**EXHIBIT
      99.2**
































**2006
      MANAGEMENT’S DISCUSSION AND ANALYSIS**


















**DISCLAIMER:**




This
      document
      contains forward-looking financial and operational information including debt
      levels, production and capital expenditure projections. These projections are
      based on the Trust’s expectations and are subject to a number of risks and
      uncertainties that could materially affect the results. These risks include,
      but are not
      limited to, future commodity prices, exchange rates, interest rates, geological
      risk, reserves risk, political risk, product demand and transportation
      restrictions. 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
      DISCUSSION AND ANALYSIS**





The
      following is Management’s Discussion and Analysis (MD&A) dated March 20,
      2007 of Vermilion’s operating and financial results
      for the
      years ended December 31, 2006 and 2005. This discussion should be read in
      conjunction with the Trust’s audited consolidated financial statements for the
      years ended December 31, 2006 and 2005, together with accompanying
      notes.




**NON-GAAP
      MEASURES**




Included
      in this report are references to terms commonly used in the oil and gas
      industry, such as cash flow, cash flow per unit and funds from operations which
      represent cash flow from operating activities expressed before changes in
      non-cash working capital
      and are
      used by the Trust to analyze operating performance, leverage and liquidity.
      These terms do not have standardized
      meanings prescribed by Generally Accepted Accounting Principles (“GAAP”) and
      therefore may not be comparable with
      the
      calculations of similar measures for other entities. Consequently, these are
      referred to as non-GAAP measures. Cash flow,
      as discussed
      in this report, appears as a separate caption on the Trust’s cash flow statement
      as “funds from operations” and
      is reconciled
      to net earnings.




**($000’S)**
            
            
            **Year
              Ended December 31****2006**
            
            
            **2005**Funds
                from
                operations
            
            **$**
            **342,502**
            
            $
            278,165Changes
                in
                non-cash operating working capital
            
            
            **(32,252**
            **)**
            
            (32,101
            )Asset
                retirement costs incurred
            
            
            **(4,217**
            **)**
            
            (948
            )Cash
                from
                operations
            
            **$**
            **306,033**
            
            $
            245,116




**FORWARD-LOOKING
      INFORMATION**




This
      report contains forward-looking financial and operational information including
      earnings, cash flow, production and capital expenditure
      projections. These projections are based on the Trust’s expectations and are
      subject to a number of risks and uncertainties
      that
      could materially affect the results. These risks include, but are not limited
      to, future commodity prices, exchange
      rates,
      interest rates, geological risk, reserves risk, political risk, product demand
      and transportation restrictions.




**Highlights
                ($000’s except per unit amounts)**
            
            
            **2006**
            
            
            **2005**
            
            
            **2004***Revenues
            
            **$**
            **618,072**
            
            $
            529,938
            
            $
            354,525Net
                earnings
                from continuing operations
            
            
            **146,923**
            
            
            158,471
            
            
            66,010Net
                earnings
            
            
            **146,923**
            
            
            158,471
            
            
            127,513Per
                unit
                basic
            
            
            **2.30**
            
            
            2.57
            
            
            2.12Per
                unit
                diluted
            
            
            **2.22**
            
            
            2.49
            
            
            2.07Funds
                from
                operations
            
            
            **342,502**
            
            
            278,165
            
            
            170,179Per
                unit
            
            
            **4.86**
            
            
            4.50
            
            
            2.83Return
                on
                equity (%)
            
            
            **29.5**
            
            
            37.4
            
            
            34.0Total
                assets
            
            
            **1,462,839**
            
            
            1,111,739
            
            
            844,602WTI
                (US$/bbl)
            
            
            **66.21**
            
            
            56.56
            
            
            41.40AECO
                (CDN$/mcf)
            
            
            **6.53**
            
            
            8.77
            
            
            6.56Realized
                price ($/boe)
            
            
            **61.78**
            
            
            53.48
            
            
            39.48Cash
                flow
                netback ($/boe)
            
            **$**
            **34.25**
            
            $
            30.15
            
            $
            20.19


*
      Restated stock compensation expense




**2006
                Summary of Quarterly Results ($000’s except per unit
                amounts)**
            
            
            **Q1**
            
            
            **Q2**
            
            
            **Q3**
            
            
            **Q4**Revenue
            
            $
            147,286
            
            $
            147,763
            
            $
            167,301
            
            $
            155,722Net
                earnings
            
            
            40,878
            
            
            40,360
            
            
            48,081
            
            
            17,604Per
                unit
                basic
            
            
            0.65
            
            
            0.63
            
            
            0.75
            
            
            0.27Per
                unit
                diluted
            
            $
            0.62
            
            $
            0.61
            
            $
            0.72
            
            $
            0.26**2005
                Summary of Quarterly Results ($000’s except per unit
                amounts)**
            
            
            **Q1**
            
            
            **Q2**
            
            
            **Q3**
            
            
            **Q4**Revenue
            
            $
            108,715
            
            $
            117,360
            
            $
            149,877
            
            $
            153,986Net
                earnings
            
            
            25,990
            
            
            32,585
            
            
            50,118
            
            
            49,778Per
                unit
                basic
            
            
            0.43
            
            
            0.53
            
            
            0.81
            
            
            0.80Per
                unit
                diluted
            
            $
            0.41
            
            $
            0.53
            
            $
            0.79
            
            $
            0.78






*2006
              Annual Report - Vermilion Energy Trust*
            **2**





**QUARTERLY
      RESULTS**




The
      increase in
      revenue and earnings in the first and second quarter of 2006 compared to the
      first and second quarter of 2005 is the
      result of
      higher oil prices in the period. In the third and fourth quarter, the
      acquisition of Esso Rep was offset by lower gas prices in 2006. Fourth quarter
      earnings were lower due to increased foreign exchange losses and increased
      compensation expense.




**FOURTH
      QUARTER 2006**




Revenue
      for the
      three months ended December 31, 2006 increased 1% over the three months ended
      December 31, 2005. WTI remained
      virtually
      unchanged for the fourth quarter of 2006 over the fourth quarter of 2005 and
      AECO decreased 40% in the same
      period.
      Earnings decreased significantly due mostly to an increase in foreign exchange
      loss, an increase in depletion, depreciation
      and
      accretion expense and unit compensation expense.




**OPERATIONAL
      ACTIVITIES**




**Canada**




In
      Canada, the
      Trust participated in the drilling of 81 wells (54.1 net) resulting in 44 gas
      wells (28.1 net), 3 abandoned holes (1.7 net)
      and 34
      standing wells (24.3 net) awaiting further evaluation and tie-in. The total
      wells include 48 CBM and shallow gas wells (38.6
      net) which
      continue to achieve a 100% success rate.




**France**




In
      France,
      Vermilion drilled and completed four new La Torche wells with mixed outcomes.
      Further evaluation of the results indicates the need to patiently develop these
      properties to achieve maximum impact. While the recent successful recompletion
      of the Conquille 1 well, which lies approximately five kilometers east of the
      nearest producer, confirms the aerial extent of this type of reservoir, the
      geologic complexity suggests that stepping out too far from successful producers
      raises the risk of the program.
      Accordingly, the wells scheduled in 2007 are being drilled in closer proximity
      to past successes.




Early
      in July 2006,
      Vermilion acquired control of 100% of Esso Rep in France. Subsequent to the
      date
      of acquisition, Esso Rep was renamed Vermilion Emeraude Rep SAS. The acquisition
      provided incremental production of approximately 3,900 boe/d of light, sweet
      crude oil. The acquired properties are situated in ten production concessions
      in
      the Paris and Aquitaine Basins. The two
      largest
      producing fields are at Chaunoy (Paris Basin) and Cazaux (Aquitaine Basin),
      which together represent approximately 65%
      of the acquired
      production. Base decline rates from the properties are about 12% annually,
      with
      operating and cash flow netbacks
      similar to
      those received from Vermilion’s existing production in France.




Vermilion
      also
      began an active program to re-start shut-in producers, particularly in the
      Cazaux field in the Aquitaine Basin. A total of five wells were returned to
      production averaging approximately 150 bbls/d per well. Until the transportation
      issues are resolved
      in
      southern France, further re-starts and recompletions at Cazaux will be
      deferred.




**Netherlands**




In
      the Netherlands,
      Vermilion submitted three drilling permits to regulatory authorities and
      received approvals for all three, now scheduled
      for
      mid-2007. Initial targets include two development wells in existing tight-gas
      reservoirs at Harlingen and a larger step-out
      prospect
      at DeBlesse. The Trust reactivated two shut-in gas wells, installed three
      additional velocity strings and performed
      stimulations on two producing wells in 2006. The engineering team is finalizing
      plans to optimize facilities at the Harlingen
      and
      Garijp gas treatment centres. Enhanced compression utilization at Garijp allowed
      Vermilion to reduce the number of
      compressors by
      one third at that location. At Harlingen, Vermilion plans to replace two large
      gas-turbine compressors with smaller,
      electric
      powered units, which will reduce total horsepower requirements by two-thirds
      and
      eliminate the use of produced gas
      to power this
      facility. The changes at Harlingen are scheduled for the second half of
      2007.




**Australia**




Vermilion
      completed
      the first phase of a significant expansion to the fluid handling capacity of
      the
      Wandoo platform in the fourth quarter
      of 2006.
      Production logs, used to determine the source of reservoir inflow, were
      performed on a number of wells last summer
      in
      preparation of a selective sub-surface workover program. Vermilion also
      experienced a high level of storm activity in early
      2006,
      enduring a number of direct cyclones ranging from Category 2 to Category 4
      storms. Vermilion’s personnel and facilities
      performed admirably through this difficult period that yielded no injuries
      and
      relatively minor damage.


*2006
                Annual Report - Vermilion Energy Trust*
              **3**
 
  **PRODUCTION**




Average
      production in Canada during 2006 was 4,011 bbls/d of oil and NGL’s and 41.0
      mmcf/d of natural gas compared to 4,870 bbls/d
      of oil and
      NGL’s and 38.4 mmcf/d of natural gas in 2005. Fourth quarter 2006 production
      averaged 3,752 bbls/d of oil and natural
      gas liquids
      and 42.0 mmcf/d of natural gas representing an annual decline of less than
      3%
      compared to the fourth quarter of
      2005. Canadian
      production is expected to experience modest growth in 2007.




Production
      in
      France averaged 7,800 boe/d in 2006, 37% higher than the 5,695 boe/d produced
      in
      2005, reflecting the acquisition of 3,900 boe/d in early July 2006. Fourth
      quarter production of 9,841 boe/d in 2006 compared to 6,096 boe/d produced
      in France
      during the fourth quarter of 2005, reflecting the full impact of the
      acquisition. While current production capacity
      is near
      10,000 boe/d, actual volumes in 2007 are expected to be slightly less, impacted
      by transportation issues in the Aquitaine
      Basin.




Production
      in the
      Netherlands averaged 4,943 boe/d in 2006 compared to 4,812 boe/d in 2005.
      Volumes in both years were impacted
      by low
      rates of take during the summer months, reflecting softer seasonal demand.
      Fourth quarter production in the Netherlands
      averaged 5,091 boe/d in 2006 compared with 5,214 boe/d during the same period
      in
      2005, reflecting normal production
      declines
      offset in part by a contract reallocation gain. A further 15% decline in
      production is projected for 2007, which could
      be offset by
      successful drilling operations and improved seasonal demand next summer. A
      recent pipeline expansion from the
      Netherlands to
      the UK could dampen the sharp drop in summer demand that the Trust has
      experienced over the past two years.




Australia
      production averaged 3,815 boe/d in 2006, compared to a full year average of
      3,391 in 2005. Volumes in 2005 reflected only nine months of production
      following the acquisition on March 31, 2005, while 2006 volumes were impacted
      by
      storm related shut-downs
      during
      the first quarter and operations related shut-downs in the second half of 2006.
      Production during the fourth quarter
      of 2006
      averaged 3,775 boe/d, compared to 4,294 boe/d during the same period in 2005.
      Much of the facility expansion work on the Wandoo platform was completed during
      the fourth quarter of 2006, requiring a temporary shut-down of production.
      Scheduled well interventions and additional facility modifications are expected
      to improve production from Australia in 2007.




**Year
                Ended December 31, 2006**
            
            
            **Year
              Ended December 31, 2005**
            
            
            **Year
              Ended December 31, 2004****Oil
                &**
            
            
            **Natural**
            
            
            
            
            
            **Oil
                &**
            
            
            **Natural**
            
            
            
            
            
            **Oil
                &**
            
            
            **Natural****NGLs**
            
            
            **Gas**
            
            
            **Total**
            
            
            **NGLs**
            
            
            **Gas**
            
            
            **Total**
            
            
            **NGLs**
            
            
            **Gas**
            
            
            **Total****(bbls/d**
            **)**
            
            **(mmcf/d**
            **)**
            
            **(boe/d**
            **)**
            
            **(bbls/d**
            **)**
            
            **(mmcf/d**
            **)**
            
            **(boe/d**
            **)**
            
            **(bbls/d**
            **)**
            
            **(mmcf/d**
            **)**
            
            **(boe/d**
            **)**Vermilion
                Energy TrustCanada
            **4,011**
            
            
            **40.99**
            
            
            **10,843**
            
            
            4,870
            
            
            38.39
            
            
            11,268
            
            
            5,723
            
            
            46.38
            
            
            13,453France3
            **7,576**
            
            
            **1.35**
            
            
            **7,800**
            
            
            5,478
            
            
            1.30
            
            
            5,695
            
            
            5,763
            
            
            1.53
            
            
            6,018Netherlands1
            **31**
            
            
            **29.47**
            
            
            **4,943**
            
            
            28
            
            
            28.70
            
            
            4,812
            
            
            13
            
            
            21.03
            
            
            3,519Australia2
            **3,815**
            
            
            **-**
            
            
            **3,815**
            
            
            3,391
            
            
            -
            
            
            3,391
            
            
            -
            
            
            -
            
            
            -Total
            **15,433**
            
            
            **71.81**
            
            
            **27,401**
            
            
            13,767
            
            
            68.39
            
            
            25,166
            
            
            11,499
            
            
            68.94
            
            
            22,990




1
      Effective from May 19th, 2004


2
      Effective from March 31, 2005


3
      Vermilion Emeraude Rep SAS effective from July 10, 2006




**2006
                Quarterly Production (boe/d)**
            
            
            **Q1**
            
            
            **Q2**
            
            
            **Q3**
            
            
            **Q4**Canada
            
            
            10,919
            
            
            10,883
            
            
            10,823
            
            
            10,745France1
            
            
            5,822
            
            
            6,006
            
            
            9,472
            
            
            9,841Netherlands
            
            
            5,870
            
            
            4,646
            
            
            4,183
            
            
            5,091Australia
            
            
            3,630
            
            
            3,917
            
            
            3,933
            
            
            3,775Total
            
            
            26,241
            
            
            25,452
            
            
            28,411
            
            
            29,452


1  Vermilion
      Emeraude
      Rep SAS effective from July 10, 2006




**2005
                Quarterly Production (boe/d)**
            
            
            **Q1**
            
            
            **Q2**
            
            
            **Q3**
            
            
            **Q4**Canada
            
            
            11,978
            
            
            10,996
            
            
            11,075
            
            
            11,035France
            
            
            5,559
            
            
            5,260
            
            
            5,856
            
            
            6,096Netherlands
            
            
            5,225
            
            
            3,789
            
            
            5,018
            
            
            5,214Australia1
            
            
            -
            
            
            4,498
            
            
            4,710
            
            
            4,294Total
            
            
            22,762
            
            
            24,543
            
            
            26,659
            
            
            26,639


1
      Effective from March 31, 2005




*2006
                Annual Report - Vermilion Energy Trust*
              **4**
 
  **CAPITAL
      EXPENDITURES**




Capital
      spending for the year totaled $332.8 million compared to $300.1 million spent
      in
      2005. Of this total, approximately $169.4
      million
      relates to the acquisition in France, $26.4 million relates to a number of
      minor
      property acquisitions with the remainder
      spent on
      drilling and development activities.




**Capital
                Expenditures ($000’s)**
            
            
            **2006**
            
            
            **2005**
            
            
            **2004**Land
            
            **$**
            **2,025**
            
            $
            2,233
            
            $
            493Seismic
            
            
            **2,555**
            
            
            12,116
            
            
            787Drilling
                and
                completion
            
            
            **48,559**
            
            
            43,929
            
            
            34,469Production
                equipment and facilities
            
            
            **58,160**
            
            
            25,111
            
            
            15,757Recompletions
            
            
            **15,280**
            
            
            21,163
            
            
            9,999Capitalized
                exploration administration and other
            
            
            **10,360**
            
            
            8,978
            
            
            5,754Drilling
                and
                development expenditures
            
            
            **136,939**
            
            
            113,530
            
            
            67,259Property
                acquisitions (dispositions)
            
            
            **26,435**
            
            
            94,967
            
            
            93,990Corporate
                acquisitions
            
            
            **169,445**
            
            
            91,613
            
            
            -**$**
            **332,819**
            
            $
            300,110
            
            $
            161,249**Capital
                Expenditures by Country ($000’s)**
            
            
            **2006**
            
            
            **2005**
            
            
            **2004**Canada
            
            **$**
            **111,216**
            
            $
            141,022
            
            $
            31,722France
            
            
            **209,364**
            
            
            50,649
            
            
            35,028Netherlands
            
            
            **3,673**
            
            
            12,434
            
            
            94,499Australia
            
            
            **8,566**
            
            
            96,005
            
            
            -**$**
            **332,819**
            
            $
            300,110
            
            $
            161,249




**FINANCIAL
      REVIEW**




The
      Trust (excluding Verenex Energy Inc. “Verenex”) generated funds from operations
      of $342.5 million ($4.86 per unit) in the year ended December 31, 2006 compared
      to $277.2 million ($4.07 per unit) in 2005. The full year distributions in
      2006
      totaled $130.6
      million
      ($2.04 per unit) compared to $126.2 million in 2005. This represents a payout
      ratio of approximately 38% of total cash
      flow before
      the impact of the Trust’s distribution reinvestment program (“DRIP”), which
      generated $18.8 million of cash to the Trust as unitholders reinvested their
      monthly distributions in additional units of the Trust at 95% of the weighted
      average trading price. After accounting for the DRIP, the resulting distribution
      net payout ratio in 2006 was 33%.




Development
      capital
      expenditures during the year ended 2006 was $136.9 million. Vermilion continued
      to take advantage of strong
      cash flow
      driven by high commodity prices to inject a further $9.6 million into the
      Trust’s reclamation fund during the year, increasing
      the fund
      balance to $56.4 million, which represents 44% of the present value of the
      Trust’s asset retirement obligations.
      Vermilion is committed to maintaining a source of funds available for
      abandonment and reclamation activities, such that
      future
      distribution and capital program decisions will not be impacted by these
      liabilities. Vermilion’s net debt as of December
      31, 2006
      was $355 million, approximately 1.0 times trailing cash flow.




**CASH
      FLOW
      NETBACKS**




Cash
      flow was $342.5 million in 2006, up from $278.2 million in 2005. A higher
      average wellhead price was recorded in 2006 as a
      result of a 17%
      increase in average WTI pricing compared with 2005, offset by a decrease in
      gas
      prices. Cash flow also increased
      year over
      year due to a decrease in hedging costs.




**2006
                Cash Flow ($/boe)**
            
            
            **Q1**
            
            
            **Q2**
            
            
            **Q3**
            
            
            **Q4**
            
            
            **2006**
            
            
            **2005**
            
            
            **2004**Oil
                and gas
                revenues
            
            $
            62.37
            
            $
            63.80
            
            $
            64.00
            
            $
            57.47
            
            **$**
            **61.80**
            
            $
            57.94
            
            $
            43.21Realized
                hedging (losses) gain
            
            
            (0.04
            )
            
            (0.13
            )
            
            (0.17
            )
            
            0.23
            
            
            **(0.02**
            **)**
            
            (4.46
            )
            
            (3.73
            )Royalties
                (net)
            
            
            (10.02
            )
            
            (9.45
            )
            
            (8.29
            )
            
            (9.23
            )
            
            **(9.22**
            **)**
            
            (9.54
            )
            
            (7.54
            )Transportation
            
            
            (1.04
            )
            
            (1.07
            )
            
            (1.06
            )
            
            (1.03
            )
            
            **(1.05**
            **)**
            
            (0.99
            )
            
            (1.17
            )Lifting
                costs
            
            
            (8.62
            )
            
            (9.25
            )
            
            (10.03
            )
            
            (10.52
            )
            
            **(9.65**
            **)**
            
            (7.89
            )
            
            (6.63
            )Operating
                netbacks
            
            
            42.65
            
            
            43.90
            
            
            44.45
            
            
            36.92
            
            
            **41.86**
            
            
            35.06
            
            
            24.14General
                and
                administration
            
            
            (1.29
            )
            
            (1.66
            )
            
            (2.12
            )
            
            (1.27
            )
            
            **(1.58**
            **)**
            
            (1.43
            )
            
            (1.59
            )Interest
            
            
            (0.99
            )
            
            (1.44
            )
            
            (1.65
            )
            
            (2.50
            )
            
            **(1.68**
            **)**
            
            (0.69
            )
            
            (0.37
            )Current
                and
                capital taxes
            
            
            (5.66
            )
            
            (6.83
            )
            
            (4.96
            )
            
            (0.27
            )
            
            **(4.29**
            **)**
            
            (2.71
            )
            
            (2.03
            )Foreign
                exchange
            
            
            0.29
            
            
            (0.80
            )
            
            0.02
            
            
            0.18
            
            
            **(0.06**
            **)**
            
            (0.08
            )
            
            0.04Cash
                flow
                netbacks
            
            $
            35.00
            
            $
            33.17
            
            $
            35.74
            
            $
            33.06
            
            **$**
            **34.25**
            
            $
            30.15
            
            $
            20.19




*2006
                Annual Report - Vermilion Energy Trust*
              **5**


**2005
                Cash Flow ($/boe)**
            
            
            **Q1**
            
            
            **Q2**
            
            
            **Q3**
            
            
            **Q4**Oil
                and gas
                revenues
            
            $
            53.36
            
            $
            52.90
            
            $
            61.42
            
            $
            62.87Realized
                hedging losses
            
            
            (3.98
            )
            
            (4.29
            )
            
            (5.13
            )
            
            (4.36
            )Royalties
                (net)
            
            
            (7.01
            )
            
            (9.40
            )
            
            (10.37
            )
            
            (10.94
            )Transportation
            
            
            (1.43
            )
            
            (0.96
            )
            
            (0.82
            )
            
            (0.81
            )Lifting
                costs
            
            
            (7.52
            )
            
            (8.52
            )
            
            (7.54
            )
            
            (7.99
            )Operating
                netbacks
            
            
            33.42
            
            
            29.73
            
            
            37.56
            
            
            38.77General
                and
                administration
            
            
            (1.58
            )
            
            (1.65
            )
            
            (1.16
            )
            
            (1.39
            )Interest
            
            
            (0.47
            )
            
            (0.54
            )
            
            (0.78
            )
            
            (0.90
            )Current
                and
                capital taxes
            
            
            (3.40
            )
            
            (3.12
            )
            
            (3.95
            )
            
            (0.52
            )Foreign
                exchange
            
            
            (0.08
            )
            
            (0.06
            )
            
            (0.13
            )
            
            (0.05
            )Cash
                flow
                netbacks
            
            $
            27.89
            
            $
            24.36
            
            $
            31.54
            
            $
            35.91




**REVENUE**




Total
      revenues for 2006 were $618.1 million compared to $529.9 million in 2005.
      Vermilion’s combined crude oil & NGL price was
      $73.71 per bbl
      in 2006, an increase of 14% over the $64.79 per bbl reported in 2005. The
      natural gas price realized in 2006 was $7.74 per mcf compared to $8.28 per
      mcf
      realized a year ago, a 7% year-over-year decrease.




In
      the
      following chart, “Derivative instruments” is the amortization of the fair value
      loss of Vermilion’s hedges in place as of January
      1,
      2004.




**Year
              Ended December 31****($000’S
                EXCEPT PER BOE)**
            
            
            **2006**
            
            
            **2005**Crude
                oil
                & NGL’s
            
            **$**
            **415,245**
            
            $
            326,754Per
                boe
            
            **$**
            **73.71**
            
            $
            64.79Natural
                gas
            
            
            **202,827**
            
            
            207,902Per
                mcf
            
            **$**
            **7.74**
            
            $
            8.28Combined
            
            
            **618,072**
            
            
            534,656Derivative
                instruments
            
            
            **-**
            
            
            (4,718
            )Petroleum
                and
                natural gas revenue
            
            **$**
            **618,072**
            
            $
            529,938Per
                boe
            
            **$**
            **61.80**
            
            $
            57.94




**DERIVATIVE
      INSTRUMENTS**




Vermilion
      continues
      to manage its risk exposure through prudent commodity and currency economic
      hedging strategies. Vermilion
      has the
      following collars and puts in place at the end of 2006:




**Risk
                Management: Oil**
            
            
            **Funded
                Cost**
            
            
            **bbls/d**
            
            **$**
            **US/bbl**Collar
                -
                WTI2007
            
            
            US$1.00/bbl
            
            
            500
            
            
            $60.00
                - $77.30Q1
                2007
            
            
            costless
            
            
            250
            
            
            $58.00
                - $83.85Q1
                2007
            
            
            US$0.11/bbl
            
            
            250
            
            
            $65.00
                - $90.00Q1
                2007
            
            
            US$0.06/bbl
            
            
            500
            
            
            $70.00
                - $90.00Q2
                2007
            
            
            US$0.50/bbl
            
            
            500
            
            
            $61.70
                - $90.00Put2007
            
            
            US$1.27/bbl
            
            
            250
            
            
            $57.05Collar
                -
                BRENTQ3
                2007
            
            
            US$0.88/bbl
            
            
            500
            
            
            $60.00
                - $90.00Q4
                2007
            
            
            US$0.70/bbl
            
            
            500
            
            
            $60.00
                - $89.00Call
                Spread -
                BRENT2009
                -
                2011
            
            
            US$5.73/bbl
            
            
            700
            
            
            $65.00
                - $85.00




*2006
                Annual Report - Vermilion Energy Trust*
              **6**


**Risk
                Management: Natural Gas**
            **Funded
                Cost**
            **GJ/d**
            **C$/GJ**CollarQ2
                2007
            $0.35/GJ
            2,500
            $6.50
                -
                $7.85Q2
                2007
            $0.25/GJ
            2,500
            $6.25
                -
                $7.96April-October
                2007
            $0.02/GJ
            2,500
            $6.50
                -
                $9.00PutQ1
                2007
            $0.34/GJ
            4,000
            $6.37Q1
                2007
            $0.34/GJ
            3,000
            $6.60Q1
                2007
            $0.34/GJ
            3,000
            $6.44




The
      impact of Vermilion’s hedging program reduced cash netbacks by $0.02 per boe on
      a combined basis for 2006 compared to an
      economic hedging
      cost of $4.46 per boe in 2005. Oil hedging resulted in a $1.3 million cost
      for
      2006 or $0.13 per boe. For 2005,
      oil hedging
      resulted in a $41.6 million cost for the year or $4.51 per boe. Gas hedging
      costs were negligible in the year.




**ROYALTIES**




Total
      royalties, net of ARTC, decreased to $9.22 per boe in 2006 or 15% of sales
      compared with $9.54 per boe in 2005 or 17% of
      sales. The
      decrease is due to the impact of lower gas prices. In France, royalties for
      the
      most part are calculated on a unit of production
      basis
      and rates do not react to price changes, therefore as prices increase, the
      royalties, as a percentage of sales, decline.
      In
      Australia, royalties are reduced by capital reinvestment in the country. For
      2006, Vermilion’s capital program in Australia
      was
      minimal resulting in the Trust paying royalties at or near the maximum
      rate.




**($000’S
                EXCEPT PER BOE)**
            
            
            **Year
                Ended****2006**
            
            
            **December
                31 2005**Crude
                oil
                & NGL’s
            
            **$**
            **70,941**
            
            $
            61,322Per
                boe
            
            **$**
            **12.59**
            
            $
            12.16Natural
                gas
            
            
            **21,271**
            
            
            26,679Per
                mcf
            
            **$**
            **0.81**
            
            $
            1.06Combined
            
            **$**
            **92,212**
            
            $
            88,001Per
                boe
            
            **$**
            **9.22**
            
            $
            9.54




**OPERATING
      COSTS**




Operating
      costs
      increased to $9.65 per boe in 2006 from $7.89 per boe in 2005. The increase
      in
      the dollar amount of operating costs over 2005 reflects the inclusion of a
      full
      year of expenses related to higher cost assets in Australia which were acquired
      in the first quarter of 2005. In Canada, significant activity levels in the
      industry combined with increased energy costs, have placed an upward pressure
      on
      costs. When combined with a reduction in production volumes due primarily to
      plant turnarounds, year over
      year increases
      in costs per boe have resulted. In France, operating costs are up slightly
      due
      to the higher cost assets associated
      with the
      acquisition of Vermilion Emeraude Rep SAS. In the Netherlands, operating costs
      increased slightly due primarily to unplanned plant maintenance. Cost of
      operations in Australia are up significantly due to increased labour costs, unplanned
      diesel
      purchases for gas lift purposes and the effect of lower
      volumes.




**($000’S
                EXCEPT PER BOE)**
            
            
            **Year
                Ended****2006**
            
            
            **December
                31 2005**Crude
                oil
                & NGL’s
            
            **$**
            **54,494**
            
            $
            39,060Per
                boe
            
            **$**
            **9.67**
            
            $
            7.75Natural
                gas
            
            
            **41,998**
            
            
            33,796Per
                mcf
            
            **$**
            **1.60**
            
            $
            1.35Combined
            
            **$**
            **96,492**
            
            $
            72,856Per
                boe
            
            **$**
            **9.65**
            
            $
            7.89







*2006
              Annual Report - Vermilion Energy Trust*
            **7**





**TRANSPORTATION**




Transportation
      costs as presented in the statements of earnings are defined by the point of
      legal transfer of the product. Transportation
      costs are dependent upon where the product is sold, product split, location
      of
      properties, and industry transportation
      rates that are driven by supply and demand of available transport capacity.
      For
      Canadian gas production, legal title transfers at the intersection of major
      pipelines (referred to as “the Hub”) whereas the majority of Vermilion’s
      Canadian oil production is sold at the wellhead. The majority of Vermilion’s
      transportation costs are made up of shipping charges incurred in the Aquitaine
      Basin in France where oil production is transported by tanker from the Ambès
      terminal in Bordeaux to Donges, France.
      In
      Australia, oil is sold at the Wandoo B platform and in the Netherlands gas
      is
      sold at the plant gate, resulting in no transportation
      costs relating to Vermilion’s production in these countries.




The
      increase in transportation costs in the year is due to the purchase of Vermilion
      Emeraude Rep SAS as the resulting incremental
      volumes
      are transported by tanker in France.




**($000’S
                EXCEPT PER BOE)**
            
            
            **Year
                Ended****2006**
            
            
            **December
                31 2005**Transportation
            
            **$**
            **10,504**
            
            $
            9,136Per
                boe
            
            **$**
            **1.05**
            
            $
            0.99




**GENERAL
      AND
      ADMINISTRATION EXPENSE**




General
      and administration expense for the year increased to $1.58 per boe in 2006
      from
      $1.43 per boe in 2005. The increase per boe is primarily a result of increased
      staffing levels combined with increased staff retention costs and increased
      regulatory compliance
      costs
      year over year.




**($000’S
                EXCEPT PER BOE)**
            
            
            **Year
                Ended****2006**
            
            
            **December
                31 2005**General
                and
                administration
            
            **$**
            **15,839**
            
            $
            13,241Per
                boe
            
            **$**
            **1.58**
            
            $
            1.43




**UNIT
      COMPENSATION EXPENSE**




A
      non-cash trust unit compensation expense of $2.44 per boe was recorded in 2006
      compared to $1.52 per boe in 2005. This non-cash amount relates to the value
      attributable to long-term incentives granted to officers, directors and
      employees under the Trust Unit Rights Incentive Plan (“Unit Rights Plan”) and
      the Trust Unit Award Plan (“Award Plan”).




The
      year
      over year increase reflects the transition from the Unit Rights Plan to the
      Award Plan. Vermilion finished in the top quartile
      of its
      peer group in 2006 based on total returns which effectively doubles the units
      received under the Award Plan in the year.




In
      September 2006, the Board of Directors approved a new long-term incentive plan
      for certain employees not eligible to participate in the Award Plan, which
      provides for cash payments based on the fair 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. Awards granted in 2006
      will vest over
      three years.




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.
      Expense
      associated with this unit based compensation plan is excluded from unit
      compensation expense on the statements
      of
      earnings and the table below.




**($000’S
                EXCEPT PER BOE)**
            
            
            **Year
                Ended****2006**
            
            
            **December
                31 2005**Unit
                compensation expense
            
            **$**
            **24,383**
            
            $
            14,000Per
                boe
            
            **$**
            **2.44**
            
            $
            1.52





*2006
                Annual Report - Vermilion Energy Trust*
              **8**
 
  **INTEREST
      EXPENSE**




Interest
      expense increased to $1.55 per boe in 2006 from $0.69 per boe in 2005 as a
      result of higher average debt levels. Debt levels
      are higher
      in 2006 primarily stemming from the purchase of the Australia assets in the
      first quarter of 2005, the Glacier acquisition in December 2005 and the
      acquisition of Vermilion Emeraude Rep SAS in July of 2006. The Trust’s interest
      rates have
      remained
      steady over the year.




**($000’S
                EXCEPT PER BOE)**
            
            
            **Year
                Ended****2006**
            
            
            **December
                31 2005**Interest
            
            **$**
            **15,433**
            
            $
            6,331Per
                boe
            
            **$**
            **1.55**
            
            $
            0.69




**DEPLETION,
      DEPRECIATION AND ACCRETION EXPENSE**




Depletion,
      depreciation and accretion expense increased to $16.23 per boe in 2006 from
      $13.23 per boe in 2005. The increase is
      due mainly to
      the increase of finding and development costs in Canada and France and the
      increase in the asset retirement obligation
      resulting primarily from the France acquisition.




**($000’S
                EXCEPT PER BOE)**
            
            
            **Year
                Ended****2006**
            
            
            **December
                31 2005**Depletion,
                depreciation and accretion
            
            **$**
            **162,254**
            
            $
            122,098Per
                boe
            
            **$**
            **16.23**
            
            $
            13.23




**TAXES**




The
      Trust’s current tax provision has increased to $4.29 per boe in 2006 from $2.71
      per boe in 2005 and is due primarily to higher
      commodity
      prices in the taxable jurisdictions. The recovery in future income taxes is
      a
      result of the taxable portion of distribution
      payments made to unitholders. In the Trust’s structure, payments are made
      between the operating company and the Trust
      transferring
      both income and future income tax liability to the unitholder. Therefore it
      is
      the opinion of management that no cash
      income taxes
      in Canada are expected to be paid by the operating company in the future, and
      as
      such, the future income tax liability
      recorded
      on the balance sheet related to Canadian operations will be recovered through
      earnings over time.




On
      October 31, 2006, the Canadian federal government announced plans to introduce
      a
      tax on publicly traded income trusts. The
      proposed
      changes, assuming they are enacted, would not take effect until January 1,
      2011,
      provided the Trust experiences only “normal growth” and no “undue expansion”
before then. The government has defined “normal growth” parameters, relative to
      the
      market capitalization of the Trust’s issued and outstanding publicly-traded
      trust units as of October 31, 2006. For the period
      from
      November 1, 2006 to December 31, 2007, a trust’s permitted or “safe harbour”
growth amount will be 40% of the October
      31, 2006
      market capitalization benchmark and for each of the years 2008 through and
      including 2010 will be 20% of the benchmark,
      cumulatively allowing growth of up to 100% until 2011. In addition, we
      understand that trusts may be able to issue equity
      to retire
      debt existing on October 31, 2006 without eroding their safe harbour limits.
      Vermilion’s estimated market capitalization
      as
      defined by the government, was $2.4 billion at October 31, 2006 and outstanding
      indebtedness was approximately
      $400
      million.




The
      overall impact on Vermilion of the proposed change will not be determinable
      at
      least until the final legislation is enacted. Our interpretation
      of
      the existing proposal suggests that Vermilion may be able to mitigate the
      contemplated distribution tax. Currently,
      Vermilion’s foreign operations generate after tax cash flow and subsequently
      declare and pay dividends which do not attract
      additional
      taxes when received in Canada. We anticipate being able to flow through this
      dividend income to unitholders as
      part of the
      normal distributions paid and not attract the proposed distribution tax on
      that
      portion of distributions made up of this dividend
      income. In
      addition, Vermilion has increased the return on capital or taxable portion
      of
      its distribution for 2006 to 100% in order to preserve the tax basis it would
      have utilized to declare a portion of the 2006 distribution as a return of
      capital or tax deferred.
      The Trust
      expects that it will continue with this practice through 2010 to preserve the
      tax basis during the interim period
      prior to the
      implementation of the new rules. Under the proposed legislation commencing
      in
      2011, that portion of the distribution
      that
      represents a return of capital will not attract the distribution
      tax.




The
      foregoing discussion on the proposed legislation is a general assessment of
      the
      impact on Vermilion and is not meant to be exhaustive or definitive. The impact
      of the recent proposals on Vermilion will not be known, however, until the
      government has enacted
      final
      legislation.


*2006
                Annual Report - Vermilion Energy Trust*
              **9**


****Year
              Ended**December 31****($000’S
                EXCEPT PER BOE)**
            
            
            **2006**
            
            
            **2005**Current
                and
                capital tax
            
            **$**
            **42,876**
            
            $
            25,007Per
                boe
            
            **$**
            **4.29**
            
            $
            2.71




**FOREIGN
      EXCHANGE**




A
      combined realized and unrealized foreign exchange loss of $1.30 per boe was
      recorded in 2006 with a gain of $1.16 per boe in
      2005. The loss
      for the year ended December 31, 2006 is mostly due to the impact of the
      weakening of the Canadian dollar on foreign
      currency
      denominated liabilities.




**Year
                Ended December 31****($000’S
                EXCEPT PER BOE)**
            
            
            **2006**
            
            
            **2005**Foreign
                exchange loss (gain)
            
            **$**
            **12,997**
            
            $
            (10,727
            )Per
                boe
            
            **$**
            **1.30**
            
            $
            (1.16
            )




**EARNINGS**




Net
      earnings from continuing operations in the year decreased to $146.9 million
      or
      $2.30 per unit from $158.5 million or $2.57 per
      unit in 2005.
      The decrease in earnings is due mainly to increased compensation expense and
      an
      increase in foreign exchange
      loss.




**LIQUIDITY
      AND CAPITAL RESOURCES**




Vermilion’s debt
      (net of working capital) on December 31, 2006 was $354.8 million. As at December
      31, 2006, the Trust had an unsecured
      covenant
      based revolving credit facility in the amount of $500 million. The revolving
      period under the term loan is expected
      to expire
      in July 2007 and may be extended for an additional period of up to 364 days
      at
      the option of the lender. If the lenders
      convert the
      revolving credit facility to a non-revolving credit facility, the amounts
      outstanding under the facility become repayable 12 months after the end of
      the
      revolving period. Various borrowing options are available under the facility
      including prime
      rate based
      advances and bankers’ acceptance loans.




**Liquidity
                and Capital Resources**
            
            
            **2006**
            
            
            **2005**
            
            
            **2004**Debt
                and
                working capital ($m)
            
            $
            354,809
            
            $
            245,430
            
            $
            84,686Bank
                facility
                ($m)
            
            $
            500,000
            
            $
            410,000
            
            $
            240,000Unused
                bank
                facility ($m)
            
            $
            145,191
            
            $
            164,570
            
            $
            155,314Debt-to-cash-flow
                ratio1
            
            
            1.04
            
            
            0.88
            
            
            0.50Debt-to-equity
                ratio1
            
            
            0.66
            
            
            0.54
            
            
            0.22


1
      Debt
      includes working capital




Vermilion
      has a
      long-term and short-term need for capital. Short-term working capital will
      be
      required to finance accounts receivable,
      crude
      oil inventory and other similar short-term assets. Short-term capital may also
      be used from time to time to fund cash
      distributions
      to maintain consistent monthly cash distributions to unitholders of the Trust.
      However, the acquisition and development of petroleum and natural gas properties
      requires large amounts of long-term capital. There are essentially three components
      in
      financing the capital needs of Vermilion: debt, equity and internally generated
      cash.




There
      is
      currently an active market for the equity financing of Canadian resource trusts.
      Accordingly, any future significant acquisition
      of
      producing properties is expected to be financed through additional bank debt
      combined with the issuance of trust units.




Internally
      generated cash is used primarily for distributions, internal capital
      requirements and contributions to the Trust’s reclamation
      fund.
      Internal cash flow is significantly influenced by commodity prices. Other risks
      include exchange rates, interest rates
      and marketing
      opportunities, among others. For a thorough discussion of these risks and how
      they are managed by Vermilion,
      please
      see the section on Risk Management.




*2006
                Annual Report - Vermilion Energy Trust*
              **10**
 
  **RECLAMATION
      FUND**




Vermilion
      has
      established a reclamation fund for the ultimate payment of environmental and
      site restoration costs on its asset base.
      The
      reclamation fund will be funded by Vermilion Resources Ltd. and/or its operating
      subsidiaries. Additions in 2006 totalled
      $9.6
      million. Contribution levels to the reclamation fund are reviewed on a regular
      basis and are adjusted when necessary
      to ensure
      reclamation obligations associated with the Trust’s assets will be substantially
      funded when the costs are forecast
      to be
      incurred.




**ASSET
      RETIREMENT OBLIGATION**




At
      December 31,
      2006, Vermilion had recorded an asset retirement obligation of $127.5 million
      for future abandonment and reclamation
      of its
      properties compared to $70.2 million in 2005. The increase is primarily due
      to
      the liabilities recorded related to the
      acquisition in
      France and adjustment to previous abandonment estimates related to the Trust’s
      existing Netherlands and France
      operations.




**DISTRIBUTIONS**




Vermilion
      maintained monthly distributions at $0.17 per unit for the year distributing
      a
      total of $130.6 million compared to $126.2 million
      in 2005
      before the impact of the Trust’s DRIP program. Vermilion has maintained its
      distributions at $0.17 per month since
      its
      conversion to a trust, resulting in 47 continuous months of distributions at
      this level to the end of 2006. Of the distributions
      paid
      in the year, approximately 100% will be taxed in the hands of taxable Canadian
      unitholders’ as other income. The
      Trust defines
      distributable income as funds from operations. For 2006, the Trust has paid
      out
      38% of its distributable income
      (46% in
      2005) before taking into account the Trust’s DRIP program.




**UNITHOLDERS’
      EQUITY**




During
      the year
      approximately 2.2 million units were issued pursuant to the terms of the Trust’s
      bonus plan, unitholders’ participation
      in
      the distribution reinvestment plan, the conversion of exchangeable shares and
      unit rights exercised. Unitholders’ capital
      increased
      during the year by $37.8 million as a result of the issuance of those units
      and
      $8.4 million as a result of contributed
      surplus
      transfer on exercise of unit rights. This increase in equity was offset by
      cash
      distributions of $130.6 million in the
      year.




**NON-CONTROLLING
      INTEREST - EXCHANGEABLE SHARES**




The
      Trust has recorded non-controlling interest attributed to the issued and
      outstanding exchangeable shares in accordance with accounting requirements
      pursuant to EIC-151, “Exchangeable Securities Issued by Subsidiaries of Income
      Trusts” (see Note 2 of the
      consolidated
      financial statements for further discussion). The intent of this standard is
      that exchangeable shares of a subsidiary
      which
      are transferable to third parties, outside of the consolidated entity, represent
      a non-controlling interest in the subsidiary.




The
      exchangeable shares are mandatorily converted into trust units upon redemption
      by the exchangeable shareholder. Vermilion
      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
      non-controlling interest in 2006 of $51.8 million ($38.8 million in 2005) on
      the
      consolidated balance sheet represents the book
      value of
      exchangeable shares plus accumulated earnings attributable to the outstanding
      exchangeable shares. The reduction
      in 2006
      and 2005 net income, respectively, of $14.9 million and $14.4 million,
      represents the net income attributable to the exchangeable shareholders. 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.




As
      at
      December 31, 2006 there were 4.5 million exchangeable shares outstanding at
      exchange ratio of 1.46741 whereby 6.5 million
      trust units
      would be issuable upon conversion.


*2006
                Annual Report - Vermilion Energy Trust*
              **11**
 
  **RISK
      MANAGEMENT**




Crude
      oil and natural gas exploration, production, acquisition and marketing
      operations involve a number of risks. These risks include
      operational
      fluctuations in commodity prices, exchange rates, interest rates, exploration
      uncertainties, product demand, transportation
      restrictions and governmental regulatory changes.




Vermilion
      considers
      its commodity price risk management program as a form of insurance that protects
      its cash flow and rate of return.
      The primary
      objective of the risk management program is to support Vermilion’s distributions
      and its internal capital development program. Maintenance of a strong financial
      position and a stable cash flow stream through the development of long-life
      reserves
      is key to mitigating business risks.




To
      manage the adverse impact of significant movements in commodity prices, exchange
      rates and interest rates, Vermilion uses over-the-counter
      financial structures as well as fixed/collar structures as a part of physical
      natural gas sales. Vermilion has strict controls and guidelines in place and
      enacts transactions only with counter parties that have high credit
      ratings.




Vermilion
      maintains
      an insurance program consistent with industry practice to protect against losses
      from accidental destruction of
      assets, well
      blowouts, pollution and other potential business interruptions.




**CURRENCY
      RISK**




Vermilion’s primary
      exposure to currency risk comes from a revenue stream that is denominated in
      U.S. dollars. Vermilion’s exposure to fluctuations in the Euro and Australian
      dollar is limited primarily to reinvestment and repatriation of funds and forward-sale
      contracts can be used to mitigate these risks. The remaining cash flow from
      Vermilion’s international operations is reinvested
      in each
      country, creating a natural hedge to the working capital and cash flow stream
      when they are converted to Euros
      and
      Australian dollars.




**CRITICAL
      ACCOUNTING ESTIMATES**




The
      amounts recorded for depletion and depreciation of property, plant and equipment
      and the provision for future asset retirement
      obligations are based on estimates. The ceiling test calculation is based on
      estimates of proved reserves, production rates,
      oil and
      natural gas prices, future costs and other relevant assumptions. 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.




**SENSITIVITIES**




Crude
      oil and natural gas prices may change significantly because of factors Vermilion
      cannot control. The following table provides
      a summary
      of estimated sensitivities to price fluctuations for pro-forma production levels
      and expenses for the year ended
      December 31,
      2007.




**Cash
                Available for Distributions**
            
            
            **Cash
                Available****Per
                Unit and Exchangeable Shares**
            
            
            **for
                Distributions**Change
                in
                crude oil price by Cdn$1.00/bbl
            
            $
            0.06
            
            $
            4.2
                millionChange
                in
                natural gas price by Cdn$0.10/mcf
            
            $
            0.02
            
            $
            1.3
                millionChange
                in
                interest rate by one point
            
            $
            0.03
            
            $
            2.0
                millionChange
                in
                Cdn/U.S. foreign exchange rate by one point
            
            $
            0.05
            
            $
            3.5
                millionChange
                in
                Cdn/Euro foreign exchange rate by one point
            
            $
            0.01
            
            $
            0.8
                million




**OFF
      BALANCE
      SHEET ARRANGEMENTS**




The
      Trust has certain lease agreements that are entered into in the normal course
      of
      operations. All leases are operating leases whereby
      the lease
      payments are included in operating expenses or G&A expenses depending on the
      nature of the lease. No asset
      or liability
      value has been assigned to these leases in the balance sheet as of December
      31,
      2006.




The
      Trust has not entered into any guarantee or off balance sheet arrangements
      that
      would adversely impact the Trust’s financial
      position
      or results of operations.


*2006
                Annual Report - Vermilion Energy Trust*
              1**2**
 
  **ENVIRONMENT,
      HEALTH AND SAFETY**




Vermilion
      remains
      committed to conducting its activities in an environmentally responsible manner,
      protecting the health and safety of its employees and the public in every
      country in which it operates. It is a condition of employment that Vermilion
      personnel work safely and in accordance with established regulations and
      procedures.




In
      2006,
      Vermilion remained committed to the principles of the Environment, Health and
      Safety Stewardship Program set out by the Canadian Association of Petroleum
      Producers (CAPP). This voluntary initiative promotes continual improvement
      in
      the areas of environment, health and safety performance, supplemented by
      progress reports to stakeholders.




Vermilion
      continued
      its commitment to protect land, water and air, as policies and procedures,
      demonstrating leadership in these areas,
      were
      maintained and further developed in 2006. Examples of accomplishments during
      the
      year included:




• Reducing
      long-term
      environmental liabilities through decommissioning, abandoning and reclaiming
      well leases and facilities;


• Monitoring
      long-term liabilities through regular inspections;


• Continuing
      reductions in flaring and greenhouse gas emissions;


• Minimizing
      waste
      products by reducing, recycling and recovering; and


• Continuing
      risk
      management efforts with detailed emergency-response planning.




Vermilion
      is a
      member of several organizations concerned with environment, health and safety,
      including the Western Canadian Air
      Shed and
      numerous area co-operatives. In the area of stakeholder relations, Vermilion
      works to build long-term relationships with
      environmental
      stakeholders and communities.




**RECENT
      CANADIAN ACCOUNTING AND RELATED PRONOUNCEMENTS**




***Convergence
      of Canadian GAAP with International Financial Reporting
      Standards***




In
      2006, Canada’s
      Accounting Standards Board ratified a strategic plan that will result in
      Canadian GAAP, as used by public entities,
      being
      converged with International Financial Reporting Standards over a transitional
      period. The Accounting Standards Board is expected to develop and publish a
      detailed implementation plan with a transition period expected to be
      approximately five years. This convergence initiative is in its early stages
      as
      of the date of these annual consolidated financial statements and the
      Trust also has
      the option to adopt U.S. GAAP at any time prior to the expected conversion
      date.
      Accordingly, it would be premature to assess the impact of the initiative,
      if
      any, on the Trust at this time.




***Financial
      Instruments, Comprehensive Income and Hedges***




The
      Accounting
      Standards Board (AcSB) has issued five new accounting standards relating to
      the
      recognition, measurement, disclosure
      and
      presentation of financial instruments. The new standards comprise five handbook
      sections:




*CICA
      Section
      3855 - Financial Instruments - Recognition and Measurement*


This
      standard
      establishes the criteria for recognizing and measuring financial assets,
      financial liabilities and non-financial derivatives.
      Specifically, it requires that all financial assets be measured at fair value,
      with some exceptions such as loans and investments
      that
      are classified as held to maturity. All financial liabilities are measured
      at
      fair value if they are derivatives or classified as held for trading purposes
      and other financial liabilities are measured at their carrying value. Derivative
      financial instruments are measured at fair value, even when they are part of
      a
      hedging relationship.




*CICA
      Section
      3865 - Hedges*


This
      standard
      provides optional alternative treatment to Section 3855 for entities which
      choose to designate qualifying transactions
      as
      hedges for accounting purposes. It will replace Accounting Guideline 13 (AcG
      13)
      - *Hedging
      Relationships* ,
      and build on
      Section 1560 - *Foreign
      Currency Translation* ,
      by specifying how
      hedge accounting is applied and what disclosures are necessary
      when it
      is applied. Retroactive application of this Section is not
      permitted.




*CICA
      Section
      1530 - Comprehensive Income*


This
      standard
      introduces a new requirement to temporarily present certain gains and losses
      as
      part of a new earnings


measurement
      called
      comprehensive income.


*2006
                Annual Report - Vermilion Energy Trust*
              13
 
  *CICA
      Section
      3862 - Financial Instruments - Disclosures*


This
      standard
      requires entities to provide disclosures in their financial statements that
      enable users to evaluate the significance of financial instruments to the
      entity's financial position and performance. It also requires that entities
      disclose the nature and extent
      of risks
      arising from financial instruments and how the entity manages those
      risks.




*CICA
      Section
      3863 - Financial Instruments - Presentation*


This
      standard
      establishes presentation guidelines for financial instruments and non-financial
      derivatives and deals with the classification
      of
      financial instruments, from the perspective of the issuer, between liabilities
      and equity, the classification of related
      interest,
      dividends, losses and gains, and the circumstances in which financial assets
      and
      financial liabilities are offset.




CICA
      sections 3855,
      3865 and 1530 are effective for annual and interim periods in fiscal years
      beginning on or after October 1, 2006. Upon adoption of these sections the
      carrying value of the Trust's investments in publicly traded marketable
      securities will increase
      by
      approximately $7.2 million with the offset recorded to opening accumulated
      earnings. Future gains and losses associated
      with
      these investments will be reflected in net earnings.




CICA
      sections 3862
      and 3863 are effective for annual and interim periods beginning on or after
      October 1, 2007.




***Accounting
      Changes***




The
      AcSB issued
      CICA Section 1506, *Accounting
      Changes* .
      The standard
      prescribes the criteria for changing accounting policies,
      together
      with the accounting treatment and disclosure of changes in accounting policies
      and estimates, and correction of errors. The standard requires the retrospective
      application to prior periods’ financial statements of changes in accounting principle,
      unless
      it is impractical to determine either the period-specific effects or the
      cumulative effect of the change. Application is on a prospective basis and
      is
      effective for changes in accounting policies and estimates and correction of
      errors made in fiscal years
      beginning on
      or after January 1, 2007.




We
      do not expect the adoption of this standard will have any material impact on
      our
      results of operations or financial position.




***Variable
      Interest Entities***




The
      Emerging Issues
      Committee (EIC) issued EIC Abstract 163 - Determining the Variability to be
      Considered in Applying AcG 15.
      This Abstract,
      which is harmonized with the equivalent United States FASB Staff Position (FSP)
      FIN 46(R) - 6 - Determining the Variability to be Considered in Applying FASB
      Interpretation No. 46(R), provides guidance on how an entity should determine the
      variability to be considered in applying AcG 15 - Consolidation of Variable
      Interest Entities. The Abstract is to be applied prospectively
      to
      all entities with which an enterprise first becomes involved and to all entities
      previously required to be analyzed under
      AcG 15 when a
      reconsideration event has occurred beginning the first day of the first
      reporting period beginning on or after January
      1,
      2007.




We
      do not expect the adoption of this standard will have any material impact on
      our
      results of operations or financial position.




**CORPORATE
      GOVERNANCE**




Vermilion
      is
      committed to a high standard of corporate governance practices, a dedication
      that begins at Board level and extends throughout
      the
      Trust. We believe good corporate governance is in the best interest of our
      unitholders, and that successful companies
      are those
      that deliver growth and a competitive return along with a commitment to the
      environment, to the communities
      where
      they operate and to their employees. We comply with the objectives and
      guidelines relating to corporate governance adopted by the Toronto Stock
      Exchange. In addition, the Board monitors and considers the implementation
      of corporate
      governance standards proposed by various regulatory and non-regulatory
      authorities in Canada. A full examination of our
      corporate
      governance policies will be provided in our annual Information Circular, which
      will be filed on SEDAR ( www.sedar.com )
      and mailed to all
      unitholders on or before March 31, 2007.




*2006
                Annual Report - Vermilion Energy Trust*
              14
 
  **DISCLOSURE
      CONTROLS AND PROCEDURES**




Vermilion’s
      officers have established and maintained disclosure controls and procedures
      and
      evaluated the effectiveness of these
      controls in
      conjunction with the Trust’s filings.




As
      of December 31,
      2006 the Trust has evaluated the effectiveness of the design and operation
      of
      the Trust’s disclosure controls and
      procedures.
      Based on this evaluation, the Chief Executive Officer and Chief Financial
      Officer have concluded and certified that
      the Trust’s
      disclosure controls and procedures are effective.




There
      was no change
      in Vermilion’s internal control over financial reporting that occurred during
      the period covered by this report that
      has materially
      affected, or is reasonably likely to materially affect, its internal control
      over financial reporting.


*2006
                Annual Report - Vermilion Energy Trust*
              15


**TRUST
      INFORMATION**




**DIRECTORS**
              Larry
                J.
                Macdonald1,2,3,4,5Chairman
&
                CEO, Point Energy Ltd.Calgary,
                Alberta
              
              W.
                Kenneth Davidson2,3Toronto,
                Ontario
              
              Lorenzo
                DonadeoCalgary,
                Alberta
              
              Claudio
                A.
                Ghersinich
              Executive
                Director, Carrera Investments Corp.
              Calgary,
                Alberta
              
              Joseph
                F.
                Killi2,3
              Chairman,
              Parkbridge
                Lifestyle Communities Inc.
              President,
                Rosebridge Capital Corp. Inc.
              Calgary,
                Alberta
              
              William
                F.
                Madison2,4,5Sugar
                Land,
                Texas
              
              1Chairman
                of the Board
              2Audit
                Committee
              3Governance
                and Human Resources Committee
              4Health,
                Safety and Environment Committee
              5Independent
                Reserves Committee
            
            **OFFICERS
                & KEY PERSONNEL**
              
              ***CANADA***
              
              Lorenzo
                Donadeo, P.Eng. President & Chief Executive Officer
              
              John
                D.
                Donovan, F.C.A.
              Executive
                Vice
                President Business Development
              
              Curtis
                W.
                Hicks, C.A.Executive
                Vice
                President & CFO
              
              G.
                R. (Bob)
                Mac Dougall, P.Eng. Executive Vice President & COO
              
              Keith
                D.
                Hartman, P.Eng.Vice
                President
                Exploitation
              
              Raj
                C. Patel,
                P.Eng.Vice
                President
                Marketing
              
              Paul
                L.
                Beique
              Director
                Investor Relations
              
              Cheryl
                M.
                Kinzie
              Director
                Human
                Resources & Administration
              
              Charles
                W.
                Berard, B.Eng., L.LL., LL.B.Partner,
                Macleod Dixon LLPCorporate
                Secretary
              
              ***FRANCE***
              
              Daniel
                Goulet,
                P.Eng.Directeur
                GénéralVermilion
                REP
                SAS
              
              ***NETHERLANDS***
              
              Peter
                Sider,
                P.Eng.
              Managing
                Director
              Vermilion
                Oil
                & Gas Netherlands B.V.
              
              ***AUSTRALIA***
              
              Bruce
                D. Lake,
                P.Eng.
              Managing
                Director
              Vermilion
                Oil
                & Gas Australia Pty Ltd.
            
            **AUDITORS**
              Deloitte
&
                Touche LLPCalgary,
                Alberta
              
              **BANKERS**
              
              The
                Toronto-Dominion BankCalgary,
                Alberta
              
              Bank
                of
                MontrealCalgary,
                Alberta
              
              BNP
                Paribas (Canada)Toronto,
                Ontario
              
              Royal
                Bank of
                CanadaCalgary,
                Alberta
              
              The
                Bank of Nova ScotiaCalgary,
                Alberta
              
              Alberta
                Treasury BranchesCalgary,
                Alberta
              
              Fortis
                Capital
                (Canada) Ltd.Calgary,
                Alberta
              
              Société
                Générale (Canada Branch)Calgary,
                Alberta
              
              **EVALUATION
                ENGINEERS**
              GLJ
                Petroleum Consultants Ltd.Calgary,
                Alberta
              
              **LEGAL
                COUNSEL**
              Macleod
                Dixon
                LLPCalgary,
                Alberta
              
              **TRANSFER
                AGENT**
              Computershare
                Trust Companyof
                Canada
              
              **STOCK
                EXCHANGE LISTING**
              The
                Toronto Stock ExchangeSymbol:
                VET.UN
              
              **INVESTOR
                RELATIONS CONTACT**
              Paul
                L.
                Beique
              Director
                Investor Relations
              
              **HEAD
                OFFICE**
              2800,
                400 -
                4THAvenue
                S.W.
              Calgary,
                Alberta T2P 0J4
              Telephone:
                (403) 269-4884
              Fax:
                (403)
                264-6306
              IR
                Toll Free: 1-866-895-8101
              investor_relations@vermilionenergy.com
              vermilionenergy.com













*2006
                Annual Report - Vermilion Energy Trust*
              16