                        
                        
                        (10,200
                        )
                        
                        
                        (4,056
                        )Changes in non-cash operating working capital
      (Note 14)
                        
                        
                        96,369
                        
                        
                        
                        (31,965
                        )Cash flows from operating
      activities
                        
                        
                        660,135
                        
                        
                        
                        349,890INVESTINGDrilling
      and development of petroleum and natural gas properties
                        
                        
                        (186,836
                        )
                        
                        
                        (175,639
                        )Acquisition
      of petroleum and natural gas properties (Note 4)
                        
                        
                        (46,466
                        )
                        
                        
                        (121,294
                        )Corporate
      acquisition, net of cash acquired
                        
                        
                        (1,764
                        )
                        
                        
                        -Purchase
      of short-term investments
                        
                        
                        (9,491
                        )
                        
                        
                        -Long-term
      investment (Note 4)
                        
                        
                        (627
                        )
                        
                        
                        (32,193
                        )Contributions
      to reclamation fund
                        
                        
                        (10,378
                        )
                        
                        
                        -Changes in non-cash investing working capital
      (Note 14)
                        
                        
                        (179
                        )
                        
                        
                        (4,512
                        )Cash flows used in investing
      activities
                        
                        
                        (255,741
                        )
                        
                        
                        (333,638
                        )FINANCINGIncrease
      (decrease) in long-term debt
                        
                        
                        (258,836
                        )
                        
                        
                        99,053Issue
      of trust units for cash
                        
                        
                        3,740
                        
                        
                        
                        7,045Issue
      of trust units pursuant to the distribution reinvestment
    plan
                        
                        
                        18,453
                        
                        
                        
                        35,992Cash
      distributions
                        
                        
                        (158,128
                        )
                        
                        
                        (134,595
                        )Repurchase of units
                        
                        
                        (1,213
                        )
                        
                        
                        -Cash flows from (used in) financing
      activities
                        
                        
                        (395,984
                        )
                        
                        
                        7,495Foreign exchange gain (loss) on cash held in
      foreign currencies
                        
                        
                        10,953
                        
                        
                        
                        (2,829
                        )Net
      change in cash and cash equivalents
                        
                        
                        19,363
                        
                        
                        
                        20,918Cash and cash equivalents, beginning of
      year
                        
                        
                        47,868
                        
                        
                        
                        26,950Cash and cash equivalents, end of
      year
                        
                        $
                        67,231
                        
                        
                        $
                        47,868Supplementary
      information - cash paymentsInterest
      paid
                        
                        $
                        14,905
                        
                        
                        $
                        26,071Income taxes paid
                        
                        $
                        27,699
                        
                        
                        $
                        45,934






2008
      Audited Annual Financial Statements – Exhibit 99.3
            7





Notes
to the Consolidated Financial Statements - Years Ended December 31, 2008 and
2007


(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 the purpose of the
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 (the “ceiling
test”).  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 which is 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.






2008
      Audited 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 guaranteed investments that have
an original maturity date of not more than 90 days.





Short-Term
Investments


Short-term
investments are comprised of guaranteed investment certificates with an original
maturity date of greater 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 2008 and 2007 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.






2008
      Audited 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.  When appropriate, 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 and short-term investments 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.






2008
      Audited 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 an
      appropriately weighted average exchange
rate.





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 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, 2008, the Trust adopted Section 1535, “Capital Disclosures”; Section 3862,
“Financial Instruments – Disclosures”; and Section 3863, “Financial Instruments
– Presentation”. The adoption of these standards did not impact the amounts
reported in the Trust’s consolidated financial statements, however, it did
result in additional note disclosures relating to the Trust’s capital structure
and financial instruments (see notes 20 and 21)





On January
1, 2008, the Trust adopted Section 3031, “Inventories.” The adoption of this
standard did not impact the Trust’s consolidated financial
statements.




2008
      Audited Annual Financial Statements – Exhibit 99.3
            11







4.     INVESTMENTS
AND ACQUISITIONS
 
 a)      Verenex
 
 During the
year ended December 31, 2008, the Trust purchased 72,800 shares of Verenex for
cash consideration of $0.6 million (2007 - 2.3 million shares purchased for cash
consideration of $32.2 million).  After reflecting these shares
Vermilion owns 18.8 million shares representing 42.4% of the outstanding shares
of Verenex.
 
 b)      Canada
Acquisition
 
 On January
31, 2008, the Trust completed a Canadian acquisition of gas producing assets and
gross-overriding royalties on oil producing properties for cash consideration of
$44.1 million:
 
 The
purchase price relating to this asset purchase was allocated as
follows:
  Capital
      assets
                            
                            $
                            46,057Asset retirement obligation
                            
                            
                            (1,931
                            )Total consideration
                            
                            $
                            44,126




During the
year ended December 31, 2008 the Trust acquired $2.3 million of other petroleum
and natural gas properties.
 
 c)      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




During the
year ended December 31, 2007 the Trust acquired $3.4 million of other petroleum
and natural gas properties.
 
 5.     CAPITAL
ASSETS
  Accumulated
      Depletion,Depreciation
      and
                            
                            
                            Net2008
                            
                            Cost
                            
                            
                            Amortization
                            
                            
                            Book ValuePetroleum
      and natural gas properties and equipment
                            
                            $
                            2,502,539
                            
                            
                            $
                            1,098,127
                            
                            
                            $
                            1,404,412Furniture and equipment
                            
                            
                            11,561
                            
                            
                            
                            8,344
                            
                            
                            
                            3,217$
                            2,514,100
                            
                            
                            $
                            1,106,471
                            
                            
                            $
                            1,407,629Accumulated
      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




As at
December 31, 2008 and 2007 the Trust did not exclude any costs for undeveloped
properties from the depletion and depreciation calculation.  During
the year, the Trust capitalized $4.4 million (2007 - $2.1 million) of overhead
costs related to exploration and development activities.
 
 The Trust
performed ceiling tests at December 31, 2008 and 2007 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, 2008
and 2007 and therefore the carrying values are considered
recoverable.
   2008
      Audited Annual Financial Statements – Exhibit 99.3
              12





5.     CAPITAL
ASSETS (Continued)





The
benchmark prices used in the December 31, 2008 calculations are as
follows:




CDN$/BOE
                  Canada
                  France
                  Netherlands
                  Australia2009
                  $51.43
                  $60.15
                  $58.23
                  $68.482010
                  $56.41
                  $69.56
                  $59.01
                  $78.822011
                  $59.21
                  $73.68
                  $53.38
                  $83.432012
                  $62.94
                  $80.19
                  $52.10
                  $90.812013
                  $65.37
                  $84.55
                  $54.99
                  $95.80Average increase thereafter
                  2.0%
                  2.0%
                  2.0%
                  2.0%




6.     ASSET
RETIREMENT OBLIGATIONS AND RECLAMATION FUND
 
 The asset
retirement obligations were 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 $265.1 million as at December 31, 2008 (2007
- $163.4 million) based on a total undiscounted future liability after inflation
adjustment of $948.2 million (2007 - $579.4 million).  These payments
are expected to be made over the next 47 years with the majority of the costs
being incurred between 2023 until 2045.  The Trust used a credit
adjusted risk free rate of 8% and inflation rates between 1.9% and 2.8% to
calculate the present value of the asset retirement obligations.
 
 The
following table reconciles the change in the Trust’s asset retirement
obligations:
  2008
                      
                      
                      2007Carrying
      amount, beginning of period
                      
                      $
                      163,374
                      
                      
                      $
                      127,494Increase
      in liabilities in the period
                      
                      
                      2,487
                      
                      
                      
                      12,936Disposition
      of liabilities in the period
                      
                      
                      (10,200
                      )
                      
                      
                      (4,056
                      )Change
      in estimate
                      
                      
                      66,576
                      
                      
                      
                      27,240Accretion
      expense
                      
                      
                      14,468
                      
                      
                      
                      10,067Foreign exchange
                      
                      
                      28,396
                      
                      
                      
                      (10,307
                      )Carrying amount, end of
    period
                      
                      $
                      265,101
                      
                      
                      $
                      163,374




During the
years ended December 31, 2008 and 2007, the Trust completed reviews of its
estimates of the expected costs to reclaim the net interest in its wells and
facilities.  As a result of significantly higher Canadian reclamation
costs which have been observed by the industry as a whole, Vermilion adjusted
its asset retirement obligations to reflect these increased estimated future
costs.
 
 The Trust
has set aside funds for the future payment of its estimated asset retirement
obligations.  In 2008, the Trust contributed $10.4 million to the
reclamation fund (2007 - $nil).
 
 The
following table reconciles the Trust’s reclamation fund
investments:
  2008
                      
                      
                      2007Cash
      and short term investments, at fair value
                      
                      $
                      21,700
                      
                      
                      $
                      10,838Equity and debt securities, at fair
      value
                      
                      
                      41,699
                      
                      
                      
                      47,090$
                      63,399
                      
                      
                      $
                      57,928




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.
   2008
      Audited Annual Financial Statements – Exhibit 99.3
              13




7.     LONG-TERM
DEBT
 
 As at
December 31, 2008, the Trust had an unsecured, covenant-based credit facility
allowing for maximum borrowings of $675 million. The revolving period under the
term loan is expected to expire in June 2009 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.
 
 8.     INCOME
TAXES
 
 The net
future income tax liability at December 31, 2008 and 2007 is comprised of the
following:
  2008
                                        
                                        
                                        2007Future
      income tax liabilities:Capital
      assets
                                        
                                        $
                                        (264,189
                                        )
                                        
                                        $
                                        (232,283
                                        )Derivative
      contracts
                                        
                                        
                                        (4,672
                                        )
                                        
                                        
                                        (1,086
                                        )Partnership
      income deferral
                                        
                                        
                                        (18,120
                                        )
                                        
                                        
                                        (7,240
                                        )Asset
      retirement obligation
                                        
                                        
                                        (4,630
                                        )
                                        
                                        
                                        (5,445
                                        )Other
                                        
                                        
                                        (3,678
                                        )
                                        
                                        
                                        -Unrealized
      foreign exchange
                                        
                                        
                                        (193
                                        )
                                        
                                        
                                        -Future
      income tax assets:Non-capital
      losses
                                        
                                        
                                        49,491
                                        
                                        
                                        
                                        38,909Basis
      difference of investments
                                        
                                        
                                        62
                                        
                                        
                                        
                                        61Share
      issue costs
                                        
                                        
                                        130
                                        
                                        
                                        
                                        129Other
                                        
                                        
                                        -
                                        
                                        
                                        
                                        392Unrealized foreign exchange
                                        
                                        
                                        -
                                        
                                        
                                        
                                        861Net future income tax
      (liability)
                                        
                                        $
                                        (245,799
                                        )
                                        
                                        $
                                        (205,702
                                        )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 29.50% (2007 – 32.12%), as
      follows:2008
                                        
                                        
                                        2007Earnings
      before income taxes and non-controlling interest
                                        
                                        $
                                        339,522
                                        
                                        
                                        $
                                        205,807Canadian corporate tax rate
                                        
                                        
                                        29.50
                                        %
                                        
                                        
                                        32.12
                                        %Expected
      tax expense
                                        
                                        
                                        100,159
                                        
                                        
                                        
                                        66,105Increase
      (decrease) in taxes resulting from:Income
      attributable to the unitholders
                                        
                                        
                                        (46,809
                                        )
                                        
                                        
                                        (43,808
                                        )Non-deductible
      Crown payments
                                        
                                        
                                        -
                                        
                                        
                                        
                                        123Foreign
      tax rate differentials*
                                        
                                        
                                        2,735
                                        
                                        
                                        
                                        1,528Statutory
      rate changes
                                        
                                        
                                        -
                                        
                                        
                                        
                                        70Unit
      compensation expense
                                        
                                        
                                        5,425
                                        
                                        
                                        
                                        4,492Amended
      returns and pool estimate variances
                                        
                                        
                                        1,722
                                        
                                        
                                        
                                        8,830Foreign
      exchange
                                        
                                        
                                        12,525
                                        
                                        
                                        
                                        (8,018
                                        )Other
                                        
                                        
                                        6,226
                                        
                                        
                                        
                                        (703
                                        )One-time
      tax benefit associated with offshore drilling program
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (8,929
                                        )Adjustment
      to provisions for tax positions taken
                                        
                                        
                                        5,824
                                        
                                        
                                        
                                        5,213Non-taxable portion of capital
      gains
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (195
                                        )Provision for income
      taxes
                                        
                                        $
                                        87,807
                                        
                                        
                                        $
                                        24,708* The corporate tax rate in
      France is 34.4%, 43.15% 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
recognized in earnings.  The related impact on the Trust’s
consolidated future income tax provision and future income tax liability in 2007
related to this legislation was not material.
   2008
      Audited Annual Financial Statements – Exhibit 99.3
              14





9.     UNITHOLDERS’
CAPITAL AND CONTRIBUTED SURPLUS





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




Number of Units
                    
                    
                    AmountTrust
      UnitsUnlimited
      number of trust units authorized to be issuedBalance 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
                    
                    
                    
                    380,941Distribution
      reinvestment plan
                    
                    
                    521,839
                    
                    
                    
                    18,453Issued
      on conversion of exchangeable shares
                    
                    
                    600,697
                    
                    
                    
                    17,766Unit
      rights exercised and issuance of units on vesting of trust unit award plan
      grants
                    
                    
                    1,630,943
                    
                    
                    
                    3,740Transfer
      from contributed surplus for unit based awards
                    
                    
                    -
                    
                    
                    
                    17,304Trust
      units issued for bonus plan
                    
                    
                    18,555
                    
                    
                    
                    597Unit-settled
      distributions on vested unit based awards
                    
                    
                    150,908
                    
                    
                    
                    5,834Unit buyback
                    
                    
                    (45,600
                    )
                    
                    
                    (282
                    )Balance as at December 31,
    2008
                    
                    
                    70,212,769
                    
                    
                    $
                    444,3532008
                    
                    
                    2007Contributed
      SurplusOpening
      balance
                    
                    $
                    29,211
                    
                    
                    $
                    30,513Unit
      compensation expense (excluding bonus plan)
                    
                    
                    17,791
                    
                    
                    
                    13,290Transfer to unitholders’ capital for unit based
      awards
                    
                    
                    (17,304
                    )
                    
                    
                    (14,592
                    )Ending balance
                    
                    $
                    29,698
                    
                    
                    $
                    29,211




In May
2008, Vermilion suspended its distribution reinvestment plan as it was
generating cash flow that was in excess of the level required to sustain the
Trust’s business model.
 
 In October
2008, the Trust acquired and then cancelled 45,600 of its own units pursuant to
a normal course issuer bid.  The cost to acquire these units was $1.2
million and this transaction resulted in a decrease to unitholders’ capital and
retained earnings of $0.3 million and $0.9 million respectively.
 
 Cash
distributions declared to unitholders for the year ended December 31, 2008 were
$158.7 million (2007 - $136.4 million).  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.
   2008
      Audited Annual Financial Statements – Exhibit 99.3
              15





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





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.





The
following table summarizes the change in the outstanding exchangeable share
balance:




2008
                                              
                                              
                                              2007Exchangeable
      SharesOpening
      number of exchangeable shares
                                              
                                              
                                              4,457,473
                                              
                                              
                                              
                                              4,458,919Exchanged for trust units
                                              
                                              
                                              (371,868
                                              )
                                              
                                              
                                              (1,446
                                              )Ending
      balance
                                              
                                              
                                              4,085,605
                                              
                                              
                                              
                                              4,457,473Ending exchange ratio
                                              
                                              
                                              1.66196
                                              
                                              
                                              
                                              1.55595Trust units issuable upon
      conversion
                                              
                                              
                                              6,790,112
                                              
                                              
                                              
                                              6,935,605The
      following table summarizes the changes in the non-controlling interest as
      presented on the consolidated balance sheets:2008
                                              
                                              
                                              2007Non-controlling
      interest, beginning of year
                                              
                                              $
                                              68,576
                                              
                                              
                                              $
                                              51,780Reduction
      of book value for conversion to trust units
                                              
                                              
                                              (6,579
                                              )
                                              
                                              
                                              (17
                                              )Current period net earnings attributable to
      non-controlling interest
                                              
                                              
                                              22,526
                                              
                                              
                                              
                                              16,813Non-controlling interest, end of
      year
                                              
                                              $
                                              84,523
                                              
                                              
                                              $
                                              68,576




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 no compensation expense has been recorded
(2007 - $1.1 million) related to the Unit Rights Incentive Plan as all awards
are fully vested.
   2008
      Audited Annual Financial Statements – Exhibit 99.3
              16





11.   UNIT
COMPENSATION PLANS (Continued)





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




2008
                      
                      
                      
                      
                      
                      2007Grant
      Date
                      
                      
                      
                      
                      
                      Grant
      DateNumber
      of
                      
                      
                      Weighted
      Average
                      
                      
                      Number
      of
                      
                      
                      Weighted
      AverageUnit Rights
                      
                      
                      Exercise Price
                      
                      
                      Unit Rights
                      
                      
                      Exercise PriceOpening
      Balance
                      
                      
                      1,148,616
                      
                      
                      $
                      14.55
                      
                      
                      
                      2,244,258
                      
                      
                      $
                      14.12Cancelled
                      
                      
                      
                      
                      
                      
                      -
                      
                      
                      
                      (3,900
                      )
                      
                      
                      21.55Exercised
                      
                      
                      (808,766
                      )
                      
                      $
                      12.93
                      
                      
                      
                      (1,091,742
                      )
                      
                      
                      13.63Closing balance
                      
                      
                      339,850
                      
                      
                      $
                      18.40
                      
                      
                      
                      1,148,616
                      
                      
                      $
                      14.55




A
      summary of the plan as at December 31, 2008 is as
  follows:Number
      of
                          RemainingRange
      of Exercise
                          Adjusted
                          Rights
      Outstanding
                          Contractual
      LifePrice at Grant Date
                          Exercise Price
                          and Exercisable
                          of Right (Years)$15.01 - $19.56
                          $4.55 - $9.10
                          339,850
                          0.63




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.  Original awards to
new employees vest in equal tranches over three years and subsequent grants vest
after three years.
 
 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, 2007
                      
                      
                      1,102,495Granted
                      
                      
                      533,493Vested
                      
                      
                      (407,113
                      )Cancelled
                      
                      
                      (20,620
                      )Balance December 31, 2008
                      
                      
                      1,208,255




Compensation
expense of $17.8 million was recorded during the year ended December 31, 2008
(2007 - $12.1 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 $0.9 million has been recorded as general and administration expense
during the year ended December 31, 2008 (2007 - $2.0 million).
   2008
      Audited Annual Financial Statements – Exhibit 99.3
              17





12.   PER-UNIT
AMOUNTS





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




2008
                    
                    
                    2007Net
      earnings
                    
                    $
                    229,189
                    
                    
                    $
                    164,286Non-controlling interest – exchangeable
      shares
                    
                    
                    22,526
                    
                    
                    
                    16,813Net earnings for diluted net earnings per trust
      unit calculation
                    
                    $
                    251,715
                    
                    
                    $
                    181,099Basic weighted average trust units
      outstanding
                    
                    
                    69,548,183
                    
                    
                    
                    66,122,423Dilutive
      impact of trust units issuable on conversion of exchangeable
      shares
                    
                    
                    7,108,202
                    
                    
                    
                    6,935,786Dilutive impact of unit rights incentive and trust
      unit award plans
                    
                    
                    1,362,384
                    
                    
                    
                    2,724,514Diluted weighted average trust units
      outstanding
                    
                    
                    78,018,769
                    
                    
                    
                    75,782,723




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 potential units related to incentive plans 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 result in exposure to fluctuations in commodity
prices, interest rates and foreign currency exchange rates.  The Trust
monitors and, when appropriate, uses derivative financial instruments to manage
its exposure to these risks.  The Trust does not obtain collateral or
other security to support its financial derivatives as the majority of these
instruments are with the Trust’s banking syndicate.
  Risk Management: Oil
                      Funded Cost
                      bbls/d
                      US$/bblCollar
      - BRENT2009
                      US$1.00/bbl
                      500
                      $100.50
      - $200.00Call
      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.
 
 The
following table reconciles the change in the Trust’s fair value of derivative
contracts:
  2008
                      
                      
                      2007Fair
      value of contracts, beginning of year
                      
                      $
                      2,102
                      
                      
                      $
                      6,280Opening
      unrealized loss (gain) on contracts settled during the
year
                      
                      
                      7,414
                      
                      
                      
                      (1,624
                      )Realized
      loss on contracts settled during the year
                      
                      
                      (10,625
                      )
                      
                      
                      (2,835
                      )Unrealized
      gain (loss) during the period on contracts outstanding at the end of the
      year
                      
                      
                      5,688
                      
                      
                      
                      (2,554
                      )Net payment to counterparties under contract
      settlements during the year
                      
                      
                      10,625
                      
                      
                      
                      2,835Fair value of contracts, end of
      year
                      
                      
                      15,204
                      
                      
                      
                      2,102Comprised
      of:Current
      derivative asset
                      
                      
                      11,638
                      
                      
                      
                      37Current
      derivative liability
                      
                      
                      -
                      
                      
                      
                      (7,450
                      )Non-current derivative
asset
                      
                      
                      3,566
                      
                      
                      
                      9,515Fair value of contracts, end of
      year
                      
                      $
                      15,204
                      
                      
                      $
                      2,102






2008
      Audited Annual Financial Statements – Exhibit 99.3
              18





13.   DERIVATIVE
INSTRUMENTS (Continued)





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


2008
                    
                    
                    2007Realized
      loss on contracts settled during the year
                    
                    $
                    10,625
                    
                    
                    $
                    2,835Opening
      unrealized gain (loss) on contracts settled during the
year
                    
                    
                    (7,414
                    )
                    
                    
                    1,624Unrealized (gain) loss during the period on
      contracts outstanding at the end of the year
                    
                    
                    (5,688
                    )
                    
                    
                    2,554Loss (gain) on derivative instruments for the
      year
                    
                    $
                    (2,477
                    )
                    
                    $
                    7,013




Pursuant
to a 2006 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.
 
 14.   CASH
FLOW INFORMATION
 
 The
following details the changes in non-cash working capital:
  2008
                      
                      
                      2007Accounts
      receivable
                      
                      $
                      (3,901
                      )
                      
                      $
                      3,972Crude
      oil inventory
                      
                      
                      (1,134
                      )
                      
                      
                      (2,863
                      )Prepaid
      expenses and other
                      
                      
                      (4,182
                      )
                      
                      
                      1,606Accounts
      payable and accrued liabilities and income taxes payable
                      
                      
                      106,323
                      
                      
                      
                      (37,943
                      )Foreign exchange
                      
                      
                      (916
                      )
                      
                      
                      (1,249
                      )Changes in non-cash working
      capital
                      
                      $
                      96,190
                      
                      
                      $
                      (36,477
                      )Changes
      in non-cash operating working capital
                      
                      $
                      96,369
                      
                      
                      $
                      (31,965
                      )Changes in non-cash investing working
      capital
                      
                      
                      (179
                      )
                      
                      
                      (4,512
                      )Changes in non-cash working
      capital
                      
                      $
                      96,190
                      
                      
                      $
                      (36,477
                      )






2008
      Audited Annual Financial Statements – Exhibit 99.3
              19





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.




2008
                    
                    
                    2007Petroleum
      and natural gas revenueCanada
                    
                    $
                    307,793
                    
                    
                    $
                    225,501France
                    
                    
                    318,320
                    
                    
                    
                    240,547Netherlands
                    
                    
                    114,656
                    
                    
                    
                    77,367Australia
                    
                    
                    261,136
                    
                    
                    
                    163,919$
                    1,001,905
                    
                    
                    $
                    707,334Net
      earningsCanada
                    
                    $
                    62,905
                    
                    
                    $
                    9,920France
                    
                    
                    53,857
                    
                    
                    
                    84,712Netherlands
                    
                    
                    31,132
                    
                    
                    
                    16,286Australia
                    
                    
                    81,295
                    
                    
                    
                    53,368$
                    229,189
                    
                    
                    $
                    164,286Capital
      expendituresCanada
                    
                    $
                    103,725
                    
                    
                    $
                    69,713France
                    
                    
                    53,905
                    
                    
                    
                    73,504Netherlands
                    
                    
                    13,019
                    
                    
                    
                    22,275Australia
                    
                    
                    62,653
                    
                    
                    
                    131,441$
                    233,302
                    
                    
                    $
                    296,933Total
      assetsCanada
                    
                    $
                    779,634
                    
                    
                    $
                    662,904France
                    
                    
                    587,979
                    
                    
                    
                    604,090Netherlands
                    
                    
                    136,403
                    
                    
                    
                    150,533Australia
                    
                    
                    294,343
                    
                    
                    
                    250,596$
                    1,798,359
                    
                    
                    $
                    1,668,123




16.   LONG-TERM
INVESTMENTS
 
 The
following table reconciles the Trust’s total long-term investments as presented
on the consolidated balance sheets:
  2008
                      
                      
                      2007Portfolio
      investments, at fair value
                      
                      $
                      4,579
                      
                      
                      $
                      5,032Investment in Verenex, equity method (fair value -
      $128.5 million, 2007 - $158.8 - million)
                      
                      
                      59,173
                      
                      
                      
                      58,096$
                      63,752
                      
                      
                      $
                      63,128




17.   RELATED
PARTY TRANSACTIONS
 
 During the
year, 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.
   2008
      Audited Annual Financial Statements – Exhibit 99.3
              20




18.   COMMITMENTS
 
 The Trust
has the following future commitments associated with its operating leases as at
December 31, 2008:
  2009
                      
                      
                      2010
                      
                      
                      2011
                      
                      
                      2012
                      
                      
                      2013
                      
                      
                      Thereafter
                      
                      
                      TotalPayments by Period:
                      
                      $
                      4,063
                      
                      
                      $
                      3,181
                      
                      
                      $
                      3,112
                      
                      
                      $
                      3,931
                      
                      
                      $
                      3,931
                      
                      
                      $
                      34,797
                      
                      
                      $
                      53,015




In
addition, the Trust has various other commitments associated with its business
operations, none of which in management’s view, are significant.
 
 19.   COMPONENTS
OF CASH AND CASH EQUIVALENTS
 
 The components of cash and cash
equivalents are as follows:
  2008
                      
                      
                      2007Monies
      on deposit with banks
                      
                      $
                      67,231
                      
                      
                      $
                      44,588Guaranteed short-term
      investments
                      
                      
                      -
                      
                      
                      
                      3,280Total cash and cash
    equivalents
                      
                      $
                      67,231
                      
                      
                      $
                      47,868




20.   CAPITAL
DISCLOSURES
 
 In
managing capital, the Trust reviews whether fund flows from operations, (a
non-GAAP measure, defined as cash flows from operating activities before changes
in non-cash operating working capital and asset retirement costs incurred) is
sufficient to pay for all capital expenditures, distributions, contributions to
the reclamation fund and abandonment and reclamation expenditures.  To the
extent that the forecasted fund flows from operations is not expected to be
sufficient to cover these expenditures, the Trust will evaluate its ability to
finance any excess with debt or reduce some or all categories of expenditures to
ensure that total expenditures do not exceed available funds.
 
 As a part
of the management of capital, the Trust monitors the ratio of net debt (a
non-GAAP measure, which is defined as long-term debt as shown on the
consolidated balance sheets plus working capital) to fund flows from
operations.
 
 The Trust
typically strives to maintain a ratio of net debt to fund flows from operations
near 1.0.  In a commodity price environment where prices trend higher, the
Trust may target a lower ratio and conversely, in a lower commodity price
environment, the acceptable ratio may be higher.  At times, the Trust will
use its balance sheet to finance acquisitions and in these situations, the Trust
is prepared to accept a higher ratio in the short term but will implement a plan
to reduce the ratio to acceptable levels within a reasonable period of time,
usually considered to be no more than 12 to 18 months.  This plan could
potentially include an increase in hedging activities, a reduction in capital
spending and the utilization of excess fund flows from operations to reduce
outstanding indebtedness.
 
 The
following table calculates the Trust’s ratio of net debt to fund flows from
operations:
  2008
                      
                      
                      2007Long-term
      debt
                      
                      $
                      197,651
                      
                      
                      $
                      452,490Current
      liabilities
                      
                      
                      250,275
                      
                      
                      
                      150,620Current assets
                      
                      
                      (240,173
                      )
                      
                      
                      (186,252
                      )Net debt [1]
                      
                      $
                      207,753
                      
                      
                      $
                      416,858Cash
      flows from operating activities
                      
                      $
                      660,135
                      
                      
                      $
                      349,890Changes
      in non-cash operating working capital
                      
                      
                      (96,369
                      )
                      
                      
                      31,965Asset retirement costs
    incurred
                      
                      
                      10,200
                      
                      
                      
                      4,056Fund flows from operations
    [2]
                      
                      $
                      573,966
                      
                      
                      $
                      385,911Ratio of net debt to fund flows from operations
      ([1] ÷ [2])
                      
                      
                      0.4
                      
                      
                      
                      1.1






2008
      Audited Annual Financial Statements – Exhibit 99.3
            21







20.   CAPITAL
DISCLOSURES (Continued)
 
 For the
periods presented here, the ratio of net debt to fund flows from operations was
between 0.4 and 1.1.  The 2008 year end figure of 0.4 reflects the
strong commodity price environment that prevailed for much of the
year.  Given the weakening of commodity prices through the end of 2008
and into early 2009, the Trust will target a net debt to fund flows from
operations ratio of approximately 1.0 in accordance with its capital management
strategy, exclusive of the impact of potential acquisitions.
 
 In
relation to its long-term debt, the Trust is subject to a debt to EBITDA ratio
test (where debt is defined as long-term debt as presented on the consolidated
balance sheet and EBITDA is defined as earnings before interest, taxes,
depreciation, amortization and other certain non-cash items).  During
the periods covered by these financial statements, the Trust continued to comply
with this externally imposed capital requirement.
 
 21.  
FINANCIAL INSTRUMENTS
 
 The
following table summarizes information relating to Vermilion’s financial
instruments as at December 31, 2008 and December 31, 2007:
 
 Classification of Financial
Instruments
  Related
      IncomeClass
      of
                                                          Location
      on Consolidated
                                                          Accounting
                                                          or
      Expense Account
                                                          
                                                          Carrying
      AmountFinancial Instruments
                                                          Balance Sheet
                                                          Designation
                                                          on Statement of Earnings
                                                          
                                                          and Fair Value of Asset (Liability) as
      at:December 31, 2008
                                                          
                                                          
                                                          December 31, 2007Cash
                                                          Cash
      and cash equivalents
                                                          HFT-B
                                                          Gains
      and losses on foreign
                                                          
                                                          $
                                                          67,231
                                                          
                                                          
                                                          $
                                                          47,868exchange
      are includedin
      foreign exchangeloss
      (gain)Short-term
      investments
                                                          Short-term
      investments
                                                          HFT-A
                                                          Gains
      and losses on foreign
                                                          
                                                          $
                                                          9,491
                                                          
                                                          
                                                          $
                                                          -exchange
      are includedIn
      foreign exchangeloss
      (gain)Receivables
                                                          Accounts
      receivable
                                                          LAR
                                                          Gains
      and losses on foreign
                                                          
                                                          $
                                                          123,794
                                                          
                                                          
                                                          $
                                                          119,645exchange
      are included inforeign
      exchange loss(gain).  Impairments
      arerecognized
      as generaland
      administration expenseDerivative
      assets
                                                          Derivative
      instruments
                                                          HFT-B
                                                          Loss
      (gain) on derivative
                                                          
                                                          $
                                                          15,204
                                                          
                                                          
                                                          $
                                                          9,552instrumentsDerivative
      liabilities
                                                          Derivative
      instruments
                                                          HFT-B
                                                          Loss
      (gain) on
                                                          
                                                          $
                                                          -
                                                          
                                                          
                                                          $
                                                          (7,450
                                                          )derivative
      instrumentsReclamation
      fund investments
                                                          Reclamation
      fund
                                                          HFT-A
                                                          Other
      income or expense
                                                          
                                                          $
                                                          63,399
                                                          
                                                          
                                                          $
                                                          57,928Portfolio
      investments
                                                          Long-term
      investments (1)
                                                          HFT-A
                                                          Other
      income or expense
                                                          
                                                          $
                                                          4,579
                                                          
                                                          
                                                          $
                                                          5,032Payables
                                                          Accounts
      payable and
                                                          OTH
                                                          Gains
      and losses on foreign
                                                          
                                                          $
                                                          (192,652
                                                          )
                                                          
                                                          $
                                                          (141,652
                                                          )accrued
      liabilities.
                                                          
                                                          exchange
      are included inDistributions
      payable to
                                                          
                                                          foreign
      exchange loss (gain)unitholders.Long-term debt
                                                          Long-term debt
                                                          OTH
                                                          Interest
                                                          
                                                          $
                                                          (197,651
                                                          )
                                                          
                                                          $
                                                          (452,490
                                                          )




(1)  See
note 16 for a reconciliation of the long-term investments account
   2008
      Audited Annual Financial Statements – Exhibit 99.3
              22







21.  
FINANCIAL INSTRUMENTS (Continued)
 
 Accounting
designations used in the above table:
 
 HFT-A –
Designated by the Trust as “Held for trading” upon initial
recognition.  Financial assets and liabilities designated as “Held for
trading” are carried at fair value on the consolidated balance sheets with gains
and losses associated with fair value adjustments recognized in net
earnings.
 
 HFT-B –
Classified as “Held for trading” in accordance with Section 3855 of the CICA
Handbook.  As with HFT-A instruments these financial assets and
liabilities are carried at fair value on the consolidated balance sheets with
associated gains and losses reflected in net earnings.
 
 LAR –
“Loans and receivables” are initially recognized at fair value and subsequently
are measured at amortized cost.  Impairments and foreign exchange
gains and losses are recognized in net earnings.
 
 OTH –
“Other financial liabilities” are initially recognized at fair value and
subsequently are measured at amortized cost.  Interest is recognized
in net earnings using the effective interest method.  Foreign exchange
gains and losses are recognized in net earnings.
 
 Determination of Fair
Values
 
 Fair
values for derivative assets and derivative liabilities are determined using
option pricing models that are based on assumptions which are supported by
prices from observable market transactions and are adjusted for credit
risk.  Fair values for portfolio investments and reclamation fund
investments are determined by reference to published price quotations in active
markets.  The carrying value of cash equivalents, receivables and
payables approximate their fair value due to their short
maturities.  The carrying value of long-term debt approximates its
fair value due to the use of short-term borrowing instruments at market rates of
interest.
 
 Nature and Extent of Risks
Arising From Financial Instruments
 
 Vermilion
is exposed to the following types of risks in relation to its financial
instruments:
 
 Credit
risk:
 Vermilion
extends credit to customers and the Trust may, from time-to-time, be due amounts
from counterparties in relation to derivative
instruments.  Accordingly, there is a risk of financial loss in the
event that a counterparty fails to discharge its obligation.  For
transactions that are financially significant, Vermilion reviews third-party
credit ratings and may require additional forms of security.  Cash
held on behalf of the Trust by financial institutions is also subject to credit
risk related to the credit profile of those institutions.
 
 Currency
risk:
 Vermilion
conducts business in currencies other than Canadian dollars and accordingly is
subject to currency risk associated with changes in foreign exchange rates in
relation to cash, receivables, payables, derivative assets and liabilities and
reclamation fund investments.  The impact related to working capital
is somewhat mitigated as a result of the offsetting effects of foreign exchange
fluctuations on assets and liabilities.  Vermilion monitors its
exposure to currency risk and reviews whether the use of derivative financial
instruments is appropriate to manage potential fluctuations in foreign exchange
rates.  At present, the Trust does not have any derivative instruments
in place with respect to currency risk.
 
 Commodity price
risk:
 Vermilion
uses financial derivatives as part of its risk management program associated
with the effects of changes in commodity prices on future cash
flows.  Changes in the underlying commodity prices impact the fair
value and future cash flows related to these derivatives.
 
 Equity price
risk:
 The Trust
holds investments in equity securities in its reclamation fund.  In
addition, at December 31, 2008 the Trust held portfolio investments in equity
securities with a fair value of $4.6 million.  The fair value of these
instruments is exposed to changes in the prices of the underlying
equities.
  2008
      Audited Annual Financial Statements – Exhibit 99.3
              23





21.  
FINANCIAL INSTRUMENTS (Continued)





Interest rate
risk:


Vermilion’s
debt is primarily comprised of short-term bankers acceptances that bear interest
at market rates.  Accordingly, Vermilion’s exposure to interest rate
risk in relation to its long-term debt at the balance sheet date is not
material.  The fair value of the bonds and debt securities that
Vermilion holds in its reclamation fund is subject to interest rate
risk.





Liquidity
risk:


Liquidity
risk is the risk that Vermilion will encounter difficulty in meeting obligations
associated with its financial liabilities.  The Trust does not
consider this to be a significant risk as its financial position and available
committed borrowing facility provide significant financial flexibility and allow
Vermilion to meet its obligations as they come due.





Vermilion
does not consider there to be a present risk in relation to funds availability
to the Trust under its committed borrowing facility.





The nature
of these risks and the Trust’s strategy for managing these risks has not changed
significantly from the prior period.





Summarized Quantitative Data
Associated with the Above Risks





Credit
risk:


As at
December 31, 2008 Vermilion’s maximum exposure to receivable credit risk was
$139.0 million which is the aggregate value of receivables and derivative assets
at the balance sheet date.  Vermilion’s receivables are due from
counterparties that have investment grade third party credit ratings or, in the
absence of the availability of such ratings; Vermilion has satisfactorily
reviewed the counterparty for creditworthiness as appropriate.  In
addition, at December 31, 2008 Vermilion had $67.2 million in cash on deposit at
banks.  The Trust continues to review the options to mitigate its risk
in relation to recent economic events.





As at the
balance sheet date, the amount of financial assets that were past due or
impaired was not material.





Liquidity
risk:


The
following table summarizes Vermilion’s financial liabilities and their
contractual maturities:




Later
      than one
                    
                    
                    Later
      than three
                    
                    
                    Later
      than oneNot
      later
                    
                    
                    month
      and not later
                    
                    
                    months
      and not later
                    
                    
                    year
      and not laterDue in (from balance sheet
      date)
                    
                    than one month
                    
                    
                    than three months
                    
                    
                    than one year
                    
                    
                    than five yearsNon-derivative financial
      liabilities
                    
                    $
                    123,718
                    
                    
                    $
                    63,805
                    
                    
                    $
                    5,129
                    
                    
                    $
                    197,651




Minimal
liquidity risk exists with regards to the Trust’s financial liabilities given
the Trust’s financial position and committed borrowing facility.
 
 Market
risk:
 As
previously noted, the Trust is exposed to currency risk related to changes in
foreign currency denominated financial instruments, commodity price risk related
to outstanding derivative positions, interest rate risk related to its long-term
debt and investments in debt securities and equity price risk related to
investments in equity securities.  The following table summarizes what
the impact on net earnings before tax would be for the year given changes in the
relevant risk variables that the Trust considers were reasonably possible at
December 31, 2008.  The impact on net earnings before tax associated
with changes in these risk variables for liabilities that are not considered
financial instruments is excluded from this analysis.  This analysis
does not attempt to reflect any interdependencies between the relevant risk
variables.
  2008
      Audited Annual Financial Statements – Exhibit 99.3
                24





21.   
FINANCIAL INSTRUMENTS (Continued)




Effect
      on net earnings beforeRisk
                                                                                    Description of change in risk
      variable
                                                                                    
                                                                                    tax increase (decrease)Currency
      risk – Euro to Canadian
                                                                                    Increase in
      strength of the Canadian dollar against theEuro
      by 10% over the relevant closing rates on December 31,
    2008.
                                                                                    
                                                                                    $
                                                                                    (3,527
                                                                                    )Decrease in
      strength of the Canadian dollar against theEuro
      by 5% over the relevant closing rates on December 31,
2008.
                                                                                    
                                                                                    $
                                                                                    1,763Currency
      risk – US$ to Canadian
                                                                                    Increase in
      strength of the Canadian dollar against theUS$
      by 10% over the relevant closing rates on December 31,
    2008.
                                                                                    
                                                                                    $
                                                                                    (5,584
                                                                                    )Decrease in
      strength of the Canadian dollar against theUS$
      by 5% over the relevant closing rates on December 31,
2008.
                                                                                    
                                                                                    $
                                                                                    2,792Currency
      risk – AUD$ to Canadian
                                                                                    Increase in
      strength of the Canadian dollar against theAUD$
      by 10% over the relevant closing rates on December 31,
    2008.
                                                                                    
                                                                                    $
                                                                                    (1,234
                                                                                    )Decrease in
      strength of the Canadian dollar against theAUD$
      by 5% over the relevant closing rates on December 31,
2008.
                                                                                    
                                                                                    $
                                                                                    617Commodity
      price risk
                                                                                    Increase in
      relevant oil reference price at December 31, 2008 by
      US$5.00/bblwithin
      option pricing models used to determine the fair value of derivative
      positions.
                                                                                    
                                                                                    $
                                                                                    146Decrease in
      relevant oil reference price at December 31, 2008 by
      US$5.00/bblwithin option pricing models used to determine the
      fair value of derivative positions.
                                                                                    
                                                                                    $
                                                                                    (59
                                                                                    )




Reasonably
possible changes in the relevant variables associated with interest rate risk
and equity price risk would not have had a material impact on net earnings for
the year ended December 31, 2008.
 
 22.   RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
 
 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.
 
 In January
2009, the CICA issued Section 1582 – “Business Combinations”, Section 1601–
“Consolidated Financial Statements” and Section 1602 – “Non-controlling
Interests”.   These new sections are effective for years
beginning on or after January 1, 2011 with earlier adoption permitted. Sections
1582 and 1602 will require net assets, non-controlling interests and goodwill
acquired in a business combination to be recorded at fair value and
non-controlling interests will be reported as a component of equity. In
addition, the definition of a business is expanded and is described as an
integrated set of activities and assets that are capable of being managed to
provide a return to investors or economic benefits to owners, members or
participants. Finally, acquisition costs are not part of the consideration and,
with the exception of trust unit issue costs, acquisition-related costs are to
be expensed when incurred.  Vermilion is current assessing the
potential impact and whether or not it will elect to adopt these standards in
advance of the transition to IFRS.
   2008
      Audited Annual Financial Statements – Exhibit 99.3
                25





23.   SUBSEQUENT
EVENT





On
February 24, 2008 Verenex entered into an agreement under which a company has
agreed to acquire all of Verenex's outstanding common shares for $10.00 per
share.  Pursuant to this arrangement, Vermilion entered into a lock-up
agreement with the acquirer whereby the Trust has agreed to tender its common
shares in Verenex under the offer.  Vermilion holds 18.8 million
shares in Verenex and accordingly, the Trust's proceeds from a successful
transaction would be approximately $187.6 million.





The
completion of this transaction is subject to a number of conditions including
consent from the Libyan National Oil Corporation and valid acceptance of the
offer by at least 66.7% of Verenex's shareholders as well as other governmental
and regulatory approvals.





24.   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 had the following effect on net
earnings:




2008
                    
                    
                    2007Net
      earnings and comprehensive income as reported under Canadian
      GAAP
                    
                    $
                    229,189
                    
                    
                    $
                    164,286Differences
      having the effect of increasing (decreasing) net earningsUnit
      based compensation (a)
                    
                    
                    (9,715
                    )
                    
                    
                    (22,264
                    )Non-controlling
      interest adjustment (c)
                    
                    
                    22,526
                    
                    
                    
                    16,813Depletion,
      depreciation and accretion (c, e and f)
                    
                    
                    (503,598
                    )
                    
                    
                    3,220Equity
      method accounting adjustments (g)
                    
                    
                    (8
                    )
                    
                    
                    (4,361
                    )Dilution
      gain on sale of shares by equity method investee (d)
                    
                    
                    -
                    
                    
                    
                    29,082Deferred tax consequences of U.S. GAAP adjustments
      (c)
                    
                    
                    144,372
                    
                    
                    
                    (6,469
                    )Net earnings (loss) and comprehensive income
      (loss) under U.S. GAAP
                    
                    
                    (117,234
                    )
                    
                    
                    180,307Deficit,
      beginning of year, under U.S. GAAP
                    
                    
                    (1,697,655
                    )
                    
                    
                    (1,536,381
                    )Distributions
      declared (Canadian and U.S. GAAP)
                    
                    
                    (158,674
                    )
                    
                    
                    (136,389
                    )Temporary equity adjustment to retained earnings
      (b and h)
                    
                    
                    595,706
                    
                    
                    
                    (205,192
                    )Deficit, end of year, under U.S.
      GAAP
                    
                    $
                    (1,377,857
                    )
                    
                    $
                    (1,697,655
                    )Net
      earnings (loss) per trust unit under U.S. GAAPBasic
                    
                    $
                    (1.53
                    )
                    
                    $
                    2.47Diluted
                    
                    $
                    (1.53
                    )
                    
                    $
                    2.38Weighted
      average trust units outstandingBasic
      (c)
                    
                    
                    76,656,385
                    
                    
                    
                    73,058,209Diluted (c)
                    
                    
                    78,094,239
                    
                    
                    
                    75,772,059






2008
      Audited Annual Financial Statements – Exhibit 99.3
            26





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





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




2008
                          
                          
                          2008
                          
                          
                          2007
                          
                          
                          2007CDN GAAP
                          
                          
                          U.S. GAAP
                          
                          
                          CDN GAAP
                          
                          
                          U.S. GAAPASSETSCurrentCash
      and cash equivalents
                          
                          $
                          67,231
                          
                          
                          $
                          67,231
                          
                          
                          $
                          47,868
                          
                          
                          $
                          47,868Short-term
      investments
                          
                          
                          9,491
                          
                          
                          
                          9,491
                          
                          
                          
                          -
                          
                          
                          
                          -Accounts
      receivable
                          
                          
                          123,794
                          
                          
                          
                          123,794
                          
                          
                          
                          119,645
                          
                          
                          
                          119,645Crude
      oil inventory
                          
                          
                          12,167
                          
                          
                          
                          12,167
                          
                          
                          
                          11,033
                          
                          
                          
                          11,033Derivative
      instruments
                          
                          
                          11,638
                          
                          
                          
                          11,638
                          
                          
                          
                          37
                          
                          
                          
                          37Prepaid expenses and other
                          
                          
                          15,852
                          
                          
                          
                          15,852
                          
                          
                          
                          7,669
                          
                          
                          
                          7,669240,173
                          
                          
                          
                          240,173
                          
                          
                          
                          186,252
                          
                          
                          
                          186,252Derivative
      instruments
                          
                          
                          3,566
                          
                          
                          
                          3,566
                          
                          
                          
                          9,515
                          
                          
                          
                          9,515Long-term
      investments (d and g)
                          
                          
                          63,752
                          
                          
                          
                          92,378
                          
                          
                          
                          63,128
                          
                          
                          
                          91,762Goodwill
                          
                          
                          19,840
                          
                          
                          
                          19,840
                          
                          
                          
                          19,840
                          
                          
                          
                          19,840Reclamation
      fund
                          
                          
                          63,399
                          
                          
                          
                          63,399
                          
                          
                          
                          57,928
                          
                          
                          
                          57,928Capital assets (c, e and f)
                          
                          
                          1,407,629
                          
                          
                          
                          869,403
                          
                          
                          
                          1,331,460
                          
                          
                          
                          1,311,639$
                          1,798,359
                          
                          
                          $
                          1,288,759
                          
                          
                          $
                          1,668,123
                          
                          
                          $
                          1,676,936LIABILITIESCurrentAccounts
      payable and accrued liabilities
                          
                          $
                          179,312
                          
                          
                          $
                          179,312
                          
                          
                          $
                          128,858
                          
                          
                          $
                          128,858Unit
      based compensation liability (a)
                          
                          
                          -
                          
                          
                          
                          17,756
                          
                          
                          
                          -
                          
                          
                          
                          71,627Distributions
      payable to unitholders
                          
                          
                          13,340
                          
                          
                          
                          13,340
                          
                          
                          
                          12,794
                          
                          
                          
                          12,794Income
      taxes payable
                          
                          
                          57,623
                          
                          
                          
                          57,623
                          
                          
                          
                          1,518
                          
                          
                          
                          1,518Derivative instruments
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          7,450
                          
                          
                          
                          7,450250,275
                          
                          
                          
                          268,031
                          
                          
                          
                          150,620
                          
                          
                          
                          222,247Long-term
      debt
                          
                          
                          197,651
                          
                          
                          
                          197,651
                          
                          
                          
                          452,490
                          
                          
                          
                          452,490Asset
      retirement obligation
                          
                          
                          265,101
                          
                          
                          
                          265,101
                          
                          
                          
                          163,374
                          
                          
                          
                          163,374Unit
      based compensation liability (a)
                          
                          
                          -
                          
                          
                          
                          9,210
                          
                          
                          
                          -
                          
                          
                          
                          15,641Future income taxes
                          
                          
                          245,799
                          
                          
                          
                          98,698
                          
                          
                          
                          205,702
                          
                          
                          
                          206,594958,826
                          
                          
                          
                          838,691
                          
                          
                          
                          972,186
                          
                          
                          
                          1,060,346Non-controlling interest – exchangeable shares
      (c)
                          
                          
                          84,523
                          
                          
                          
                          -
                          
                          
                          
                          68,576
                          
                          
                          
                          -Temporary equity (a, b and
    c)
                          
                          
                          -
                          
                          
                          
                          1,827,925
                          
                          
                          
                          -
                          
                          
                          
                          2,314,245UNITHOLDERS’
      EQUITYUnitholders’
      capital (b)
                          
                          
                          444,353
                          
                          
                          
                          -
                          
                          
                          
                          380,941
                          
                          
                          
                          -Contributed
      surplus
                          
                          
                          29,698
                          
                          
                          
                          -
                          
                          
                          
                          29,211
                          
                          
                          
                          -Retained earnings (deficit)
                          
                          
                          280,959
                          
                          
                          
                          (1,377,857
                          )
                          
                          
                          217,209
                          
                          
                          
                          (1,697,655
                          )755,010
                          
                          
                          
                          (1,377,857
                          )
                          
                          
                          627,361
                          
                          
                          
                          (1,697,655
                          )$
                          1,798,359
                          
                          
                          $
                          1,288,759
                          
                          
                          $
                          1,668,123
                          
                          
                          $
                          1,676,936






2008
      Audited Annual Financial Statements – Exhibit 99.3
            27





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





a)
            Unit
      based compensation





Under
      U.S. GAAP, the Trust’s unit based compensation plans are accounted for as
      liability plans whereas under Canadian GAAP 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.  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
      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
      31,2008
                                
                                
                                2007Expected
      volatility
                                
                                
                                41.00
                                %
                                
                                
                                19.46
                                %Risk-free
      interest rate
                                
                                
                                1.37
                                %
                                
                                
                                3.17
                                %Expected
      life of option (years)
                                
                                
                                0.63
                                
                                
                                
                                0.78Fair value per option
                                
                                $
                                11.78
                                
                                
                                $
                                24.31The
      fair value of trust unit awards was determined using a Monte Carlo
      simulation model integrating historical market performance data in
      relation to the Trust and certain peer entities and incorporating
      management’s estimates as follows:December
      31,
                                
                                
                                December
      31,2008
                                
                                
                                2007Risk
      free interest rate
                                
                                
                                1.21
                                %
                                
                                
                                3.56
                                %Annual forfeiture rate
                                
                                
                                7.75
                                %
                                
                                
                                5.40
                                %




b)
              Temporary
      equity
 
 As
      trust units are redeemable on demand for cash and as exchangeable shares
      can only be redeemed for trust units 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 will ultimately 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, 2008 of $14.8 million (2007 - $53,000) related to
      the conversion of exchangeable shares, as well as the related future
      income taxes and 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.






2008
      Audited Annual Financial Statements – Exhibit 99.3
            28





24.  
DIFFERENCES BETWEEN CANADIAN AND UNITED STATES OF AMERICA GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
(Continued)





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





Under
      Canadian GAAP, entities that apply full-cost accounting do not recognize
      dilution gains on sales of shares by equity method investees when the sale
      of shares is, in substance, a sale of oil and gas properties unless
      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 and accordingly,
      the Trust has recorded a dilution gain related to Verenex’s 2007 share
      offering.  No share offerings by Verenex occurred in
      2008.





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, 2008 additional
      depletion and depreciation of $1.2 million (2007 - $1.5 million) 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.  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, 2008 resulted in a writedown of capitalized costs of
      $504.6 million on a before-tax basis.  This writedown is
      reflected as additional depletion expense.  The application of
      the impairment test under U.S. GAAP did not result in a writedown 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)
            Repurchase
      of Units





During
      the year ended December 31, 2008 the Trust acquired and then cancelled
      45,600 of its own units pursuant to a normal course issuer
      bid.  Under Canadian GAAP, an adjustment to retained earnings is
      required to reflect the difference between the consideration paid by the
      Trust and the book value of the related trust units.  As the
      trust units are reflected as temporary equity under U.S. GAAP and are
      carried at the redemption value, there was no difference between the book
      value of the trust units acquired and the consideration paid by the Trust
      and accordingly no retained earnings adjustment was required under U.S.
      GAAP.






2008
      Audited Annual Financial Statements – Exhibit 99.3
            29





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





i)
            Recently
      adopted U.S. Accounting Standards




OnJanuary 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 result in a
difference to the Trust’s consolidated financial statements under U.S.
GAAP.





On
January 1, 2008 the Trust adopted Statement of Financial Accounting
Standards (“SFAS”) 157, “Fair Value Measurements”.  SFAS 157 provides a
common definition of fair value, establishes a framework for measuring fair
value under U.S. GAAP and expands disclosures about fair value
measurements.  This standard applies when other accounting pronouncements
require fair value measurements and does not require new fair value
measurements.  The adoption of this standard did not have a material impact
on the Trust’s consolidated financial statements.





On January
1, 2008 the Trust adopted SFAS 159, “Fair Value Option for Financial Assets and
Liabilities”. This standard provides companies with an option to measure, at
specified election dates, certain financial assets and liabilities at fair
value. Changes in fair value are recognized in earnings. The Trust has elected
not to use the optional fair value measurement.





In
May 2008, the FASB issued SFAS 162, “The Hierarchy of Generally
Accepted Accounting Principles”. This standard became effective
November 15, 2008 following the SEC’s approval of the Public Company
Accounting Oversight Board Auditing amendments to AU Section, 411 “The Meaning
of Present Fairly in Conformity with Generally Accepted Accounting Principles”.
The statement is intended to improve financial reporting by identifying a
consistent hierarchy for selecting accounting principles to be used in preparing
financial statements that are presented in conformity with U.S.
GAAP.   The adoption of this standard did not have a material impact
on the Trust’s consolidated financial statements.





j)
            Recently
      issued U.S. Accounting Standards





In
December 2007, the FASB issued SFAS 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 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 December
15, 2008.





In
December 2007, the FASB issued SFAS 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.






2008
      Audited Annual Financial Statements – Exhibit 99.3
            30





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





j)
            Recently
      issued U.S. Accounting Standards
(Continued)





In
June 2008, the FASB issued FASB Staff Position EITF 03-6-1, “Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities” (“FSP EITF 03-6-1”).  FSP EITF 03-6-1
addresses whether instruments granted in share-based payment transactions are
participating securities prior to vesting, and therefore need to be included in
the computation of earnings per share under the two-class method as described in
FASB Statement of Financial Accounting Standards No. 128, “Earnings per
Share.”  FSP EITF 03-6-1 is effective for financial statements issued
for fiscal years beginning on or after December 15, 2008 and earlier
adoption is prohibited.   The Trust is evaluating the impact of
EITF 03-6-1 on its consolidated financial statements.





As of
December 31, 2009, the Trust will be required to prospectively adopt the
new reserves requirements that arise from the completion of the SEC’s project,
“Modernization of Oil and Gas Reporting”. The new rules include provisions
that permit the use of new technologies to establish proved reserves if those
technologies have been demonstrated empirically to lead to reliable conclusions
about reserves volumes.  Additionally, oil and gas reserves will be
reported using an average price based upon the prior 12-month period rather than
year-end prices.  The new rules will affect the reserve estimate used
in the calculation of DD&A and the ceiling test for U.S. GAAP
purposes.  The Trust is assessing the impact these new rules will have
on its consolidated financial statements.






2008
      Audited Annual Financial Statements – Exhibit 99.3
            31





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 2, 4,
      5
                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
                May
      8, 2009 at 10:00 a.m.
                The
      Ballroom
                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
                
                Paul
      L. Beique
                Vice
      President Capital Markets
                
                Mona
      Jasinski, M.B.A., C.H.R.P.
                Vice
      President People
                
                Raj
      C. Patel, P.Eng.
                Vice
      President Marketing
                
                Daniel
      Goulet, P.Eng.
                Director
      Production and Operations
                
                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.
              AUDITORS
                Deloitte
      & Touche LLP
                Calgary,
      Alberta
                
                BANKERS
                The
      Toronto-Dominion Bank
                Calgary,
      Alberta
                
                Bank
      of Montreal
                Calgary,
      Alberta
                
                BNP
      Paribas (Canada)
                Toronto,
      Ontario
                
                The
      Bank of Nova Scotia
                Calgary,
      Alberta
                
                Royal
      Bank of Canada
                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
                Vice
      President Capital Markets
                
                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 FREEgraphic
              investor_relations@vermilionenergy.com
                www.vermilionenergy.com




2008
      Audited Annual Financial Statements – Exhibit 99.3
            32