EXHIBIT
99.2




























2007
MANAGEMENT’S DISCUSSION AND ANALYSIS



















DISCLAIMER





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





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











MANAGEMENT’S
DISCUSSION AND ANALYSIS





The
following is Management’s Discussion and Analysis (MD&A) dated March 17,
2008 of Vermilion’s operating and financial results for the years ended December
31, 2007 and 2006.  This discussion should be read in conjunction with
the Trust’s audited consolidated financial statements for the years ended
December 31, 2007 and 2006, together with accompanying notes.





A
discussion of Vermilion’s operating and financial results for the fourth quarter
of 2007 is contained in Vermilion’s press release dated March 3, 2008 filed on
The System for Electronic Document Analysis and Retrieval (SEDAR - www.sedar.com).





NON-GAAP
MEASURES





This
report includes non-GAAP (“Generally Accepted Accounting Principles”) measures
as further described herein.  These measures do not have standardized
meanings prescribed by GAAP and therefore may not be comparable with the
calculations of similar measures for other entities.





“Fund
flows from operations” represents cash flows from operating activities before
changes in non-cash operating working capital and asset retirement costs
incurred. Management considers fund flows from operations and per unit
calculations of fund flows from operations (see discussion relating to per unit
calculations below) to be key measures as they demonstrate the Trust’s ability
to generate the cash necessary to pay distributions, repay debt, fund asset
retirement costs and make capital investments.  Management believes
that by excluding the temporary impact of changes in non-cash operating working
capital, fund flows from operations provides a useful measure of the Trust’s
ability to generate cash that is not subject to short-term movements in
operating working capital.  As fund flows from operations also
excludes asset retirement costs incurred, it assists management in assessing the
ability of the Trust to fund current and future asset retirement
costs.  The most directly comparable GAAP measure is cash flows from
operating activities.  Fund flows from operations is reconciled to
cash flows from operating activities below.





Year Ended December
      31($000’s)
              
              2007
              
              
              2006Cash flows from operating
      activities
              
              $
              349,890
              
              
              $
              306,033Changes in
      non-cash operating working capital
              
              
              31,965
              
              
              
              32,252Asset
      retirement costs incurred
              
              
              4,056
              
              
              
              4,217Fund flows from
      operations
              
              $
              385,911
              
              
              $
              342,502


“Acquisitions,
including acquired working capital deficiency” is the sum of “Acquisition of
petroleum and natural gas properties” and “Corporate acquisition, net of cash
acquired” as presented in the Trust’s consolidated statements of cash flows plus
any working capital deficiencies acquired as a result of those
acquisitions.  Management considers acquired working capital
deficiencies to be an important element of a property or corporate
acquisition.





“Net
debt” is the sum of long-term debt and working capital and is used by management
to analyze the financial position and leverage of the Trust.





“Cash
distributions per unit” represents actual cash distributions paid per unit by
the Trust during the relevant periods.





“Cash
distributions net” is calculated as actual cash distributions paid or payable
for a given period less proceeds received by the Trust pursuant to the
Distribution Reinvestment Plan (“DRIP”).  Cash distributions both
before and after DRIP are reviewed by management and are also assessed as a
percentage of fund flows from operations to analyze how much of the cash that is
generated by the Trust is being used to fund distributions.





“Total
net distributions, capital expenditures, reclamation fund contributions and
asset retirement costs incurred” is calculated as the addition of net cash
distributions as determined above plus the following amounts for the relevant
periods from the Trust’s consolidated statements of cash
flows:  “Drilling and development of petroleum and natural gas
properties”, “Contributions to reclamation fund” and “Asset retirement costs
incurred.”  This measure is reviewed by management and is also
assessed as a percentage of fund flows from operations to analyze the amount of
cash that is generated by the Trust that is available to repay debt and fund
potential acquisitions.








2007
      Annual Report – Vermilion Energy Trust – MD&A
            2














“Netbacks”
are per-unit of production measures used in operational and capital allocation
decisions.





“Adjusted
basic trust units outstanding” and “Adjusted basic weighted average trust units
outstanding” are used in the per unit calculations on the Highlights schedule of
this document and are different from the most directly comparable GAAP figures
in that they include amounts related to outstanding exchangeable shares at the
period end exchange ratio.  As the exchangeable shares will eventually
be converted into units of the Trust, management believes that their inclusion
in the calculation of basic rather than only diluted per unit statistics
provides meaningful information.





“Diluted
trust units outstanding” is the sum of “Adjusted basic trust units outstanding”
plus outstanding awards under the Trust’s Unit Rights Incentive Plan and the
Trust Unit Award Incentive Plan, based on current performance factor
estimates.





FORWARD-LOOKING
INFORMATION





This
document contains forward-looking financial and operational information as to
the Trust’s internal projections and expectations relating to future events or
performance.  In some cases, forward-looking information can be
identified by terminology such as “may”, “will”, “should”, “expects”,
“projects”, “anticipates” and similar expressions.  These statements
represent management’s expectations concerning future operating results or the
economic performance of the Trust and are subject to a number of risks and
uncertainties that could materially affect 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, which may cause actual performance and
financial results in future periods to differ materially from any projections of
future performance or results expressed by such forward-looking
statements.  Accordingly, readers are cautioned that events or
circumstances could cause results to differ materially from those
predicted.


Highlights ($000’s except per unit
      amounts)
                
                2007
                
                
                2006
                
                
                2005Revenues
                
                $
                707,334
                
                
                $
                618,072
                
                
                $
                529,938Net
earnings
                
                
                164,286
                
                
                
                146,923
                
                
                
                158,471Per unit,
      basic
                
                
                2.48
                
                
                
                2.30
                
                
                
                2.57Per unit,
      diluted
                
                
                2.39
                
                
                
                2.22
                
                
                
                2.49Fund flows from
      operations
                
                
                385,911
                
                
                
                342,502
                
                
                
                278,165Per unit,
      adjusted basic
                
                
                5.28
                
                
                
                4.86
                
                
                
                4.50Return on equity
      (%)
                
                
                28.2
                
                
                
                29.5
                
                
                
                37.4Total
assets
                
                
                1,668,123
                
                
                
                1,462,839
                
                
                
                1,111,739WTI
    (US$/bbl)
                
                
                72.34
                
                
                
                66.21
                
                
                
                56.56AECO
    (CDN$/mcf)
                
                
                6.45
                
                
                
                6.53
                
                
                
                8.77Realized price
      ($/boe)
                
                
                61.86
                
                
                
                61.80
                
                
                
                57.94Fund flows netback
      ($/boe)
                
                $
                33.75
                
                
                $
                34.25
                
                
                $
                30.15




2007 Summary of Quarterly
      Results($000’s except per unit
      amounts)
              
              
              Q1
              
              
              
              Q2
              
              
              
              Q3
              
              
              
              Q4Revenue
              
              $
              148,808
              
              
              $
              164,862
              
              
              $
              187,939
              
              
              $
              205,725Net
earnings
              
              
              31,347
              
              
              
              41,050
              
              
              
              48,640
              
              
              
              43,249Per unit
      basic
              
              
              0.48
              
              
              
              0.62
              
              
              
              0.73
              
              
              
              0.65Per unit
      diluted
              
              $
              0.47
              
              
              $
              0.60
              
              
              $
              0.71
              
              
              $
              0.62
  2006 Summary of Quarterly
      Results($000’s except per unit
      amounts)
              
              
              Q1
              
              
              
              Q2
              
              
              
              Q3
              
              
              
              Q4Revenue
              
              $
              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


2007
      Annual Report – Vermilion Energy Trust – MD&A
              3











OPERATIONAL
ACTIVITIES





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
barrel of oil equivalent (“boe”) is based on a conversion rate of six thousand
cubic feet of natural gas to one barrel of oil and is based on an energy
equivalency conversion method primarily applicable at the burner tip and does
not represent a value equivalency at the wellhead.





Canada





In
Canada, the Trust participated in the drilling of 51 wells (35.1 net) during
2007, resulting in 29 gas wells (22.1 net), three oil wells (2.4 net), six
abandoned wells (6.0 net) and 13 standing wells (4.6 net) awaiting further
evaluation and tie-in.  The total wells include 27 CBM and shallow gas
wells (19.2 net).  The abandoned wells were related to a shallow gas
exploration venture in Saskatchewan, which has been discontinued.





France





In
France, Vermilion drilled and completed two oil wells (2.0 net) in the
Champotran/La Torche Field, participated in one oil well (0.2 net) at Itteville
in the Paris Basin, and drilled one offshore well (0.5 net) which resulted in a
dry and abandoned well.   A comprehensive trucking operation was
established as an interim replacement for the Ambès pipeline.  More
than 9,500 truckloads carrying approximately 1.5 million barrels of oil were
transported from producing facilities to shipping terminals, virtually incident
free, reflecting Vermilion’s strong commitment to safety and the
environment.  Ongoing refurbishment of alternate tanks at the Ambès
terminal should allow the resumption of the pipeline operations sometime in the
first half of 2008.





Netherlands





In the
Netherlands, Vermilion successfully drilled two wells (1.9 net) at Harlingen and
one well (0.5 net) at De Blesse, validating the geological and geophysical
interpretations for these wells and initiating a drilling program that is
expected to resume in 2009.  The Trust successfully replaced two
oversized gas-powered, turbine compression units at the Harlingen gas treatment
centre reducing total horsepower requirements and liberating 1.2 mmcf/d (200
boe/d) of fuel gas to the sales line.





Australia





The
Wandoo Platform faced three evacuations in the first quarter of the year and one
in the fourth quarter of the year.  Downtime resulting from
evacuations has been reduced through a series of platform modifications, and the
total cyclone-related production shortfall was narrowed to approximately 240
boe/d in 2007.  Vermilion completed the expansion of fluid handling
capacity on the Wandoo platform in the second quarter of 2007.  Two
successful workover and recompletions in the Wandoo Field provided essential
information that confirmed the opportunity to capture additional reserves and
production by repositioning wellbores closer to the top of the oil column in
this reservoir.  A two well drilling program is planned for 2008 to
initiate the capture of this opportunity.  With success, Vermilion
would review additional drilling opportunities in this field.





PRODUCTION





Average
production in Canada during 2007 was 4,081 bbls/d of oil and NGL’s and 47.7
mmcf/d of natural gas (12,038 boe/d) compared to 4,011 bbls/d of oil and NGL’s
and 41.0 mmcf/d of natural gas (10,843 boe/d) in 2006.  Fourth quarter
2007 production averaged 12,065 boe/d, representing an increase of 12% over
prior year levels.





Production
in France averaged 8,809 boe/d in 2007, 13% higher than the 7,800 boe/d produced
in 2006, reflecting the full year impact of the July 2006 acquisition, net of
the reduction in volumes arising from the Ambès pipeline and terminal
shut-down.  Fourth quarter production of 8,946 boe/d in 2007 was 9%
lower than the 9,841 boe/d produced in France during the fourth quarter of 2006,
reflecting normal declines together with the impact of the Ambès situation and a
reduction in workover activity in 2007.








2007
      Annual Report – Vermilion Energy Trust – MD&A
            4














Production
in the Netherlands averaged 4,413 boe/d in 2007, down 11% from the 4,943 boe/d
recorded in 2006, due primarily to normal reservoir declines and some
maintenance downtime.  Fourth quarter production averaged 4,468 boe/d
in 2007 compared with 5,091 boe/d during the same period in 2006.  As
recently completed wells are tied in, production is expected to increase early
in 2008 before resuming normal declines.





Australia
production averaged 6,065 boe/d in 2007, compared to a full year average of
3,815 in 2006.  Volumes in 2006 were impacted by storm related
shut-downs during the first quarter and operations related shut-downs in the
second half of 2006.  In 2007 production was curtailed by cyclone
action in the first half of the year, and boosted by the acquisition of the
remaining 40% interest in the Wandoo Field in the second half of
2007.  Production during the fourth quarter of 2007 averaged 7,591
boe/d, compared to 3,775 boe/d during the same period in 2006.  The
two wells scheduled for drilling in the second half of 2008 are expected to be
tied-in by year end, but are not anticipated to contribute to 2008 production
volumes.




Year Ended December 31,
      2007
              
              
              Year Ended December 31,
      2006
              
              
              Year Ended December 31,
      2005Oil &
              
              
              Natural
              
              
              
              
              
              Oil &
              
              
              Natural
              
              
              
              
              
              Oil &
              
              
              NaturalNGLs
              
              
              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)Canada
              
              
              4,081
              
              
              
              47.74
              
              
              
              12,038
              
              
              
              4,011
              
              
              
              40.99
              
              
              
              10,843
              
              
              
              4,870
              
              
              
              38.39
              
              
              
              11,268France2
              
              
              8,621
              
              
              
              1.13
              
              
              
              8,809
              
              
              
              7,576
              
              
              
              1.35
              
              
              
              7,800
              
              
              
              5,478
              
              
              
              1.30
              
              
              
              5,695Netherlands
              
              
              40
              
              
              
              26.24
              
              
              
              4,413
              
              
              
              31
              
              
              
              29.47
              
              
              
              4,943
              
              
              
              28
              
              
              
              28.70
              
              
              
              4,812Australia1
              
              
              6,065
              
              
              
              -
              
              
              
              6,065
              
              
              
              3,815
              
              
              
              -
              
              
              
              3,815
              
              
              
              3,391
              
              
              
              -
              
              
              
              3,391Total
              
              
              18,807
              
              
              
              75.11
              
              
              
              31,325
              
              
              
              15,433
              
              
              
              71.81
              
              
              
              27,401
              
              
              
              13,767
              
              
              
              68.39
              
              
              
              25,166


1  Initial
acquisition effective from March 31, 2005, subsequent acquisition of remaining
40% effective June 20, 2007


2  Vermilion
Emeraude Rep SAS effective from July 10, 2006




2007 Quarterly Production
      (boe/d)
              
              
              Q1
              
              
              
              Q2
              
              
              
              Q3
              
              
              
              Q4Canada
              
              
              12,054
              
              
              
              12,351
              
              
              
              11,686
              
              
              
              12,065France
              
              
              8,055
              
              
              
              9,221
              
              
              
              9,002
              
              
              
              8,946Netherlands
              
              
              4,754
              
              
              
              3,904
              
              
              
              4,529
              
              
              
              4,468Australia1
              
              
              4,227
              
              
              
              5,440
              
              
              
              6,955
              
              
              
              7,591Total
              
              
              29,090
              
              
              
              30,916
              
              
              
              32,172
              
              
              
              33,070


1  Acquisition
of remaining 40% interest effective June 20, 2007




2006 Quarterly Production
      (boe/d)
              
              
              Q1
              
              
              
              Q2
              
              
              
              Q3
              
              
              
              Q4Canada
              
              
              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








2007
      Annual Report – Vermilion Energy Trust – MD&A
            5














CAPITAL
EXPENDITURES





Capital
spending for the year totalled $305.2 million compared to $332.8 million spent
in 2006.  Of this total, approximately $126.2 million relates to the
acquisition in Australia for the remaining 40% interest in the Wandoo Field and
$3.4 million relates to a number of minor property acquisitions with the
remainder spent on drilling and development activities.




Capital Expenditures
      ($000’s)
              
              2007
              
              
              2006
              
              
              2005Land
              
              $
              3,484
              
              
              $
              2,025
              
              
              $
              2,233Seismic
              
              
              491
              
              
              
              2,555
              
              
              
              12,116Drilling and
      completion
              
              
              89,081
              
              
              
              48,559
              
              
              
              43,929Production equipment and
      facilities
              
              
              61,586
              
              
              
              58,160
              
              
              
              25,111Recompletions
              
              
              11,021
              
              
              
              15,280
              
              
              
              21,163Capitalized exploration
      administration and other
              
              
              9,976
              
              
              
              10,360
              
              
              
              8,978Drilling and development
      expenditures
              
              
              175,639
              
              
              
              136,939
              
              
              
              113,530Property
      acquisitions
              
              
              129,605
              
              
              
              26,435
              
              
              
              94,967Corporate
      acquisitions
              
              
              -
              
              
              
              169,445
              
              
              
              91,613$
              305,244
              
              
              $
              332,819
              
              
              $
              300,110
 
 Capital Expenditures by Country
      ($000’s)
              
              2007
              
              
              2006
              
              
              2005Canada
              
              $
              69,713
              
              
              $
              111,216
              
              
              $
              141,022France
              
              
              73,504
              
              
              
              209,364
              
              
              
              50,649Netherlands
              
              
              22,275
              
              
              
              3,673
              
              
              
              12,434Australia
              
              
              139,752
              
              
              
              8,566
              
              
              
              96,005$
              305,244
              
              
              $
              332,819
              
              
              $
              300,110




FINANCIAL
REVIEW





The
trust generated fund flows from operations of $385.9 million ($5.28 per adjusted
unit) in the year ended December 31, 2007 compared to $342.5 million ($4.86 per
adjusted unit) in 2006.  The full year distributions in 2007 totalled
$136.4 million ($2.06 per unit) compared to $130.6 million ($2.04 per unit) in
2006.  Fund flows from operations for 2007 reflects a substantial reduction
in current income taxes resulting from certain transactions, including the
drilling of the offshore well in France and the property acquisition in
Australia.  This impact on current income taxes has been mostly reflected
in the second half of the year when the Trust obtained certainty over both the
completion of the transactions and their related tax effect.





Cash
distributions as a percentage of fund flows from operations was 35.3% before the
impact of the Trust’s distribution reinvestment program (“DRIP”), which
generated $36.0 million of cash to the Trust.  Unitholders reinvest
their monthly distributions to receive additional trust units equal to 5% of the
DRIP units purchased with their distributions.  After accounting for
the DRIP, cash distributions as a percentage of fund flows from operations were
26.0%.  This compares to cash distributions as a percentage of fund
flows from operations of 38.1% before the impact of the DRIP and 32.7% after the
DRIP in 2006.





Development
capital expenditures during the year were $175.6 million.  The total of net
distributions (after DRIP), capital expenditures, reclamation fund contributions
and asset retirement costs represented 73% of fund flows from operations in 2007
as compared to 77% in 2006.





Vermilion’s
net debt was $416.9 million at the end of 2007 compared with $354.8 million at
the end of 2006.  Vermilion was able to execute a $176 million development
capital program, acquire $130 million of producing properties, declare over $100
million in net cash distributions, increase its equity position in Verenex by
over $30 million and still maintain a strong financial position.  The
net debt at the end of the 2007 is equivalent to less than 1.1 times trailing
fund flows from operations and only 0.8 times annualized fourth quarter funds
from operations.








2007
      Annual Report – Vermilion Energy Trust – MD&A
            6














FUND
FLOWS NETBACKS





Fund
flows from operations was $385.9 million in 2007, up from $342.5 million in
2006.  A slightly higher average wellhead price was recorded in 2007
as a result of a 9% increase in average WTI pricing compared with 2006, offset
by the increased strength of the Canadian dollar.




2007 Fund Flows
      ($/boe)
              
              
              Q1
              
              
              
              Q2
              
              
              
              Q3
              
              
              
              Q4
              
              
              2007
              
              
              2006
              
              
              2005Oil and gas
      revenues
              
              $
              56.83
              
              
              $
              58.60
              
              
              $
              63.50
              
              
              $
              67.62
              
              
              $
              61.86
              
              
              $
              61.80
              
              
              $
              57.94Realized hedging gain or
      (loss)
              
              
              0.31
              
              
              
              (0.11
              )
              
              
              0.01
              
              
              
              (1.11
              )
              
              
              (0.25
              )
              
              
              (0.02
              )
              
              
              (4.46
              )Royalties
    (net)
              
              
              (6.76
              )
              
              
              (7.32
              )
              
              
              (10.18
              )
              
              
              (9.57
              )
              
              
              (8.53
              )
              
              
              (9.22
              )
              
              
              (9.54
              )Transportation
              
              
              (1.58
              )
              
              
              (2.30
              )
              
              
              (2.13
              )
              
              
              (1.97
              )
              
              
              (2.01
              )
              
              
              (1.05
              )
              
              
              (0.99
              )Operating
    costs
              
              
              (10.40
              )
              
              
              (9.91
              )
              
              
              (10.16
              )
              
              
              (11.28
              )
              
              
              (10.45
              )
              
              
              (9.65
              )
              
              
              (7.89
              )Operating
      netback
              
              
              38.40
              
              
              
              38.96
              
              
              
              41.04
              
              
              
              43.69
              
              
              
              40.62
              
              
              
              41.86
              
              
              
              35.06General and
      administration
              
              
              (2.15
              )
              
              
              (1.69
              )
              
              
              (1.55
              )
              
              
              (1.24
              )
              
              
              (1.64
              )
              
              
              (1.58
              )
              
              
              (1.43
              )Interest
              
              
              (1.76
              )
              
              
              (1.68
              )
              
              
              (2.14
              )
              
              
              (2.18
              )
              
              
              (1.95
              )
              
              
              (1.68
              )
              
              
              (0.69
              )Current and capital
      taxes
              
              
              (5.37
              )
              
              
              (3.23
              )
              
              
              (3.44
              )
              
              
              (0.23
              )
              
              
              (2.98
              )
              
              
              (4.29
              )
              
              
              (2.71
              )Proceeds on sale of
      investments
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              0.40
              
              
              
              0.11
              
              
              
              -
              
              
              
              -Foreign
      exchange
              
              
              (0.11
              )
              
              
              (2.11
              )
              
              
              (0.54
              )
              
              
              1.03
              
              
              
              (0.41
              )
              
              
              (0.06
              )
              
              
              (0.08
              )Fund flows
      netback
              
              $
              29.01
              
              
              $
              30.25
              
              
              $
              33.37
              
              
              $
              41.47
              
              
              $
              33.75
              
              
              $
              34.25
              
              
              $
              30.15
  2006 Fund Flows
      ($/boe)
                
                
                Q1
                
                
                
                Q2
                
                
                
                Q3
                
                
                
                Q4Oil and gas
      revenues
                
                $
                62.37
                
                
                $
                63.80
                
                
                $
                64.00
                
                
                $
                57.47Realized hedging gain or
      loss
                
                
                (0.04
                )
                
                
                (0.13
                )
                
                
                (0.17
                )
                
                
                0.23Royalties
    (net)
                
                
                (10.02
                )
                
                
                (9.45
                )
                
                
                (8.29
                )
                
                
                (9.23
                )Transportation
                
                
                (1.04
                )
                
                
                (1.07
                )
                
                
                (1.06
                )
                
                
                (1.03
                )Operating
    costs
                
                
                (8.62
                )
                
                
                (9.25
                )
                
                
                (10.03
                )
                
                
                (10.52
                )Operating
      netback
                
                
                42.65
                
                
                
                43.90
                
                
                
                44.45
                
                
                
                36.92General and
      administration
                
                
                (1.29
                )
                
                
                (1.66
                )
                
                
                (2.12
                )
                
                
                (1.27
                )Interest
                
                
                (0.99
                )
                
                
                (1.44
                )
                
                
                (1.65
                )
                
                
                (2.50
                )Current and capital
      taxes
                
                
                (5.66
                )
                
                
                (6.83
                )
                
                
                (4.96
                )
                
                
                (0.27
                )Foreign
      exchange
                
                
                0.29
                
                
                
                (0.80
                )
                
                
                0.02
                
                
                
                0.18Fund flows
      netback
                
                $
                35.00
                
                
                $
                33.17
                
                
                $
                35.74
                
                
                $
                33.06




REVENUE





Total
revenues for 2007 were $707.3 million compared to $618.1 million in
2006.  Vermilion’s combined crude oil & NGL price was $74.08 per
bbl in 2007, an increase of 1% over the $73.71 per bbl reported in
2006.  The natural gas price realized in 2007 was $7.25 per mcf
compared to $7.74 per mcf realized a year ago, a 6% year-over-year
decrease.





Year Ended December
      31($000’s except per boe and per
      mcf)
              
              2007
              
              
              2006Crude oil &
      NGL’s
              
              $
              508,540
              
              
              $
              415,245Per boe
              
              $
              74.08
              
              
              $
              73.71Natural gas
              
              
              198,794
              
              
              
              202,827Per mcf
              
              $
              7.25
              
              
              $
              7.74Combined
              
              
              707,334
              
              
              
              618,072Per boe
              
              $
              61.86
              
              
              $
              61.80





2007
      Annual Report – Vermilion Energy Trust – MD&A
            7














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 2007:





Risk Management:
      Oil
              Funded Cost
              bbls/d
              US$/bblCollar –
WTIQ1
      2008
              US$0.50/bbl
              500
              $63.00 -
    $79.05Q2
      2008
              US$0.50/bbl
              500
              $64.30 -
    $76.00Q3
      2008
              US$0.28/bbl
              250
              $70.00 -
    $90.00Q4
      2008
              US$0.50/bbl
              250
              $69.00 -
    $90.00Collar -
    BRENTQ1
      2008
              US$0.25/bbl
              500
              $68.42 -
    $83.00Q1
      2008
              US$0.25/bbl
              500
              $69.25 -
    $82.00Q2
      2008
              US$0.50/bbl
              500
              $64.00 -
    $80.10Q2
      2008
              US$0.25/bbl
              500
              $67.20 -
    $82.00Q3
      2008
              US$0.25/bbl
              500
              $66.40 -
    $82.00Q3
      2008
              US$0.25/bbl
              500
              $66.60 -
    $82.00Q3
      2008
              US$0.19/bbl
              250
              $65.00 -
    $90.00Q4
      2008
              -
              500
              $68.20 -
    $81.00Call Spread -
      BRENT2009 -
      2011
              US$5.73/bbl
              700
              $65.00 -
    $85.00


The
impact of Vermilion’s hedging program decreased cash netbacks by $0.25 per boe
on a combined basis for 2007 compared to an economic hedging cost of $0.02 per
boe in 2006.  Oil hedging resulted in a $3.2 million cost for 2007 or
$0.47 per boe.  For 2006, oil hedging resulted in a $1.3 million cost
for the year or $0.13 per boe.  Gas hedging costs were negligible in
2007 and 2006.





ROYALTIES





Total
royalties for the year decreased to $8.53 per boe in 2007 or 14% of sales
compared with $9.22 per boe in 2006 or 15% of sales.  The decrease is
largely due to Vermilion’s active capital program in Australia resulting in the
Trust paying royalties at a reduced rate compared to 2006.  Royalties
in Canada, which are paid on a sliding scale basis, were relatively consistent
year over year.  Royalties did not change substantially in France,
where for the most part, royalties are calculated on a unit of production
basis.  Production in the Netherlands is not subject to
royalties.





Year Ended December
      31($000’s except per boe and per
      mcf)
              
              2007
              
              
              2006Crude oil &
      NGL’s
              
              $
              73,933
              
              
              $
              70,941Per boe
              
              $
              10.77
              
              
              $
              12.59Natural gas
              
              
              23,585
              
              
              
              21,271Per mcf
              
              $
              0.86
              
              
              $
              0.81Combined
              
              $
              97,518
              
              
              $
              92,212Per boe
              
              $
              8.53
              
              
              $
              9.22





2007
      Annual Report – Vermilion Energy Trust – MD&A
            8














OPERATING
COSTS





Operating
costs increased to $10.45 per boe in 2007 from $9.65 per boe in
2006.  The increase in the dollar amount of operating costs over 2006
reflects the inclusion of a full year of expenses related to the acquisition of
Vermilion Emeraude Rep SAS as well as the inclusion of expenses associated with
the mid-2007 acquisition of the remaining 40% interest in the Wandoo Field in
offshore Australia.  On a per boe basis, operating costs in Canada
have remained relatively consistent year over year.  In France, per
unit costs have increased as a result of the acquisition of the higher cost
Vermilion Emeraude assets coupled with the impact of the oil spill at the Ambès
terminal in 2007.  The Trust has been reimbursed for a portion of the
costs incurred as a result of the Ambès incident through proceeds of its
insurance policies.  There is the potential to recover additional
costs, however, the timing and certainty of recovery is not determinable at this
time and therefore no provision for additional recoveries has been
made.  Unplanned maintenance resulted in an increase in per boe
operating costs in the Netherlands.





Year Ended December
      31($000’s except per boe and per
      mcf)
              
              2007
              
              
              2006Crude oil &
      NGL’s
              
              $
              75,102
              
              
              $
              54,494Per boe
              
              $
              10.94
              
              
              $
              9.67Natural gas
              
              
              44,415
              
              
              
              41,998Per mcf
              
              $
              1.62
              
              
              $
              1.60Combined
              
              $
              119,517
              
              
              $
              96,492Per boe
              
              $
              10.45
              
              
              $
              9.65


TRANSPORTATION





Transportation
costs are a function of the point of legal transfer of the product and are
dependent upon where the product is sold, product split, location of properties
as well as 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 the
refinery.  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.





Transportation
costs in France have increased as a result of the oil spill at the Ambès
terminal as Vermilion is currently transporting some of its production to port
by truck.  It is expected that the terminal will resume operations in
2008.





Year Ended December
      31($000’s except per
      boe)
              
              2007
              
              
              2006Transportation
              
              $
              22,926
              
              
              $
              10,504Per boe
              
              $
              2.01
              
              
              $
              1.05


GENERAL
AND ADMINISTRATION EXPENSE





General
and administration expense for the year increased to $1.64 per boe in 2007 from
$1.58 per boe in 2006.  The increase per boe is primarily a result of
increased staffing levels combined with increased staff retention
costs.  Also contributing to the increase are consulting costs
incurred in France as a result of the oil spill at the Ambès
terminal.





Year Ended December
      31($000’s except per
      boe)
              
              2007
              
              
              2006General and
      administration
              
              $
              18,726
              
              
              $
              15,839Per boe
              
              $
              1.64
              
              
              $
              1.58





2007
      Annual Report – Vermilion Energy Trust – MD&A
            9














UNIT
COMPENSATION EXPENSE





A
non-cash trust unit compensation expense of $1.22 per boe was recorded in 2007
compared to $2.44 per boe in 2006.  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 and the Trust Unit
Award Plan.





Year Ended December
      31($000’s except per
      boe)
              
              2007
              
              
              2006Unit compensation
      expense
              
              $
              13,985
              
              
              $
              24,383Per boe
              
              $
              1.22
              
              
              $
              2.44


INTEREST
EXPENSE





Interest
expense increased to $1.95 per boe in 2007 from $1.68 per boe in 2006 as a
result of higher average debt levels.  Debt levels are higher in 2007
primarily stemming from the Australia acquisition at the end of the second
quarter of 2007.  The Trust’s interest rates have remained relatively
consistent over the year.





Year Ended December
      31($000’s except per
      boe)
              
              2007
              
              
              2006Interest
              
              $
              22,330
              
              
              $
              16,781Per boe
              
              $
              1.95
              
              
              $
              1.68


DEPLETION,
DEPRECIATION AND ACCRETION EXPENSE





Depletion,
depreciation and accretion expense increased to $18.49 per boe in 2007 from
$16.23 per boe in 2006.   The increase is due mainly to higher
finding and development costs in Canada and France as well as the increase in
the asset retirement obligation resulting primarily from the Australia
acquisition.





Year Ended December
      31($000’s except per
      boe)
              
              2007
              
              
              2006Depletion, depreciation and
      accretion
              
              $
              211,397
              
              
              $
              162,254Per boe
              
              $
              18.49
              
              
              $
              16.23


TAXES





The
Trust’s current tax provision has decreased to $2.98 per boe in 2007 from $4.29
per boe in 2006.  In 2007 certain transactions, including the drilling
of the offshore well in France and the property acquisition in Australia
resulted in a substantial reduction in current income taxes associated with the
Trust’s international operating subsidiaries.  This impact on current
income tax has been mostly reflected in the second half of 2007 as the Trust
obtained certainty over both the completion of the transactions and the related
tax effect.





On June
22, 2007, the Canadian federal government passed legislation that enacted a tax
on publicly traded income trusts as originally announced on October 31,
2006.  The changes do 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.








2007
      Annual Report – Vermilion Energy Trust – MD&A
            10














Our
interpretation suggests that Vermilion may be able to largely mitigate the
contemplated distribution tax for a period of time beyond
2011.  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 distribution tax on that portion of
distributions made up of this dividend income.  In addition, Vermilion
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 legislation the portion of
the distribution that represents a return of capital will not attract the
distribution tax.  This analysis is a general assessment of the impact
on Vermilion and is not meant to be exhaustive or definitive.





Applying
this legislation resulted in the recognition of future income taxes related to
timing differences in Vermilion Energy Trust, the parent entity, whereas
previously such differences were only recognized in relation to subsidiaries of
the Trust.  The related impact on the Trust’s consolidated future
income tax provision and future income tax liability related to this legislation
was not material.





Year Ended December
      31($000’s except per
      boe)
              
              2007
              
              
              2006Current and capital
      tax
              
              $
              34,033
              
              
              $
              42,876Per boe
              
              $
              2.98
              
              
              $
              4.29


FOREIGN
EXCHANGE





A
combined realized and unrealized foreign exchange gain of $1.01 per boe was
recorded in 2007 with a loss of $1.30 per boe in 2006.  The gain for
the year ended December 31, 2007 is mostly due to the impact of the
strengthening of the Canadian dollar on foreign currency denominated
liabilities.





Year Ended December
      31($000’s except per
      boe)
              
              2007
              
              
              2006Foreign exchange loss
      (gain)
              
              $
              (11,533
              )
              
              $
              12,997Per boe
              
              $
              (1.01
              )
              
              $
              1.30


EARNINGS





Net
earnings in the year increased to $164.3 million or $2.48 per unit from $146.9
million or $2.30 per unit in 2006.  The increase is mainly a result of
increased operating revenues, as stronger price realizations more than offset
increased operating costs.





LIQUIDITY
AND CAPITAL RESOURCES





Vermilion’s
debt (net of working capital) on December 31, 2007 was $417
million.  As at December 31, 2007, the Trust had an unsecured covenant
based revolving credit facility in the amount of $625 million.  The
revolving period under the term loan is expected to expire in June 2008 and may
be extended for an additional period of up to 364 days at the option of the
lender.  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.




Liquidity and Capital
      Resources
              
              2007
              
              
              2006
              
              
              2005Debt and working capital
      ($m)
              
              $
              416,858
              
              
              $
              354,809
              
              
              $
              245,430Bank facility
      ($m)
              
              $
              625,000
              
              
              $
              500,000
              
              
              $
              410,000Unused bank facility
      ($m)
              
              $
              208,142
              
              
              $
              145,191
              
              
              $
              164,570Debt-to-cash-flow ratio1
              
              
              1.08
              
              
              
              1.04
              
              
              
              0.88Debt-to-equity ratio1
              
              
              0.66
              
              
              
              0.66
              
              
              
              0.54


1  Debt
includes working capital. These are non-GAAP measures and may not be
comparable to similar measures for other entities.








2007
      Annual Report – Vermilion Energy Trust – MD&A
            11














Vermilion
has a long-term and short-term need for capital.  Short-term working
capital is 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.  The acquisition and
development of petroleum and natural gas properties requires long-term
capital.  There are essentially three methods of 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.





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 is
funded by Vermilion Resources Ltd. and its operating
subsidiaries.  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, 2007, Vermilion had recorded an asset retirement obligation of
$163.4 million for future abandonment and reclamation of its properties compared
to $127.5 million as at December 31, 2006.  The increase is due mostly
to a change in abandonment obligation estimates coupled with the additional
obligation related to the Australia acquisition partially offset by the impact
of foreign exchange.





DISTRIBUTIONS





Vermilion
increased monthly distributions to $0.19 per unit, beginning in December of
2007, bringing total distributions to $2.06 per unit for the
year.  Distributions declared in 2007 totalled $136.4 million compared
to $130.6 million for the same period in the prior year.  The 12% increase
in distributions is the first since Vermilion’s conversion to a trust and
follows 58 continuous months of distributions at $0.17 per
month.





Since
inception, the Trust has declared $614.8 million in distributions to unitholders
as compared to unitholders capital of $380.9 million at December 31,
2007.





Proceeds
from the Trust’s distributions reinvestment program were $36.0 million in 2007
(2006 - $18.8 million).





Sustainability of
Distributions





($000’s)Three Months
      Ended
                
                
                Year Ended
                
                
                Year Ended
                
                
                Year EndedDec 31,
2007
                
                
                Dec 31,
2007
                
                
                Dec 31,
2006
                
                
                Dec 31,
2005Cash flows from operating
      activities
                
                $
                51,737
                
                
                $
                349,890
                
                
                $
                306,033
                
                
                $
                245,116Net
earnings
                
                $
                43,249
                
                
                $
                164,286
                
                
                $
                146,923
                
                
                $
                158,471Distributions
      declared
                
                $
                35,564
                
                
                $
                136,389
                
                
                $
                130,638
                
                
                $
                126,190Excess of cash flows from
      operating activities over cash distributions
    declared
                
                $
                16,173
                
                
                $
                213,501
                
                
                $
                175,395
                
                
                $
                118,926Excess of net earnings over cash
      distributions declared
                
                $
                7,685
                
                
                $
                27,897
                
                
                $
                16,285
                
                
                $
                32,281


Excess
of cash flows from operating activities over cash distributions declared and net
earnings over cash distributions declared are used to fund capital expenditures,
asset retirement costs, reclamation fund contributions and debt
repayments.








2007
      Annual Report – Vermilion Energy Trust – MD&A
            12














UNITHOLDERS’
EQUITY





During
2007, approximately 2.6 million units were issued pursuant to the conversion of
exchangeable shares, the Trust’s bonus plan, the Trust’s unit based compensation
programs and unitholders’ participation in the distribution reinvestment
plan.  Unitholders’ capital increased during the same period by $45.3
million as a result of the issuance of those units and by $14.6 million as a
result of contributed surplus transfer related to unit based compensation
plans.





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.





As at
December 31, 2007 there were 4.5 million exchangeable shares outstanding at the
exchange ratio of 1.55595 whereby 6.9 million trust units would be issuable upon
conversion.  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 2007 of $68.6 million ($51.8 million in 2006) on the
consolidated balance sheet represents the book value of exchangeable shares plus
accumulated earnings attributable to the outstanding exchangeable shares. The
reduction in 2007 and 2006 net income, respectively, of $16.8 million and $14.9
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.





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.








2007
      Annual Report – Vermilion Energy Trust – MD&A
            13














CRITICAL
ACCOUNTING ESTIMATES





The
Trust’s financial and operating results contain estimates made by management in
the following areas:





i.
            Capital
      expenditures are based on estimates of projects in various stages of
      completion;


ii.
            Revenues,
      royalties and operating costs include accruals based on estimates of
      management;


iii.
            Fair
      value of derivative instruments are based on estimates that are subject to
      fluctuation of commodity prices and foreign exchange
  rates;


iv.
            Depletion,
      depreciation and accretion are based on estimates of oil and gas reserves
      that the Trust expects to recover in the
future;


v.
            Asset
      retirement obligations are based on estimates of future costs and the
      timing of expenditures;


vi.
            The
      future recoverable value of capital assets and goodwill are also based on
      estimates that the Trust expects to realize;
and


vii.
            Unit
      compensation expense is determined using accepted fair value approaches
      which rely on historical data and certain estimates made by
      management.





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, 2008.





Cash Available for
      Distributions
              Cash
    AvailablePer Unit and Exchangeable
      Shares
              for
      DistributionsChange in crude oil price by
      Cdn$1.00/bbl
              $0.06
              $4.9
  millionChange in natural gas price by
      Cdn$0.10/mcf
              $0.02
              $1.7
  millionChange in interest rate by one
      point
              $0.06
              $4.2
  millionChange in Cdn/U.S. foreign
      exchange rate by one point
              $0.05
              $3.8
  millionChange in Cdn/Euro foreign
      exchange rate by one point
              $0.01
              $0.5
  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 and accordingly no asset
or liability value has been assigned in the balance sheet as of December 31,
2007.





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





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.








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      Annual Report – Vermilion Energy Trust – MD&A
            14














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
2007, Vermilion remained committed to the principles of the Environment, Health
and Safety Stewardship Program set out by the Canadian Association of Petroleum
Producers.  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 2007.  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.





RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS





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





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





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





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





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








2007
      Annual Report – Vermilion Energy Trust – MD&A
            15














RECENTLY
ADOPTED ACCOUNTING STANDARDS





Financial
Instruments





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





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





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





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


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





Accounting
Changes





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





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 April 2,
2008.








2007
      Annual Report – Vermilion Energy Trust – MD&A
            16














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, 2007 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.





SARBANES
OXLEY





On July
31, 2002, the United States Congress enacted the Sarbanes Oxley Act (“SOX”) that
applies to all companies registered with the U.S. Securities and Exchange
Commission.  Section 404 of the SOX legislation “Internal Controls
Over Financial Reporting” requires that management identify, document and assess
internal controls and issue an opinion on the effectiveness of internal controls
surrounding the financial reporting process.





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.





The
Trust’s Management, together with its Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of the design and operation
of the Company’s system of internal control over financial reporting. Based on
this evaluation, management concluded that the Trust’s system of internal
control over financial reporting was effective as of December 31,
2007.





The
Chief Executive Officer and Chief Financial Officer will file the required
Certificates under Section 302 of SOX along with the Trust’s Form 40F
report.  The 40F filing will also include an audit opinion from
Trust’s external auditors relating to the effectiveness of the Trust’s internal
controls over financial reporting.








2007
      Annual Report – Vermilion Energy Trust – MD&A
            17














TRUST
INFORMATION





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







2007
      Annual Report – Vermilion Energy Trust – MD&A
              18