**Exhibit
      99.1**


**MANAGEMENT’S
        REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING**
 
 The
        management of
        Enerplus Resources Fund is responsible for establishing and maintaining adequate
        internal control over financial reporting for the Fund. Under the supervision
        of
        our Chief Executive Officer and our Chief Financial Officer we have conducted
        an
        evaluation of the effectiveness of our internal control over financial reporting
        based on the *Internal
        Control-Integrated Framework* issued
        by the
        Committee of Sponsoring Organizations of the Treadway Commission (COSO).
        Based
        on our assessment, we have concluded that as of December 31, 2006, our internal
        control over financial reporting is effective.
  Because
        of inherent
        limitations, internal control over financial reporting may not prevent or
        detect
        misstatements and even those systems determined to be effective can provide
        only
        reasonable assurance with respect to the financial statement preparation
        and
        presentation.
 
 Management’s
        assessment of the effectiveness of the Fund’s internal control over financial
        reporting as of December 31, 2006, has been audited by Deloitte &
Touche LLP, the Fund’s Independent Registered Chartered Accountants, who also
        audited the Fund’s Consolidated Financial Statements for the year ended
        December 31, 2006.
 
 **REPORT
        OF
        INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS**
  To
        the Board of Directors and Unitholders of Enerplus Resources Fund:
  We
        have audited management's assessment, included in the accompanying Management's
        Report on Internal Control Over Financial Reporting, that Enerplus Resources
        Fund and subsidiaries (the “Fund”) maintained effective internal control over
        financial reporting as of December 31, 2006, based on criteria established
        in
        Internal Control-Integrated Framework issued by the Committee of Sponsoring
        Organizations of the Treadway Commission. The Fund's management is responsible
        for maintaining effective internal control over financial reporting and for
        its
        assessment of the effectiveness of internal control over financial reporting.
        Our responsibility is to express an opinion on management's assessment and
        an
        opinion on the effectiveness of the Fund's internal control over financial
        reporting based on our audit.
 
 We
        conducted our audit in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether effective
        internal control over financial reporting was maintained in all material
        respects. Our audit included obtaining an understanding of internal control
        over
        financial reporting, evaluating management's assessment, testing and evaluating
        the design and operating effectiveness of internal control, and performing
        such
        other procedures as we considered necessary in the circumstances. We believe
        that our audit provides a reasonable basis for our opinions.
 
 A
        company's internal control over financial reporting is a process designed
        by, or
        under the supervision of, the company's principal executive and principal
        financial officers, or persons performing similar functions, and effected
        by the
        company's board of directors, management, and other personnel to provide
        reasonable assurance regarding the reliability of financial reporting and
        the
        preparation of financial statements for external purposes in accordance with
        generally accepted accounting principles. A company's internal control over
        financial reporting includes those policies and procedures that (1) pertain
        to
        the maintenance of records that, in reasonable detail, accurately and fairly
        reflect the transactions and dispositions of the assets of the company; (2)
        provide reasonable assurance that transactions are recorded as necessary
        to
        permit preparation of financial statements in accordance with generally accepted
        accounting principles, and that receipts and expenditures of the company
        are
        being made only in accordance with authorizations of management and directors
        of
        the company; and (3) provide reasonable assurance regarding prevention or
        timely
        detection of unauthorized acquisition, use, or disposition of the company's
        assets that could have a material effect on the financial
        statements.
 
 Because
        of the
        inherent limitations of internal control over financial reporting, including
        the
        possibility of collusion or improper management override of controls, material
        misstatements due to error or fraud may not be prevented or detected on a
        timely
        basis. Also, projections of any evaluation of the effectiveness of the internal
        control over financial reporting to future periods are subject to the risk
        that
        the controls may become inadequate because of changes in conditions, or that
        the
        degree of compliance with the policies or procedures may deteriorate.
 
 In
        our opinion, management's assessment that the Fund maintained effective internal
        control over financial reporting as of December 31, 2006, is fairly stated,
        in
        all material respects, based on the criteria established in Internal
        Control-Integrated Framework issued by the Committee of Sponsoring Organizations
        of the Treadway Commission. Also in our opinion, the Fund maintained, in
        all
        material respects, effective internal control over financial reporting as
        of
        December 31, 2006, based on the criteria established in Internal
        Control-Integrated Framework issued by the Committee of Sponsoring Organizations
        of the Treadway Commission.
 
 
 rule
  We
        have also audited, in accordance with Canadian generally accepted auditing
        standards and the standards of the Public Company Accounting Oversight Board
        (United States), the consolidated financial statements as of and for the
        year
        ended December 31, 2006 of the Fund, and our report dated February 21, 2007
        expressed an unqualified opinion on those financial statements.
 
 **DELOITTE
                & TOUCHE LLP**Independent
                  Registered Chartered AccountantsCalgary,
                  CanadaFebruary
                21,
                2007
              “signed”
  
 **MANAGEMENT’S
        RESPONSIBILITY FOR FINANCIAL STATEMENTS**
 
 In
        management’s
        opinion, the accompanying consolidated financial statements of Enerplus
        Resources Fund (the “Fund”) have been prepared within reasonable limits of
        materiality and in accordance with Canadian generally accepted accounting
        principles. Since a precise determination of many assets and liabilities
        is
        dependent on future events, the preparation of financial statements necessarily
        involves the use of estimates and approximations. These have been made using
        careful judgment and with all information available up to February 21, 2007.
        Management is responsible for all information in the annual report and for
        the
        consistency, therewith, of all other financial and operating data presented
        in
        this report.
 
 To
        meet its
        responsibility for reliable and accurate financial statements, management
        has
        established and monitors systems of internal control which are designed to
        provide reasonable assurance that financial information is relevant, reliable
        and accurate, and that assets are safeguarded and transactions are executed
        in
        accordance with management’s authorization.
 
 The
        consolidated
        financial statements have been examined by Deloitte & Touche LLP,
        Independent Registered Chartered Accountants. Their responsibility is to
        express
        a professional opinion on the fair presentation of the consolidated financial
        statements in accordance with Canadian generally accepted accounting principles.
        The Independent Registered Chartered Accountants Report outlines the scope
        of
        their examination and sets forth their opinion.
 
 The
        Audit
        Committee, consisting exclusively of independent directors, has reviewed
        these
        statements with management and the Independent Registered Chartered Accountants
        and has recommended their approval to the Board of Directors. The Board of
        Directors has approved the consolidated financial statements of the
        Fund.
 
 “signed”
              “signed”Gordon
                J.
                Kerr
              Robert
                  J.
                  WatersPresident
                and
              Senior
                  Vice
                  President andChief Executive
                Officer
              Chief Financial
                Officer
  Calgary,
        Alberta
 February
        21,
        2007
 
 
  Page
            2 of
            26
 
  **REPORT
        OF
        INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS**
 
 To
        the Board of Directors and Unitholders of Enerplus Resources Fund **:**
  We
        have audited the accompanying consolidated balance sheets of Enerplus Resources
        Fund and subsidiaries (the “Fund”) as of December 31, 2006 and 2005, and the
        related consolidated statements of income, accumulated deficit and cash flows
        for the years then ended. These financial statements are the responsibility
        of
        the Fund’s management. Our responsibility is to express an opinion on these
        financial statements based on our audits.
  With
        respect to the
        financial statements for the year ended December 31, 2006, we conducted our
        audit in accordance with Canadian generally accepted auditing standards and
        the
        standards of the Public Company Accounting Oversight Board (United States).
        With
        respect to the financial statements for the year ended December 31, 2005,
        we
        conducted our audit in accordance with Canadian generally accepted auditing
        standards. Those standards require that we plan and perform the audit to
        obtain
        reasonable assurance about whether the financial statements are free of material
        misstatement. An audit includes examining, on a test basis, evidence supporting
        the amounts and disclosures in the financial statements. An audit also includes
        assessing the accounting principles used and significant estimates made by
        management, as well as evaluating the overall financial statement presentation.
        We believe that our audits provide a reasonable basis for our
        opinion.
 
 In
        our opinion, such consolidated financial statements present fairly, in all
        material respects, the financial position of Enerplus Resources Fund and
        subsidiaries as of December 31, 2006 and 2005, and the results of their
        operations and their cash flows for the years then ended in conformity with
        Canadian generally accepted accounting principles.
 
 We
        have also audited, in accordance with the standards of the Public Company
        Accounting Oversight Board (United States), the effectiveness of the Fund’s
        internal control over financial reporting as of December 31, 2006, based
        on the
        criteria established in Internal Control - Integrated Framework issued by
        the
        Committee of Sponsoring Organizations of the Treadway Commission and our
        report
        dated February 21, 2007 expressed an unqualified opinion on management's
        assessment of the effectiveness of the Fund's internal control over financial
        reporting and an unqualified opinion on the effectiveness of the Fund's internal
        control over financial reporting.
   **DELOITTE
                  & TOUCHE LLP**Independent
                    Registered Chartered AccountantsCalgary,
                    CanadaFebruary
                  21,
                  2007
                “signed”
 
 
 
 Page
            3 of
            26


**CONSOLIDATED
      BALANCE SHEETS**





**As
                at
                December 31 (CDN$ thousands)**
            
            
            **2006**
            
            
            2005**Assets**Current
                assetsCash
            
            **$**
            **124**
            
            $
            10,093Accounts
                receivable
            
            
            **175,454**
            
            
            170,623Deferred
                financial assets (Note 2)
            
            
            **23,612**
            
            
            49,874Other
                current
                (Note 10)
            
            
            **6,715**
            
            
            26,751**205,905**
            
            
            257,341Property,
                plant and equipment (Note 3)
            
            
            **3,726,097**
            
            
            3,650,327Goodwill
                (Note 6)
            
            
            **221,578**
            
            
            221,234Other
                assets
                (Notes 7 and 10)
            
            
            **50,224**
            
            
            1,721**$**
            **4,203,804**
            
            $
            4,130,623**Liabilities**Current
                liabilitiesAccounts
                payable
            
            **$**
            **284,286**
            
            $
            316,875Distributions
                payable to unitholders
            
            
            **51,723**
            
            
            49,367Deferred
                credits (Note 2)
            
            
            **-**
            
            
            57,368**336,009**
            
            
            423,610Long-term
                debt (Note 7)
            
            
            **679,774**
            
            
            659,918Future
                income
                taxes (Note 9)
            
            
            **331,340**
            
            
            442,970Asset
                retirement obligations (Note 4)
            
            
            **123,619**
            
            
            110,606**1,134,733**
            
            
            1,213,494**Equity**Unitholders’
                capital (Note 8)Trust
                UnitsAuthorized:      UnlimitedIssued
                and
                Outstanding:  2006
                -
                123,150,8202005
                -
                117,539,331
            
            
            **3,713,126**
            
            
            3,410,614Accumulated
                deficit
            
            
            **(971,085**
            **)**
            
            (901,527
            )Cumulative
                translation adjustment (Note 1(j))
            
            
            **(8,979**
            **)**
            
            (15,568
            )**2,733,062**
            
            
            2,493,519**$**
            **4,203,804**
            
            $
            4,130,623








Signed
      on behalf of
      the Board of Directors:








**“signed”**
            **“signed”****Douglas
              R.
              Martin**
            **Robert
                L. Normand**Director
            Director







**CONSOLIDATED
      STATEMENTS OF ACCUMULATED DEFICIT**







**For
                the year ended December 31 (CDN$ thousands)**
            
            
            **2006**
            
            
            2005Accumulated
                income, beginning of year
            
            **$**
            **1,408,178**
            
            $
            976,137Net
                income
            
            
            **544,782**
            
            
            432,041Accumulated
                income, end of year
            
            **$**
            **1,952,960**
            
            $
            1,408,178Accumulated
                cash distributions, beginning of year
            
            **$**
            **(2,309,705**
            **)**
            $
            (1,811,500
            )Cash
                distributions
            
            
            **(614,340**
            **)**
            
            (498,205
            )Accumulated
                cash distributions, end of year
            
            **$**
            **(2,924,045**
            **)**
            $
            (2,309,705
            )Accumulated
                deficit, end of year
            
            **$**
            **(971,085**
            **)**
            $
            (901,527
            )





Page
          4 of
          26







**CONSOLIDATED
      STATEMENTS OF INCOME**





**For
                the year ended December 31 (CDN$ thousands except per trust unit
                amounts)**
            
            
            **2006**
            
            
            2005**Revenues**Oil
                and gas
                sales
            
            **$**
            **1,595,324**
            
            $
            1,550,569Royalties
            
            
            **(293,161**
            **)**
            
            (296,983
            )Derivative
                instruments (Notes 2 and 10)Financial
                contracts - qualified hedges
            
            
            **-**
            
            
            (27,256
            )Other
                financial contracts
            
            
            **(3,226**
            **)**
            
            (82,664
            )Other
                income
            
            
            **2,465**
            
            
            11,064**1,301,402**
            
            
            1,154,730**Expenses**Operating
            
            
            **251,239**
            
            
            216,808General
                and
                administrative (Note 8(b))
            
            
            **59,937**
            
            
            40,375Transportation
            
            
            **22,611**
            
            
            26,915Interest
                on
                long-term debt (Note 7)
            
            
            **32,168**
            
            
            25,791Foreign
                exchange (gain)/loss
            
            
            **(528**
            **)**
            
            1,677Depletion,
                depreciation, amortization and accretion
            
            
            **481,598**
            
            
            386,545**847,025**
            
            
            698,111Income
                before
                taxes
            
            
            **454,377**
            
            
            456,619Capital
                taxes
            
            
            **3,393**
            
            
            6,486Current
                taxes
            
            
            **18,236**
            
            
            2,764Future
                income
                tax (recovery)/expense (Note 9)
            
            
            **(112,034**
            **)**
            
            15,328**Net
                Income**
            
            **$**
            **544,782**
            
            $
            432,041Net
                income
                per trust unitBasic
            
            **$**
            **4.48**
            
            $
            3.96Diluted
            
            **$**
            **4.47**
            
            $
            3.95Weighted
                average number of trust units outstanding (thousands)Basic
            
            
            **121,588**
            
            
            109,083Diluted
            
            
            **121,858**
            
            
            109,371








Page
          5 of
          26


rule




**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**





**For
                the year ended December 31 (CDN$ thousands)**
            
            
            **2006**
            
            
            2005**Operating
                Activities**Net
                income
            
            **$**
            **544,782**
            
            $
            432,041Non-cash
                items add/(deduct):Depletion,
                depreciation, amortization and accretion
            
            
            **481,598**
            
            
            386,545Non-cash
                financial contracts (Note 2)
            
            
            **(31,106**
            **)**
            
            (32,679
            )Non-cash
                foreign exchange
            
            
            **(32**
            **)**
            
            (2,036
            )Unit
                based
                compensation (Note 8)
            
            
            **6,323**
            
            
            3,040Future
                income
                tax (Note 9)
            
            
            **(112,034**
            **)**
            
            15,328Asset
                retirement obligations settled (Note 4)
            
            
            **(11,514**
            **)**
            
            (7,829
            )**878,017**
            
            
            794,410Increase
                in
                non-cash operating working capital
            
            
            **(14,321**
            **)**
            
            (19,777
            )Cash
                flow
                from operating activities
            
            
            **863,696**
            
            
            774,633**Financing
                Activities**Issue
                of
                trust units, net of issue costs (Note 8)
            
            
            **296,189**
            
            
            507,209Cash
                distributions to unitholders
            
            
            **(614,340**
            **)**
            
            (498,205
            )Increase
                in
                bank credit facilities (Note 7)
            
            
            **19,888**
            
            
            76,963Decrease
                in
                non-cash financing working capital
            
            
            **2,356**
            
            
            12,924Cash
                flow
                from financing activities
            
            
            **(295,907**
            **)**
            
            98,891**Investing
                Activities**Capital
                expenditures
            
            
            **(496,201**
            **)**
            
            (373,032
            )Property
                acquisitions (Note 5)
            
            
            **(51,313**
            **)**
            
            (123,896
            )Property
                dispositions
            
            
            **1,599**
            
            
            66,511Corporate
                acquisitions, net of cash acquired (Note 6)
            
            
            **-**
            
            
            (483,014
            )Purchase
                of
                investments
            
            
            **(29,172**
            **)**
            
            -(Increase)/Decrease
                in non-cash investing working capital
            
            
            **(3,535**
            **)**
            
            51,045Cash
                flow
                from investing activities
            
            
            **(578,622**
            **)**
            
            (862,386
            )Effect
                of
                exchange rate changes on cash
            
            
            **864**
            
            
            (1,045
            )Change
                in
                cash
            
            
            **(9,969**
            **)**
            
            10,093Cash,
                beginning of year
            
            
            **10,093**
            
            
            -Cash,
                end of
                year
            
            **$**
            **124**
            
            $
            10,093**Supplementary
                Cash Flow Information**Cash
                income
                taxes paid
            
            **$**
            **14,060**
            
            $
            2,669Cash
                interest
                paid
            
            **$**
            **34,924**
            
            $
            24,220














Page
          6 of
          26


rule




**NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS**





**1.
      SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES**





The
      management of
      Enerplus Resources Fund (“Enerplus” or the “Fund”) prepares the financial
      statements in accordance with Canadian generally accepted accounting principles
      (“GAAP”). A reconciliation between Canadian GAAP and United States of America
      GAAP is disclosed in Note
      14. The
      preparation of
      financial statements requires management to make estimates and assumptions
      that
      affect the reported amounts of assets and liabilities and disclosures of
      contingencies, if any, as at the date of the financial statements and the
      reported amounts of revenues and expenses during the reporting period. The
      following significant accounting policies are presented to assist the reader
      in
      evaluating these consolidated financial statements and, together with the
      following notes, should be considered an integral part of the consolidated
      financial statements.





**(a)
      Organization and Basis of Accounting**





The
      Fund is an
      open-end investment trust created under the laws of the Province of Alberta
      operating pursuant to the Amended and Restated Trust Indenture between EnerMark
      Inc. (the Fund’s wholly-owned subsidiary), Enerplus Resources Corporation
      (“ERC”) and CIBC Mellon Trust Company as Trustee. The beneficiaries of the Fund
      (the “unitholders”) are holders of the trust units issued by the Fund. As a
      trust under the Income Tax Act (Canada), Enerplus is limited to holding and
      administering permitted investments and making distributions to the
      unitholders.





The
      Fund’s
      financial statements include the accounts of the Fund and its subsidiaries
      on a
      consolidated basis. All inter-entity transactions have been eliminated. Many
      of
      the Fund’s production activities are conducted through joint ventures and the
      financial statements reflect only the Fund’s proportionate interest in such
      activities.





**(b)
      Revenue
      Recognition**





Revenue
      associated
      with the sale of crude oil, natural gas and natural gas liquids is recognized
      when title passes from the Fund to its customers based on volumes delivered
      and
      contractual delivery points and price. A portion of the properties acquired
      through the March 5, 2003 acquisition of PCC Energy Inc. and PCC Energy Corp.
      are subject to a royalty arrangement with a private company that is structured
      as a net profits interest. The results from operations included in the Fund's
      consolidated financial statements for these properties are reduced for this
      net
      profits interest.





**(c)
      Property, Plant and Equipment (“PP&E”)**





The
      Fund follows
      the full cost method of accounting for petroleum and natural gas properties
      under which all acquisition and development costs are capitalized on a country
      by country cost centre basis. Such costs include land acquisition, geological,
      geophysical, drilling costs for productive and non-productive wells, facilities
      and directly related overhead charges. Repairs, maintenance and operational
      costs that do not extend or enhance the recoverable reserves are charged to
      earnings. Proceeds from the sale of petroleum and natural gas properties are
      applied against the capitalized costs. Gains and losses are not recognized
      upon
      disposition of oil and natural gas properties unless such a disposition would
      alter the rate of depletion by 20% or more. Net costs related to operating
      and
      administrative activities during the development of large capital projects
      are
      capitalized until commercial production has commenced.





**(d)
      Impairment Test**





A
      limit is placed on the aggregate carrying value of PP&E (the “impairment
      test”). The Fund performs an impairment test on a country by country basis. An
      impairment loss exists when the carrying amount of the country’s PP&E
      exceeds the estimated undiscounted future net cash flows associated with the
      country’s proved reserves. If an impairment loss is determined to exist, the
      costs carried on the balance sheet in excess of the discounted future net cash
      flows associated with the country’s proved and probable reserves are charged to
      income.





**(e)
      Depletion and Depreciation**





The
      provision for
      depletion and depreciation of oil and natural gas assets is calculated on a
      country by country basis using the unit-of-production method, based on the
      country’s share of estimated proved reserves before royalties. Reserves and
      production are converted to equivalent units on the basis of 6 Mcf = 1 bbl,
      reflecting the approximate relative energy content.





Page
          7 of
          26


rule




**(f)
      Goodwill**





The
      Fund, when
      appropriate, recognizes goodwill relating to corporate acquisitions when the
      total purchase price exceeds the fair value of the net identifiable assets
      and
      liabilities of the acquired companies. The goodwill balance is assessed for
      impairment annually at year-end or as events occur that could result in an
      impairment. To assess impairment, the fair values of the Canadian and U.S.
      reporting units are compared to their respective book values. If the fair value
      is less than the book value, a second test is performed to determine the amount
      of impairment. The amount of impairment is measured by allocating the fair
      value
      of the reporting unit to its identifiable assets and liabilities as if they
      had
      been acquired in a business combination for a purchase price equal to their
      fair
      value. If goodwill determined in this manner is less than the carrying value
      of
      goodwill, an impairment loss is recognized in the period in which it occurs.
      Goodwill is stated at cost less impairment and is not amortized. Goodwill is
      not
      deductible for income tax purposes.




**(g)
      Asset
      Retirement Obligations**





The
      Fund recognizes
      as a liability the estimated fair value of the future retirement obligations
      associated with PP&E. The fair value is capitalized and amortized over the
      same period as the underlying asset. The Fund estimates the liability based
      on
      the estimated costs to abandon and reclaim its net ownership interest in all
      wells and facilities and the estimated timing of the costs to be incurred in
      future periods. This estimate is evaluated on a periodic basis and any
      adjustment to the estimate is prospectively applied. As time passes, the change
      in net present value of the future retirement obligation is expensed through
      accretion. Retirement obligations settled during the period reduce the future
      retirement liability. No gains or losses on retirement activities were realized,
      due to settlements approximating the estimates.





**(h)
      Income
      Taxes**




The
      Fund is a
      taxable entity under the Income Tax Act (Canada) and is taxable only on Canadian
      income that is not distributed or distributable to the Fund’s unitholders. In
      the Trust structure, payments made between the Canadian operating entities
      and
      the Fund, ultimately transfers both income and future income tax liability
      to
      the unitholders. The future income tax liability associated with Canadian assets
      recorded on the balance sheet is recovered over time through these payments.
      As
      the Canadian operating entities transfer all of their Canadian taxable income
      to
      the Fund, no provision for current Canadian income tax has been made by any
      Canadian operating entity.





The
      U.S. operating
      entity is subject to U.S. income taxes on its taxable income determined under
      U.S. income tax rules and regulations. Repatriation of funds from U.S.
      operations will also be subject to applicable withholding taxes as required
      under U.S. tax law. A provision has been setup to reflect these current U.S.
      income taxes.





The
      Fund follows
      the liability method of accounting for income taxes. Under this method, income
      tax liabilities and assets are recognized for the estimated tax consequences
      attributable to temporary differences between the amounts reported in the
      financial statements of the Fund’s corporate subsidiaries and their respective
      tax bases, using substantively enacted income tax rates. The effect of a change
      in these income tax rates on future income tax liabilities and assets is
      recognized in income during the period that the change occurs.





**(i)
      Financial Instruments**





The
      Fund is exposed
      to market risks resulting from fluctuations in commodity prices and interest
      rates in the normal course of operations. The Fund uses various types of
      financial instruments to manage these market risks. Prior to December 31, 2005,
      the Fund designated certain commodity contracts and interest rate swaps as
      qualified hedges. Effective December 31, 2005, the Fund elected to stop
      designating commodity contracts as qualified hedges. The fair value of the
      former commodity hedges has been recorded as a financial liability with an
      offset to deferred financial assets. The deferred financial asset will be
      amortized over the remaining lives of the associated financial contracts. The
      fair value of the financial liability will be determined at each period end
      with
      any resulting change in fair value being taken into income in that
      period.





The
      gain or loss in
      fair value of all financial contracts that had not previously qualified for
      hedge accounting are taken into income during the period of change and charged
      to deferred credits or deferred financial assets on the balance sheet.





Proceeds
      or costs
      realized from holding interest rate swaps are recognized at the time each
      transaction under a contract is settled and is recorded in interest expense.
      The
      Fund has designated the interest rate swaps as qualified hedges and these swaps
      are evaluated quarterly to ensure they effectively hedge the underlying interest
      rate.





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**(j)
      Foreign
      Currency Translation**





The
      Fund’s U.S.
      operations are self-sustaining. Assets and liabilities of these operations
      are
      translated into Canadian dollars at period end exchange rates, while revenues
      and expenses are converted using average rates for the period. Gains and losses
      from the translation into Canadian dollars are deferred and included in the
      cumulative translation adjustment as part of unitholders’ equity.





Other
      monetary
      assets and liabilities, not related to the Fund’s U.S. operations, are
      translated into Canadian dollars at rates of exchange in effect at the balance
      sheet date. The other assets and related depreciation, depletion and
      amortization, other liabilities, revenue and other expenses are translated
      into
      Canadian dollars at rates of exchange in effect at the respective transaction
      dates. The resulting exchange gains or losses are included in
      earnings.





**(k)
      Unit
      Based Compensation**





The
      Fund uses the
      fair value method of accounting for the trust unit rights incentive plan. Under
      this method, the fair value of the rights is determined on the date in which
      fair value can reasonably be determined, generally being the grant date. This
      amount is charged to earnings over the vesting period of the rights, with a
      corresponding increase in contributed surplus. When rights are exercised, the
      proceeds, together with the amount recorded in contributed surplus, are recorded
      to unitholders’ capital.





**2.
      DEFERRED
      FINANCIAL ASSETS AND DEFERRED CREDITS**





The
      deferred
      financial assets of $23,612,000 at December 31, 2006 consist of the fair value
      of the financial instruments of $49,268,000 less the related deferred premiums
      of $25,656,000.





**Deferred
                Financial Assets ($ thousands)**Fair
                value of
                financial instrumentsDeferred
                financial assets as at December 31, 2005
            
            $
            49,874Deferred
                financial credits as at December 31, 2005
            
            
            (57,368
            )Change
                in fair
                value - other financial contracts(1)
            
            
            80,980Amortization
                of
                deferred financial assets(2)
            
            
            (49,874
            )**$**
            **23,612**


(1) Changes
      in the fair
      value of financial contracts that do not qualify for hedge accounting are taken
      into income during the period as other
      financial
      contracts and reflected as an increase or decrease in the deferred financial
      asset or liability.


(2) Represents the
      amortization of the fair value of financial contracts on December 31, 2005
      for
      which hedge accounting is no longer applied. These deferred financial assets
      are
      fully amortized at December 31, 2006.








The
      following table
      summarizes the income statement effects of other financial
      contracts:





**Other
                Financial Contracts ($ thousands)**
            
            
            **2006**
            
            
            2005Change
                in
                fair value
            
            **$**
            **(80,980**
            **)**
            $
            (35,823
            )Amortization
                of deferred financial assets
            
            
            **49,874**
            
            
            3,144Realized
                cash
                costs, net
            
            
            **34,332**
            
            
            115,343Other
                financial contracts
            
            **$**
            **3,226**
            
            $
            82,664





During
      the year
      ended December 31, 2006, the Fund realized cash costs of $nil from commodity
      financial contracts that qualified as hedges compared to cash costs of
      $27,256,000 (net gains and losses) during 2005.








**3.
      PROPERTY, PLANT AND EQUIPMENT**





**($
                thousands)**
            
            
            **2006**
            
            
            2005Property,
                plant and equipment
            
            **$**
            **5,855,511**
            
            $
            5,306,137Accumulated
                depletion, depreciation and accretion
            
            
            **(2,129,414**
            **)**
            
            (1,655,810
            )Net
                property,
                plant and equipment
            
            **$**
            **3,726,097**
            
            $
            3,650,327





Capitalized
      development G&A of $14,111,000 (2005 - $11,571,000) is included in PP&E
      and the depletion and depreciation calculation includes future capital costs
      of
      $472,567,000 (2005 - $464,423,000) included in our reserve reports. Excluded
      from PP&E for the depletion and depreciation calculation is $81,183,000
      (2005 - $61,795,000) related to the Joslyn development project that has not
      commenced commercial production.





An
      impairment test calculation was performed on a country by country basis on
      the
      PP&E values at December 31, 2006 in which the estimated undiscounted future
      net cash flows associated with the proved reserves exceeded the carrying amount
      of the Fund’s PP&E.





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rule




The
      following table
      outlines benchmark prices and the exchange rate used in the impairment tests
      for
      both Canadian and U.S. cost centres at December 31, 2006:





**Year**
            
            
            **WTI
                Crude Oil****(1)**
              **US$/bbl**
            
            
            **Exchange
                Rate**
              **US$/CDN$**
            
            
            **Edm
                Light Crude****(1)**
              **CDN$/bbl**
            
            
            **Natural
                Gas 30 day spot @ AECO****(1)**
              **CDN$/Mcf**2007
            
            $
            65.73
            
            $
            0.87
            
            $
            74.10
            
            $
            7.722008
            
            
            68.82
            
            
            0.87
            
            
            77.62
            
            
            8.592009
            
            
            62.42
            
            
            0.87
            
            
            70.25
            
            
            7.742010
            
            
            58.37
            
            
            0.87
            
            
            65.56
            
            
            7.552011
            
            
            55.20
            
            
            0.87
            
            
            61.90
            
            
            7.72Thereafter
            
            
            +
                2.0
            %
            
            0.87
            
            
            +
                2.0
            %
            
            +
                2.0
            %


(1)  Actual
      prices used
      in the impairment test were adjusted for commodity price differentials specific
      to the Fund








**4.
      ASSET
      RETIREMENT OBLIGATIONS**





Total
      future asset
      retirement obligations were estimated by management based on the Fund’s net
      ownership interest in wells and facilities, estimated costs to abandon and
      reclaim the wells and facilities and the estimated timing of the costs to be
      incurred in future periods. The Fund has estimated the net present value of
      its
      total asset retirement obligations to be $123,619,000 at December 31, 2006
      compared to $110,606,000 at December 31, 2005 based on a total liability of
      $436,663,000 and $422,045,000 respectively. These payments are expected to
      be
      made over the next 66 years with the majority of costs incurred between 2036
      and
      2045. To calculate the present value of the asset retirement obligations for
      2006 the Fund used a weighted credit-adjusted rate of approximately 6.3% and
      an
      inflation rate of 2.0%, the same as for 2005. Settlements during the year
      approximated our estimates and as a result, no gains or losses were recognized.





Following
      is a
      reconciliation of the asset retirement obligations:





**($
                thousands)**
            
            
            **2006**
            
            
            2005Asset
                retirement obligations, beginning of year
            
            **$**
            **110,606**
            
            $
            105,978Changes
                in
                estimates
            
            
            **12,757**
            
            
            8,764Acquisition
                and development activity
            
            
            **5,574**
            
            
            6,791Dispositions
            
            
            **(45**
            **)**
            
            (9,413
            )Asset
                retirement obligations settled
            
            
            **(11,514**
            **)**
            
            (7,829
            )Accretion
                expense
            
            
            **6,241**
            
            
            6,315Asset
                retirement obligations, end of year
            
            **$**
            **123,619**
            
            $
            110,606








**5.
      PROPERTY
      ACQUISITIONS**





**Assets
      of
      Sleeping Giant LLC (“Sleeping Giant”)**





On
      October 4, 2005 the Fund acquired all ownership interests and retired the debt
      of Sleeping Giant, a private U.S. company holding additional working interests
      in certain properties of Lyco Energy Corporation for total cash consideration
      of
      $111,914,000 which was financed through existing credit facilities. The fair
      value of this consideration was allocated to cash and positive working capital
      assumed of $5,754,000 and PP&E of $106,160,000. This acquisition has been
      accounted for as an asset acquisition. The operating results of Sleeping Giant
      subsequent to October 4, 2005 are included in the Fund’s consolidated financial
      statements.





**6.
      CORPORATE ACQUISITIONS**





The
      allocation to
      the fair value of the assets acquired and liabilities assumed plus the future
      income tax cost are summarized as follows:





**($
                thousands)**
            
            
            2005
              Lyco
            
            
            2005
              TriLochProperty,
                plant and equipment
            
            $
            506,379
            
            $
            77,786Goodwill
                (with no tax base)
            
            
            179,019
            
            
            18,450Future
                income
                taxes
            
            
            (179,019
            )
            
            (18,450
            )506,379
            
            
            77,786Cash
            
            
            27,231
            
            
            -Non-cash
                working capital deficiency
            
            
            (31,664
            )
            
            (399
            )Net
                assets
                acquired
            
            $
            501,946
            
            $
            77,387






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rule




Goodwill
      is
      comprised of the following:





**Goodwill
                ($ thousands)**
            
            
            **2006**
            
            
            2005Balance,
                beginning of year
            
            **$**
            **221,234**
            
            $
            29,082Lyco
                acquisition
            
            
            **-**
            
            
            179,019TriLoch
                acquisition
            
            
            **-**
            
            
            18,450Foreign
                exchange(1)
            
            
            **344**
            
            
            (5,317
            )**Balance,
                end of year**
            
            **$**
            **221,578**
            
            $
            221,234


(1)  The
      foreign
      exchange results from the translation of Lyco goodwill at the period end
      rate.





**Lyco
      Energy
      Corporation (“Lyco”)**





On
      August 30, 2005 the Fund acquired all the outstanding common shares and retired
      the debt including all outstanding mandatorily redeemable preferred shares
      of
      Lyco, a private U.S. company operating in the states of Montana and North
      Dakota. Total consideration was approximately $501,946,000, and the Fund assumed
      a net working capital deficiency of $4,433,000. Goodwill of $179,019,000 was
      recorded based on the excess of the consideration paid over the value assigned
      to the identifiable assets and liabilities including the future income tax
      liability. The acquisition, which was financed through an equity offering and
      available credit facilities, has been accounted for using the purchase method
      of
      accounting for business combinations. Results from the operations of Lyco
      subsequent to August 30, 2005 are included in the Fund’s consolidated financial
      statements.





**TriLoch
      Resources Inc. (“TriLoch”)**





On
      July 1, 2005 the Fund acquired all the outstanding common shares of TriLoch,
      a
      public Alberta corporation operating in southern Alberta, in exchange for
      1,632,516 trust units of the Fund with a recorded value of $69,088,000. The
      trust unit value was based on the weighted average price of the Fund’s trust
      units on the Toronto Stock Exchange during the five day trading period
      surrounding the announcement of the TriLoch transaction. Total consideration
      was
      $77,387,000 consisting of units, deal costs and the retirement of TriLoch’s bank
      indebtedness. The Fund also assumed a working capital deficiency of $399,000.
      Goodwill of $18,450,000 has been recorded as a result of the excess of the
      consideration paid over the value allocated to the identifiable assets and
      liabilities including the future income tax liability. This acquisition has
      been
      accounted for using the purchase method of accounting for business combinations.
      Results from the operations of TriLoch subsequent to July 1, 2005 are included
      in the Fund’s consolidated financial statements.





**7.
      LONG-TERM DEBT**





**($
                thousands)**
            
            
            **2006**
            
            
            2005Bank
                credit
                facilities (a)
            
            **$**
            **348,520**
            
            $
            328,632Senior
                notes
                (b)US$175
                million (issued June 19, 2002)
            
            
            **268,328**
            
            
            268,328US$54
                million
                (issued October 1, 2003)
            
            
            **62,926**
            
            
            62,958Total
                long-term debt
            
            **$**
            **679,774**
            
            $
            659,918





**(a)
      Unsecured Bank Credit Facility**





Enerplus
      has an
      $850,000,000 unsecured covenant based three year term facility and has the
      ability to extend the facility each year or repay the entire balance at the
      end
      of the three year term. During 2006, the facility was extended until November
      2009. At December 31, 2006, Enerplus had available credit of $501,480,000 under
      this facility. The facility is extendible each year with a bullet payment
      required at the end of the three year term. Various borrowing options are
      available under the facility including prime rate based advances and bankers’
acceptance loans. This facility carries floating interest rates that are
      expected to range between 55.0 and 110.0 basis points over bankers’ acceptance
      rates, depending on Enerplus’ ratio of senior debt to earnings before interest,
      taxes and non-cash items. The effective interest rate on the facility for the
      year ended December 31, 2006 was 4.8% (2005 - 3.4%).





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rule




**(b)
      Senior
      Unsecured Notes**





On
      October 1, 2003 Enerplus issued US$54,000,000 senior unsecured notes that mature
      October 1, 2015. The notes have a coupon rate of 5.46% priced at par with
      interest paid semi-annually on April 1 and October 1 of each year. Principal
      payments are required in five equal installments beginning October 1, 2011
      and
      ending October 1, 2015. Costs incurred in connection with issuing the notes
      in
      the amount of $475,000 are classified as deferred charges on the balance sheet
      and are being amortized as a part of depletion, depreciation, amortization
      and
      accretion (“DDA&A”) over the term of the notes. At December 31, 2006, the
      amount remaining to be amortized associated with these costs was $346,000 (2005
      - $386,000). The notes are subject to fluctuations in foreign exchange rates.





On
      June 19, 2002 Enerplus issued US$175,000,000 senior unsecured notes that mature
      June 19, 2014. The notes have a coupon rate of 6.62% priced at par, with
      interest paid semi-annually on June 19 and December 19 of each year. Principal
      payments are required in five equal installments beginning June 19, 2010 and
      ending June 19, 2014. Costs incurred in connection with issuing the notes in
      the
      amount of $1,892,000 are classified as deferred charges on the balance sheet
      and
      are being amortized to DDA&A over the term of the notes. At December 31,
      2006, the amount remaining to be amortized was $1,177,000 (2005 - $1,335,000).
      Concurrent with the issuance of the notes on June 19, 2002, the Fund entered
      into a cross currency swap with a syndicate of financial institutions. Under
      the
      terms of the swap, the amount of the notes was fixed for purposes of interest
      and principal repayments at a notional amount of CDN$268,328,000. Interest
      payments are made on a floating rate basis, set at the rate for three-month
      Canadian bankers’ acceptances, plus 1.18%.





The
      bank credit
      facility and the senior notes (the “Combined Facilities”) are the legal
      obligation of EnerMark Inc. and are guaranteed by its subsidiaries. Payments
      with respect to the Combined Facilities have priority over payments to the
      Fund
      and over claims of and future distributions to the unitholders. However,
      unitholders have no direct liability beyond their equity investment should
      cash
      flow be insufficient to repay the Combined Facilities.








**8.
      FUND
      CAPITAL**





**(a)
      Unitholders’ Capital**





Trust
      Units





Authorized:
      Unlimited number of trust units





**(thousands)**
            
            **2006**
            2005**Issued:**
            
            
            **Units**
            
            
            **Amount**
            
            
            Units
            
            
            AmountBalance
                before Contributed Surplus, beginning of year
            
            
            **117,539**
            
            
            **3,407,567**
            
            
            104,124
            
            $
            2,826,641Issued
                for
                cash:Pursuant
                to
                public offerings
            
            
            **4,370**
            
            
            **240,287**
            
            
            10,638
            
            
            466,885Pursuant
                to
                rights plans
            
            
            **640**
            
            
            **22,974**
            
            
            805
            
            
            24,737Trust
                unit
                rights incentive plan (non-cash) - exercised
            
            
            **-**
            
            
            **3,065**
            
            
            -
            
            
            4,629DRIP*,
                net of
                redemptions
            
            
            **602**
            
            
            **32,928**
            
            
            339
            
            
            15,613Issued
                for
                acquisition of corporate and property interests (non-cash)
            
            
            **-**
            
            
            **-**
            
            
            1,633
            
            
            69,062**123,151**
            
            
            **3,706,821**
            
            
            117,539
            
            
            3,407,567Contributed
                Surplus (Trust Unit Rights Plan)
            
            
            **-**
            
            
            **6,305**
            
            
            -
            
            
            3,047Balance,
                end
                of year
            
            
            **123,151**
            
            **$**
            **3,713,126**
            
            
            117,539
            
            $
            3,410,614


*  Distribution
      Reinvestment and Unit Purchase Plan





**Contributed
                surplus ($ thousands)**
            
            
            **2006**
            
            
            2005Balance,
                beginning of year
            
            **$**
            **3,047**
            
            $
            4,636Trust
                unit
                rights incentive plan (non-cash) - exercised
            
            
            **(3,065**
            **)**
            
            (4,629
            )Trust
                unit
                rights incentive plan (non-cash) - expensed
            
            
            **6,323**
            
            
            3,040Balance,
                end
                of year
            
            **$**
            **6,305**
            
            $
            3,047





On
      March 20, 2006 the Fund closed an equity offering of 4,370,000 units at a price
      of $58.00 per unit for gross proceeds of $253,460,000 ($240,287,000 net of
      issuance costs).





On
      August 9, 2005 the Fund completed a Canadian equity offering of 10,637,500
      subscription receipts at a price of $46.25 per subscription receipt for gross
      proceeds of $491,984,000 ($466,885,000 net of issuance costs). The subscription
      receipts were exchanged for an equal number of trust units on August 30, 2005
      upon the closing of the Lyco transaction.





Page
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rule




On
      July 1, 2005 the Fund issued 1,632,516 trust units pursuant to the acquisition
      of TriLoch valued at $42.32 per trust unit, being the weighted average trading
      price of the Fund’s trust units on the Toronto Stock Exchange during the five
      day trading period surrounding the announcement of the TriLoch transaction,
      for
      a recorded value of $69,088,000 ($69,062,000 net of issuance
      costs).





Pursuant
      to the
      monthly Distribution Reinvestment and Unit Purchase Plan (“DRIP”), Canadian
      unitholders are entitled to reinvest cash distributions in additional trust
      units of the Fund. Trust units are issued at 95% of the weighted average market
      price on the Toronto Stock Exchange for the 20 trading days preceding a
      distribution payment date without service charges or brokerage fees. Eligible
      unitholders are also entitled to make optional cash payments to acquire
      additional trust units; however, the 5% discount does not apply.





Trust
      units are
      redeemable by unitholders at approximately 85% of the current market price.
      Redemptions are limited to $500,000 during any rolling two calendar months.
      Redemption requests in excess of $500,000 can be paid using investments of
      the
      Fund or a non-interest bearing instrument.





**(b)
      Trust
      Unit Rights Incentive Plan**





As
      at December 31, 2006 a total of 3,079,000 rights issued pursuant to the Trust
      Unit Rights Incentive Plan (“Rights Plan”) were outstanding at an average
      exercise price of $48.53. This represents 2.5% of the total trust units
      outstanding of which 809,000 rights, with an average exercise price of $39.81,
      were exercisable. Under the Rights Plan, distributions per trust unit to
      Enerplus unitholders in a calendar quarter which represent a return of more
      than
      2.5% of the net PP&E of Enerplus at the end of such calendar quarter, may
      result in a reduction in the exercise price of the rights. Results for the
      year
      ended December 31, 2006 reduced the exercise price of the outstanding rights
      by
      $2.02 per trust unit of which a $0.51 reduction is effective January 2007 and
      a
      $0.50 reduction is effective April 2007. Plan members have the choice to
      exercise rights using the original exercise price or a reduced strike price.
      In
      certain circumstances, it may be more advantageous to use the original exercise
      price as it could effectively lower the plan member’s tax rate on the
      transaction.





The
      Fund uses a
      binomial lattice option-pricing model to calculate the estimated fair value
      of
      rights granted under the plan. The following assumptions were used to arrive
      at
      the estimate of fair value:





**2006**
            
            
            2005Dividend
                yield
            
            
            **9.26**
            **%**
            
            8.97
            %Right’s
                exercise price reduction
            
            **$**
            **1.61**
            
            $
            1.43Volatility
            
            
            **25.61**
            **%**
            
            21.46
            %Risk-free
                interest rate
            
            
            **4.13**
            **%**
            
            3.70
            %Forfeiture
                rate
            
            
            **2.80**
            **%**
            
            4.60
            %





The
      fair value of
      the rights granted under the plan during 2006 ranged between 12% and 14% (2005
      -
      9% and 10%) of the underlying market price of a trust unit on the grant date.





During
      the year the
      Fund expensed $6,323,000 or $0.05 per unit (2005 - $3,040,000 or $0.03 per
      unit)
      of unit based compensation expense using the fair value method. The remaining
      future fair value of the rights of $10,113,000 at December 31, 2006 (2005 -
      $6,380,000) will be recognized in earnings over the remaining vesting period
      of
      the rights. Activity for the rights issued pursuant to the Rights Plan is as
      follows:





**2006**
            2005**Number
                of Rights (000’s)**
            
            
            **Weighted
                Average Exercise Price****(1)**
            
            
            Number
                of Rights (000’s
            )
            
            Weighted
                Average Exercise Price(1)Trust
                unit
                rights outstandingBeginning
                of
                year
            
            
            **2,621**
            
            **$**
            **42.80**
            
            
            2,401
            
            $
            34.33Granted
            
            
            **1,473**
            
            
            **54.49**
            
            
            1,125
            
            
            53.07Exercised
            
            
            **(640**
            **)**
            
            **35.94**
            
            
            (805
            )
            
            30.72Cancelled
            
            
            **(375**
            **)**
            
            **46.35**
            
            
            (100
            )
            
            37.15End
                of
                year
            
            
            **3,079**
            
            
            **48.53**
            
            
            2,621
            
            
            42.80Rights
                exercisable at the end of the year
            
            
            **809**
            
            **$**
            **39.81**
            
            
            643
            
            $
            32.46


(1) Exercise
      price reflects grant prices less reduction in strike price discussed
      above.




The
      following table
      summarizes information with respect to outstanding rights as at December 31,
      2006. Rights vest between one and three years and expire between four and six
      years.


Page
          13 of
          26










**Rights
                Outstanding at December 31, 2006 (000’s)**
            
            
            **Original
                Exercise Price**
            
            
            **Exercise
                Price after Price Reductions**
            
            
            **Expiry
                Date December 31**
            
            
            **Rights
                Exercisable at December 31, 2006 (000’s**
            **)**10
            
            $
            24.50
            
            $
            18.41
            
            
            2007
            
            
            101
            
            
            26.40
            
            
            20.43
            
            
            2008
            
            
            138
            
            
            26.09
            
            
            20.33
            
            
            2008
            
            
            386
            
            
            27.70
            
            
            22.14
            
            
            2009
            
            
            623
            
            
            33.00
            
            
            27.75
            
            
            2009
            
            
            2319
            
            
            36.00
            
            
            31.13
            
            
            2009
            
            
            19192
            
            
            37.62
            
            
            33.14
            
            
            2009
            
            
            19214
            
            
            40.70
            
            
            36.61
            
            
            2010
            
            
            130
            
            
            37.25
            
            
            33.53
            
            
            2010
            
            
            858
            
            
            38.83
            
            
            35.51
            
            
            2010
            
            
            40387
            
            
            40.80
            
            
            37.83
            
            
            2010
            
            
            20880
            
            
            45.55
            
            
            42.90
            
            
            2011
            
            
            992
            
            
            44.86
            
            
            42.56
            
            
            2011
            
            
            16143
            
            
            49.75
            
            
            47.85
            
            
            2011
            
            
            46566
            
            
            56.93
            
            
            55.44
            
            
            2011
            
            
            192178
            
            
            56.55
            
            
            55.54
            
            
            2012
            
            
            -436
            
            
            54.21
            
            
            53.70
            
            
            2012
            
            
            -320
            
            
            56.00
            
            
            56.00
            
            
            2012
            
            
            -486
            
            
            52.90
            
            
            52.90
            
            
            2012
            
            
            -3,079
            
            $
            50.10
            
            $
            48.53
            
            
            
            
            
            809








**(c)
      Basic
      and Diluted per Trust Unit Calculations**





Net
      income per
      trust unit has been determined based on the following:





**(thousands)**
            
            
            **2006**
            
            
            2005Weighted
                  average units
            
            
            **121,588**
            
            
            109,083Dilutive
                impact of rights
            
            
            **270**
            
            
            288Diluted
                trust
                units
            
            
            **121,858**
            
            
            109,371





No
      rights were excluded in calculating the weighted average number of diluted
      units
      for the year ended December 31, 2006. In 2005 we excluded 132,511 rights because
      their exercise price was greater than the annual average unit market price
      of
      $48.08. During the last two years, outstanding rights were the only potential
      dilutive instrument.





**9.
      INCOME
      TAXES**





**(a)
      Enerplus Resources Fund**





The
      Fund is an
      inter-vivos trust for income tax purposes. As such, the Fund’s income that is
      not allocated to the Fund’s unitholders is taxable. The Fund intends to allocate
      all income to unitholders.





For
      2006, the Fund
      had taxable income of $588,000,000 (2005 - $451,000,000) or $4.81 per trust
      unit
      (2005 - $4.05 per trust unit). Taxable income of the Fund is comprised of
      dividend, royalty, interest and partnership income, less deductions for Canadian
      oil and gas property expense (“COGPE”) and trust unit issue costs.





The
      amounts of
      COGPE and issue costs remaining in the Fund at December 31, 2006 are
      $466,700,000 and $35,543,000 respectively (2005 - $466,700,000 and
      $40,109,000).





***Proposed
      Tax on Income Trusts***





On
      October 31, 2006, the Federal Government announced a new tax on publicly traded
      flow through entities including Enerplus. The tax would be applicable beginning
      in 2011 at the rate of 31.5% provided that Enerplus does not exceed the guidance
      provided on normal growth. Enerplus can issue up to $7.5 billion of new equity
      before 2011 without exceeding the guidance on normal growth. In addition, we
      understand that a trust will be able to issue equity to retire debt existing
      on
      October 31, 2006 without eroding their safe harbour equity limits.





At
      the present time, the proposed changes to tax legislation are not substantively
      enacted. Further, the timing of the enactment or the exact content of the
      proposed changes is difficult to predict. Therefore, no amounts in respect
      of
      this matter are reflected in the future tax liability presented on the balance
      sheet.





Page
          14 of
          26




rule




If
      substantively enacted, the Fund would be treated as a taxable entity resulting
      in the recording of future income tax assets and liabilities. Enerplus’ future
      tax liability would be adjusted to include differences between the accounting
      and tax bases of the trust’s assets and liabilities at the substantively enacted
      tax rates.





**(b)
      Corporate Subsidiaries**





The
      future income
      tax liability on the balance sheet arises as a result of the following temporary
      differences:





**($
                thousands)**
            
            
            **Canadian**
            
            
            **Foreign**
            
            
            **2006**
              **Total**Excess
                of net
                book value of property, plant and equipment over the underlying tax
                bases
            
            **$**
            **179,770**
            
            **$**
            **183,081**
            
            **$**
            **362,851**Asset
                retirement obligations
            
            
            **(37,667**
            **)**
            
            **-**
            
            
            **(37,667**
            **)**Deferred
                hedging and other
            
            
            **6,963**
            
            
            **(807**
            **)**
            
            **6,156**Future
                income
                tax liability
            
            **$**
            **149,066**
            
            **$**
            **182,274**
            
            **$**
            **331,340**








**($
                thousands)**
            
            
            Canadian
            
            
            Foreign
            
            
            2005
              TotalExcess
                of net
                book value of property, plant and equipment over the underlying tax
                bases
            
            $
            302,610
            
            $
            183,355
            
            $
            485,965Asset
                retirement obligations
            
            
            (37,976
            )
            
            -
            
            
            (37,976
            )Deferred
                hedging and other
            
            
            (1,925
            )
            
            (3,094
            )
            
            (5,019
            )Future
                income
                tax liability
            
            $
            262,709
            
            $
            180,261
            
            $
            442,970








The
      provision for
      income taxes varies from the amounts that would be computed by applying the
      combined Canadian federal and provincial income tax rates for the following
      reasons:





**($
                thousands)**
            
            
            **2006**
            
            
            2005Income
                before
                taxes
            
            **$**
            **454,377**
            
            $
            456,619Computed
                income tax expense at the enacted rate of 34.88% (38.01% for
                2005)
            
            **$**
            **158,487**
            
            $
            173,564Increase
                (decrease) resulting from:Net
                income
                attributed to the Fund
            
            
            **(197,694**
            **)**
            
            (172,463
            )Non-deductible
                crown royalties
            
            
            **11,878**
            
            
            30,652Resource
                allowance
            
            
            **(11,998**
            **)**
            
            (37,047
            )Amended
                returns and pool balances
            
            
            **(21,446**
            **)**
            
            16,544Change
                in tax
                rate
            
            
            **(35,500**
            **)**
            
            -Other
            
            
            **2,475**
            
            
            6,842**$**
            **(93,798**
            **)**
            $
            18,092Future
                income
                tax (recovery)/expense
            
            **$**
            **(112,034**
            **)**
            $
            15,328Current
                tax
            
            **$**
            **18,236**
            
            $
            2,764








The
      breakdown of
      our current and future income tax balances between our Canadian and Foreign
      operations is as follows:





**For
                the year ended December 31, 2006 ($ thousands)**
            
            
            **Canadian**
            
            
            **Foreign**
            
            
            **Total**Future
                income
                (recovery)/expense
            
            **$**
            **(113,643**
            **)**
            **$**
            **1,609**
            
            **$**
            **(112,034**
            **)**Current
                income tax
            
            
            **-**
            
            
            **18,236**
            
            
            **18,236**








**For
                the year ended December 31, 2005 ($ thousands)**
            
            
            Canadian
            
            
            Foreign
            
            
            TotalFuture
                income
                expense
            
            $
            8,708
            
            $
            6,620
            
            $
            15,328Current
                income tax
            
            
            -
            
            
            2,764
            
            
            2,764





**10.
      FINANCIAL INSTRUMENTS**





The
      Fund’s
      financial instruments presented on the balance sheet consist of cash, accounts
      receivable, deferred financial assets, other current assets, other assets,
      accounts payable, distributions payable to unitholders, deferred credits and
      long-term debt.





The
      carrying value
      of cash, accounts receivable, deferred financial assets, other assets, current
      liabilities and the outstanding bank credit facility balances approximate their
      fair value. Other current assets are comprised of prepaid expenses and
      marketable securities and other assets are comprised of long-term investments.
      Marketable securities




Page
          15 of
          26




rule




and
      long-term
      investments are carried on the balance sheet at the lower of cost and fair
      value. The fair value of the marketable securities at December 31, 2006 exceeded
      the cost of these securities by $14,493,000. The book value of other assets
      at
      December 31, 2006 of $48,700,000 was lower than the fair value of these assets
      by $3,231,000.





The
      Fund carried
      US$54,000,000 of fixed rate debt. In addition, it carried US$175,000,000 of
      fixed rate debt that was converted to CDN$268,328,000 floating rate debt through
      a cross-currency swap with a syndicate of financial institutions. At December
      31, 2006 the fair value of the senior unsecured notes was $62,990,000 (for
      the
      US$54,000,000 notes) and $208,217,000 (for the US$175,000,000 notes), see Note
      7 .





The
      estimated fair
      values have been determined based on available market information and
      appropriate valuation methods. The actual amounts realized may differ from
      these
      estimates.





**(a)
      Credit
      Risk**





Most
      of the Fund’s
      accounts receivable relate to oil and natural gas sales and are exposed to
      typical industry credit risks. The Fund manages this credit risk by entering
      into sales contracts with only credit-worthy counterparties and reviewing its
      exposure to individual entities on a regular basis. The Fund is also exposed
      to
      certain losses in the event of non-performance by counterparties to derivative
      financial instruments. This credit risk is managed by the Fund by selecting
      financially sound counterparties.





In
      2006, approximately 15% of the Fund’s oil and gas sales were made to a AA+ rated
      counterparty.





**(b)
      Interest Rate Risk**





The
      Fund is exposed
      to movements in interest rates. Long-term debt is comprised of both variable
      rate bank facilities and fixed rate senior notes. The Fund monitors the interest
      rate forward market and through the use of interest rate swaps along with the
      fixed-rate notes has fixed the interest rate on approximately 20% of its debt.
      See part (d) below.





**(c)
      Currency Risk**





The
      Fund is exposed
      to fluctuations in foreign currency as a result of its U.S. operations and
      the
      issuance of senior unsecured notes denominated in U.S. dollars. Through the
      use
      of a financial swap, the exposure on our US$175,000,000 senior unsecured notes
      has been converted to Canadian dollar debt. As well, the Fund has indirect
      exposure to fluctuations in foreign currency as crude oil sales and a portion
      of
      natural gas sales are based on U.S. dollar indices. We have not entered into
      any
      foreign currency derivatives with respect to oil and natural gas sales.





**(d)
      Derivative Financial Instruments**





The
      Fund uses
      certain derivative financial instruments to manage its commodity price, foreign
      currency and interest rate exposures. The fair values of these instruments
      are
      based on an approximation of the amounts that would have been paid to or
      received from counterparties to settle the instruments outstanding as at
      December 31, 2006 with reference to forward prices and market valuations
      provided by third party sources.





The
      fair values of
      derivative financial instruments are as follows:





Page
          16 of
          26


rule




***Interest
      Rate Swaps***





The
      Fund has
      entered into interest rate swaps on $75,000,000 of notional debt at rates
      varying from 4.10% to 4.61% before banking fees that are expected to range
      between 0.55% and 1.10%. These interest rate swaps mature between January 2007
      and January 2012. The fair value of the $75,000,000 interest rate swaps as
      at
      December 31, 2006 represents an unrealized cost of $673,000. These swaps have
      been designated as a cash flow hedge for accounting purposes.





***Cross
      Currency Interest Rate Swap***





The
      fair value of
      the cross currency interest rate swap related to the US$175,000,000 senior
      unsecured notes as at December 31, 2006 represents an unrealized cost of
      $65,002,000 whereas the fair value of the underlying debt instrument as at
      December 31, 2006 represents an unrealized gain of $60,111,000. The cross
      currency swap has been designated as a fair value hedge for accounting purposes.





***Crude
      Oil Instruments***





Enerplus
      has
      entered into the following financial option contracts to reduce the impact
      of a
      downward movement in crude oil prices. The net premium cost of the crude oil
      instruments entered into as of December 31, 2006 is $20,108,000.





The
      following table
      summarizes the Fund’s crude oil risk management positions at February 13,
      2007:





**WTI
                US$/bbl****Daily
                Volumes bbls/day**
            
            
            **Purchased
                Put**
            
            
            **Fixed
                Price and Swaps**TermJanuary
                1,
                2007 - December 31, 2007Put
            
            
            5,000
            
            $
            71.00
            
            
            -Put
            
            
            2,500
            
            $
            68.00
            
            
            -Put(1)
            
            
            2,500
            
            $
            65.70
            
            
            -Swap(1)
            
            
            2,500
            
            
            -
            
            $
            66.24


(1)
      Financial contracts entered into during the fourth quarter of 2006.





***Natural
      Gas Instruments***





Enerplus
      has
      physical and financial contracts in place on its natural gas production as
      described below. The net premium cost of the natural gas instruments entered
      into as of December 31, 2006 is $5,548,000.





The
      following table
      summarizes the Fund’s natural gas risk management positions at February 13,
      2007:








**AECO
                CDN$/Mcf****Daily
                Volumes MMcf/day**
            
            
            **Sold
                Call**
            
            
            **Purchased**
              **Put**
            
            
            **Sold**
              **Put**
            
            
            **Fixed
                Price and Swaps**TermJanuary
                1,
                2007 - March 31, 2007Collar
            
            
            6.6
            
            $
            11.45
            
            $
            9.00
            
            
            -
            
            
            -Collar(1)
            
            
            9.5
            
            $
            9.50
            
            $
            7.00
            
            
            -
            
            
            -Collar(1)
            
            
            9.5
            
            $
            10.66
            
            $
            7.00
            
            
            -
            
            
            -Costless
                Collar
            
            
            6.6
            
            $
            11.45
            
            $
            7.70
            
            
            -
            
            
            -Put(1)
            
            
            6.6
            
            
            -
            
            $
            7.50
            
            
            -
            
            
            -Put(1)
            
            
            4.7
            
            
            -
            
            $
            7.39
            
            
            -
            
            
            -January
                1,
                2007 - June 30, 2007Put(1)
            
            
            4.7
            
            
            -
            
            $
            7.50
            
            
            -
            
            
            -April
                1, 2007
                - October 31, 2007Collar
            
            
            6.6
            
            $
            10.02
            
            $
            7.50
            
            
            -
            
            
            -Collar
            
            
            6.6
            
            $
            9.00
            
            $
            7.50
            
            
            -
            
            
            -Collar(1)
            
            
            9.5
            
            $
            9.10
            
            $
            7.10
            
            
            -
            
            
            -Collar(1)
            
            
            9.5
            
            $
            9.15
            
            $
            7.14
            
            
            -
            
            
            -Collar(1)
            
            
            9.5
            
            $
            9.50
            
            $
            7.20
            
            
            -
            
            
            -






Page
          17 of
          26









Costless
                Collar(2)
            
            
            4.7
            
            $
            8.02
            
            $
            7.17
            
            
            -
            
            
            -Costless
                Collar(2)
            
            
            4.7
            
            $
            8.23
            
            $
            7.28
            
            
            -
            
            
            -Costless
                Collar(2)
            
            
            4.7
            
            $
            8.20
            
            $
            7.503-Way
                option(1)
            
            
            4.7
            
            $
            9.50
            
            $
            7.75
            
            $
            5.49
            
            
            -Put(1)
            
            
            4.7
            
            
            -
            
            $
            7.28
            
            
            -
            
            
            -Swap(1)
            
            
            6.6
            
            
            -
            
            
            -
            
            
            -
            
            $
            7.60Swap(1)
            
            
            4.7
            
            
            -
            
            
            -
            
            
            -
            
            $
            7.33Swap(1)
            
            
            2.4
            
            
            -
            
            
            -
            
            
            -
            
            $
            7.84Swap(1)
            
            
            2.4
            
            
            -
            
            
            -
            
            
            -
            
            $
            7.96Swap(2)
            
            
            7.1
            
            
            -
            
            
            -
            
            
            -
            
            $
            7.17Swap(2)
            
            
            2.4
            
            
            -
            
            
            -
            
            
            -
            
            $
            7.70Swap(2)
            
            
            2.4
            
            
            -
            
            
            -
            
            
            -
            
            $
            7.53Swap(2)
            
            
            2.4
            
            
            -
            
            
            -
            
            
            -
            
            $
            8.35November
                1,
                2007 - March 31, 2008Collar(1)
            
            
            2.4
            
            $
            9.95
            
            $
            8.00
            
            
            -
            
            
            -3-Way
                option(1)
            
            
            4.7
            
            $
            10.50
            
            $
            8.20
            
            $
            5.70
            
            
            -Swap(1)
            
            
            4.7
            
            
            -
            
            
            -
            
            
            -
            
            $
            8.702007
                -
                2010Physical
                (escalated pricing)
            
            
            2.0
            
            
            -
            
            
            -
            
            
            -
            
            $
            2.52


(1) Financial
      contracts entered into during the fourth quarter of 2006.


(2) Financial
      contracts entered into during the first quarter of 2007.








***Electricity
      Instrument***





The
      Fund has
      entered into electricity swap contracts that fix the price of electricity.
      These
      contracts have been designated as cash flow hedges and the fair value of these
      instruments as at December 31, 2006 represents an unrealized gain of $1,494,000.
      Proceeds or costs realized from the electricity contracts are recognized as
      operating costs.




The
      following table
summarizes
      the Fund’s electricity management positions at February 13,
      2007:








**Term**
            
            
            **Volumes
                MWh**
            
            
            **Price**
              **CDN$/MWh**January
                1,
                2007 - December 31, 2007
            
            
            5.0
            
            $
            61.50January
                1,
                2007 - December 31, 2007
            
            
            4.0
            
            $
            62.90January
                1,
                2008 - September 30, 2008
            
            
            4.0
            
            $
            63.00





The
      Fund did not
      enter into any new electricity contracts in the fourth quarter of
      2006.








**11.
      COMMITMENTS AND CONTINGENCIES**





**(a)
      Pipeline Transportation**





Enerplus
      has
      contracted to transport natural gas with various pipelines totaling 35.3
      MMcf/day until 2008; of this amount 5 MMcf/day extends until 2015. Enerplus
      also
      has a contract to transport a minimum of 2,480 bbls/day of crude oil from the
      field to suitable marketing sales points until 2010.





**(b)
      Oil
      Sands Lease #24**





The
      Fund's
      acquisition of a working interest in the Joslyn project included the
      assumption of a proportionate share of certain contingent project debt.
      Effectively, this debt is comprised of principal of $3,150,000 plus accrued
      interest to December 31, 2006 of $1,379,000. Interest is accrued at the Bank
      of
      Canada prime business rate and is not compounded. The debt is contingent on
      attaining certain production hurdles with respect to development of the project.
      As it is still too early to determine if these hurdles will be
      satisfied, no portion of the contingent debt has been accrued for in the
      consolidated financial statements.





Page
          18 of
          26


rule




**(c)
      Office
      Lease**





Enerplus
      has office
      lease commitments for both its Canadian and U.S. operations that expire between
      November 2009 and January 2011. Annual costs of these lease commitments, which
      include rent and operating fees, amount to approximately
      $6,700,000.





**(d)
      Guarantees**





(i)
      Corporate
      indemnities have been provided by the Fund to all directors and certain officers
      of its subsidiaries and affiliates for various items including, but not limited
      to, all costs to settle suits or actions due to their association with the
      Fund
      and its subsidiaries and/or affiliates, subject to certain restrictions. The
      Fund has purchased directors’ and officers’ liability insurance to mitigate the
      cost of any potential future suits or actions. Each indemnity, subject to
      certain exceptions, applies for so long as the indemnified person is a director
      or officer of one of the Fund’s subsidiaries and/or affiliates. The maximum
      amount of any potential future payment cannot be reasonably
      estimated.





(ii)
      The Fund may
      provide indemnifications in the normal course of business that are often
      standard contractual terms to counterparties in certain transactions such as
      purchase and sale agreements. The terms of these indemnifications will vary
      based upon the contract, the nature of which prevents the Fund from making
      a
      reasonable estimate of the maximum potential amounts that may be required to
      be
      paid. Management believes the resolution of these matters would not have a
      material adverse impact on the Fund’s liquidity, consolidated financial position
      or results of operations.





Enerplus
      has the
      following minimum annual commitments including long-term debt:




**Minimum
                Annual Commitment Each Year**
            
            
            **Total**
              **Committed**
              **after
                2011****($
                thousands)**
            
            
            **Total**
            
            
            **2007**
            
            
            **2008**
            
            
            **2009**
            
            
            **2010**
            
            
            **2011**Bank
                credit
                facility
            
            **$**
            **348,520**
            
            $
            -
            
            $
            -
            
            $
            348,520
            
            $
            -
            
            $
            -
            
            $
            -Senior
                unsecured notes
            
            
            **331,254**
            
            
            -
            
            
            -
            
            
            -
            
            
            53,666
            
            
            66,251
            
            
            211,337Pipeline
                commitments
            
            
            **28,543**
            
            
            6,364
            
            
            5,788
            
            
            2,952
            
            
            2,444
            
            
            2,275
            
            
            8,720Office
                lease
            
            
            **20,917**
            
            
            6,745
            
            
            6,828
            
            
            6,702
            
            
            592
            
            
            50
            
            
            -Total
                commitments
            
            **$**
            **729,234**
            
            $
            13,109
            
            $
            12,616
            
            $
            358,174
            
            $
            56,702
            
            $
            68,576
            
            $
            220,057





In
      addition, the Fund is involved in claims and litigation arising in the normal
      course of business. The resolution of these claims is uncertain and there can
      be
      no assurance they will be resolved in favour of the Fund; however, management
      believes the resolution of these matters would not have a material adverse
      impact on the Fund’s liquidity, consolidated financial position or results of
      operations.





**12.
      GEOGRAPHICAL INFORMATION**





**As
                at
                December 31, 2006**
              **($
                thousands)**
            
            
            **Canada**
            
            
            **U.S.**
            
            
            **Total**Oil
                and gas
                revenue
            
            **$**
            **1,323,631**
            
            **$**
            **271,693**
            
            **$**
            **1,595,324**Capital
                assets
            
            
            **3,101,277**
            
            
            **624,820**
            
            
            **3,726,097**Goodwill
            
            
            **47,532**
            
            
            **174,046**
            
            
            **221,578**





**As
                at
                December 31, 2005**
              **($
                thousands)**
            
            
            Canada
            
            
            U.S.
            
            
            TotalOil
                and gas
                revenue
            
            $
            1,471,473
            
            $
            79,096
            
            $
            1,550,569Capital
                assets
            
            
            3,054,078
            
            
            596,249
            
            
            3,650,327Goodwill
            
            
            47,532
            
            
            173,702
            
            
            221,234








**13.
      EVENTS
      SUBSEQUENT TO DECEMBER 31, 2006**





On
      January 31, 2007, Enerplus closed the acquisition of gross overriding royalty
      (“GORR”) interests in the Jonah natural gas field in Wyoming for total
      consideration of US$52,000,000 (CDN$60,000,000). The full amount of the purchase
      price will be recorded to PP&E in 2007. This represents a GORR of
      approximately 0.5% on about 650 producing natural gas wells in the Jonah
      field.





Page
          19 of
          26





rule




**14.
      DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
      PRINCIPLES**





The
      Fund’s
      consolidated financial statements have been prepared in accordance with Canadian
      GAAP. These principles, as they pertain to the Fund’s consolidated statements
      differ from United States GAAP (“U.S. GAAP”) as follows:





The
      application of
      U.S. GAAP would have the following effects on net income as reported:





**($
                thousands)**
            
            
            **2006**
            
            
            2005Net
                income as
                reported in the ConsolidatedStatement
                of
                Income - Canadian GAAP
            
            **$**
            **544,782**
            
            $
            432,041AdjustmentsDepletion,
                depreciation, amortization and accretion (Note (a))
            
            
            **74,391**
            
            
            57,050Amortization
                of financial derivative deferred charges (Note (b))
            
            
            **-**
            
            
            3,143Unrealized
                gain (loss) on cross-currency and interest rate swap (Note
                (b))
            
            
            **1,245**
            
            
            (4,049
            )Capitalized
                interest (Note (c))
            
            
            **3,436**
            
            
            -Compensation
                expense (Note (d))
            
            
            **(2,237**
            **)**
            
            (19,732
            )Income
                tax
                expense of above adjustments, including expense due to change in
                tax rates
                of $35,016 for 2006 (2005 - recovery of $2,548)
            
            
            **(58,234**
            **)**
            
            (16,540
            )Net
                income
                before cumulative effect of change in accounting principle - U.S.
                GAAP
            
            
            **563,383**
            
            
            451,913Cumulative
                effect of adoption of SFAS 123R (Note (d))
            
            
            **-**
            
            
            1,753Net
                income -
                U.S. GAAP
            
            
            **563,383**
            
            
            453,666Change
                in
                fair value of cash flow hedges, net of tax of $14,595 (2005 - $26,540
                net
                of tax of $9,064) (Note (b))
            
            
            **35,287**
            
            
            (17,476
            )Change
                in
                fair value of available for sale securities, net of tax of $1,998
                (2005 -
                $9,229 net of tax of $3,139) (Note (e))
            
            
            **4,829**
            
            
            6,090Change
                in
                cumulative translation adjustment (Note (g))
            
            
            **6,589**
            
            
            (15,568
            )Comprehensive
                income
            
            **$**
            **610,088**
            
            $
            426,712Net
                income
                per trust unit before cumulative change in accounting principleBasic
            
            **$**
            **4.63**
            
            $
            4.14Diluted
            
            **$**
            **4.62**
            
            $
            4.13Cumulative
                effect of change in accounting principleBasic
            
            **$**
            **-**
            
            $
            0.02Diluted
            
            **$**
            **-**
            
            $
            0.02Net
                income
                per trustBasic
            
            **$**
            **4.63**
            
            $
            4.16Diluted
            
            **$**
            **4.62**
            
            $
            4.15Weighted
                average number of trust units outstandingBasic
            
            
            **121,588**
            
            
            109,083Diluted
            
            
            **121,860**
            
            
            109,371Deficit:Balance,
                beginning of year - U.S. GAAP
            
            **$**
            **(3,551,509**
            **)**
            $
            (2,366,709
            )Net
                income -
                U.S. GAAP
            
            
            **563,383**
            
            
            453,666Change
                in
                redemption value (Note (f))
            
            
            **586,876**
            
            
            (1,140,261
            )Cash
                distributions
            
            
            **(614,340**
            **)**
            
            (498,205
            )Balance,
                end
                of year - U.S. GAAP
            
            **$**
            **(3,015,590**
            **)**
            $
            (3,551,509
            )Accumulated
                other comprehensive income (loss):Balance,
                beginning of year - U.S. GAAP
            
            **$**
            **(40,772**
            **)**
            $
            (13,818
            )Change
                in
                fair value of cash flow hedges and available for sale securities,
                net of
                tax
            
            
            **40,116**
            
            
            (11,386
            )Change
                in cumulative
                translation adjustment
            
            
            **6,589**
            
            
            (15,568
            )Balance,
                end
                of year - U.S. GAAP
            
            **$**
            **5,933**
            
            $
            (40,772
            )





Page
          20 of
          26







Reconciliation
      of
      Accumulated Other Comprehensive Income (loss):





**As
                at
                December 31 ($ thousands)**
            
            
            **2006**
            
            
            2005Fair
                Value of
                Derivatives Designated as Cash Flow Hedges:Interest
                rate
                swaps
            
            **$**
            **(673**
            **)**
            $
            (206
            )Natural
                gas
                instruments
            
            
            **-**
            
            
            (36,553
            )Crude
                oil
                instruments
            
            
            **-**
            
            
            (13,321
            )Electricity
                swaps
            
            
            **1,494**
            
            
            1,019**$**
            **821**
            
            $
            (49,061
            )Other
                items:Unrealized
                gain
                on available for sale securities
            
            
            **17,724**
            
            
            10,898Cumulative
                translation adjustment
            
            
            **(8,979**
            **)**
            
            (15,568
            )Deferred
                income
                taxes
            
            
            **(3,633**
            **)**
            
            12,959Accumulated
                other comprehensive income (loss)
            
            **$**
            **5,933**
            
            $
            (40,772
            )








The
      application of
      U.S. GAAP would have the following effects on the balance sheet as
      reported:





**($
                thousands)**
            
            
            **Canadian**
              **GAAP**
            
            
            **Increase
                (Decrease**
            **)**
            
            **U.S.**
              **GAAP****December
                31, 2006****Assets:**Other
                current
                assets (Note (e))
            
            **$**
            **6,715**
            
            **$**
            **14,493**
            
            **$**
            **21,208**Property,
                plant and equipment, net (Note (a)(c))
            
            
            **3,726,097**
            
            
            **(634,553**
            **)**
            
            **3,091,544**Other
                Assets
                (Note (e))
            
            
            **50,224**
            
            
            **3,231**
            
            
            **53,455****Liabilities:**Deferred
                credits/Financial derivative liabilities (Note (b))
            
            **$**
            **-**
            
            **$**
            **64,181**
            
            **$**
            **64,181**Trust
                unit
                rights liability (Note (d))
            
            
            **-**
            
            
            **14,298**
            
            
            **14,298**Long-term
                debt (Note (b))
            
            
            **679,774**
            
            
            **(60,111**
            **)**
            
            **619,663**Future
                income
                taxes/Deferred income taxes
            
            
            **331,340**
            
            
            **(197,576**
            **)**
            
            **133,764**Unitholders’
                mezzanine equity (Note (f))
            
            
            **-**
            
            
            **5,305,098**
            
            
            **5,305,098****Unitholder’s
                Equity:**Unitholders’
                capital (Note (f))
            
            **$**
            **3,706,821**
            
            **$**
            **(3,706,821**
            **)**
            **$**
            **-**Contributed
                surplus (Note (d))
            
            
            **6,305**
            
            
            **(6,305**
            **)**
            
            **-**Deficit
                (Note
                (f))
            
            
            **(971,085**
            **)**
            
            **(2,044,505**
            **)**
            
            **(3,015,590**
            **)**Accumulated
                other comprehensive income (loss) (Note (b)(e)(g))
            
            
            **-**
            
            
            **5,933**
            
            
            **5,933**Cumulative
                translation adjustment (Note (g))
            
            
            **(8,979**
            **)**
            
            **8,979**
            
            
            **-****December
                31, 2005****Assets:**Total
                current
                assets (Note (b)(e))
            
            $
            257,341
            
            $
            (38,977
            )
            $
            218,364Property,
                plant and equipment, net (Note (a))
            
            
            3,650,327
            
            
            (712,380
            )
            
            2,937,947**Liabilities:**Deferred
                credits/Financial derivative liabilities (Note (b))
            
            $
            57,368
            
            $
            61,626
            
            $
            118,994Trust
                unit
                rights liability (Note (d))
            
            
            -
            
            
            20,654
            
            
            20,654Long-term
                debt (Note (b))
            
            
            659,918
            
            
            (56,303
            )
            
            603,615Future
                income
                taxes/Deferred income taxes
            
            
            442,970
            
            
            (272,403
            )
            
            170,567Unitholders’
                mezzanine equity (Note (f))
            
            
            -
            
            
            5,580,869
            
            
            5,580,869**Unitholder’s
                Equity:**Unitholders’
                capital (Note (f))
            
            $
            3,407,567
            
            $
            (3,407,567
            )
            $
            -Contributed
                surplus (Note (d))
            
            
            3,047
            
            
            (3,047
            )
            
            -Deficit
                (Note
                (f))
            
            
            (901,527
            )
            
            (2,649,982
            )
            
            (3,551,509
            )Accumulated
                other comprehensive income (loss) (Note (b)(e)(g))
            
            
            -
            
            
            (40,772
            )
            
            (40,772
            )Cumulative
                translation adjustment (Note (g))
            
            
            (15,568
            )
            
            15,568
            
            
            -





Page
          21 of
          26







**(a)
      Property, Plant and Equipment and Depletion, Depreciation, Amortization and
      Accretion**





Under
      U.S. GAAP
      full cost accounting, the carrying value of petroleum and natural gas properties
      and related facilities, net of deferred income taxes, is limited to the present
      value of after tax future net revenue from proved reserves, discounted at 10%
      (based on prices and costs at the balance sheet date), plus the lower of cost
      and fair value of unproved properties. Under Canadian GAAP, an impairment loss
      exists when the carrying amount of the Fund’s PP&E exceeds the estimated
      undiscounted future net cash flows associated with the Fund’s proved reserves.
      If an impairment loss is determined to exist, the costs carried on the balance
      sheet in excess of the discounted future net cash flows associated with the
      Fund’s proved and probable reserves are charged to income. The application of
      the impairment tests under Canadian and U.S. GAAP did not result in a write-down
      of capitalized costs in either 2006 or 2005.




Where
      the amount of
      a ceiling test write-down under Canadian GAAP differs from the amount of the
      write-down under U.S. GAAP, the charge for DDA&A will differ in subsequent
      years. Historically the Fund’s U.S. GAAP ceiling test write-downs have exceeded
      the Canadian GAAP write-downs. As a result, U.S. GAAP DDA&A charges are
      lower than Canadian GAAP DDA&A charges.





A
      U.S. GAAP difference also exists relating to the basis of measurement of proved
      reserves that is utilized in the depletion calculation. Under U.S. GAAP,
      depletion charges are calculated by reference to proved reserves estimated
      using
      constant prices. Under Canadian GAAP, depletion charges are calculated by
      reference to proved reserves estimated using future prices and
      costs.





For
      the year ended
      December 31, 2006, DDA&A calculated under U.S. GAAP was $74,391,000
      ($52,542,000 net of tax) lower than DDA&A calculated under Canadian GAAP.
      For the year ended December 31, 2005, DDA&A calculated under U.S. GAAP was
      $57,050,000 ($37,659,000 net of tax) lower than DDA&A calculated under
      Canadian GAAP.








**(b)
      Derivative Instruments and Hedging**





Effective
      January
      1, 2004, the Fund prospectively adopted CICA Accounting Guideline - 13 “Hedging
      Relationships” (“AcG-13”) and Emerging Issues Committee Abstract 128 “Accounting
      for Trading, Speculative or Non-hedging Derivative Financial Instruments”. As a
      result of this adoption, derivative financial instruments not designated as
      hedges receive the same treatment under both Canadian and U.S. GAAP. Upon
      adoption of AcG-13, deferred credits and deferred charges of $21,015,000 were
      recognized representing the fair value of derivative financial instruments
      in
      place as of January 1, 2004 that did not qualify for hedge accounting. These
      deferred charges were amortized over the life of the financial instruments
      for
      Canadian GAAP and were equal to the aggregate of U.S. GAAP gains and losses
      incurred on these instruments prior to January 1, 2004. During 2005, the
      remaining $3,143,000 ($2,074,000 net of tax) of the deferred charges were
      amortized to income resulting in a U.S. GAAP difference.





Under
      Canadian
      GAAP, disclosure of the fair value of derivative financial instruments that
      qualify for hedge accounting is required with no effect on assets, liabilities
      or net income. Under U.S. GAAP, all derivative instruments are recognized on
      the
      balance sheet as either an asset or liability measured at fair value. Changes
      in
      the fair value are recognized in earnings unless specific hedge criteria are
      met.





*Cash
      Flow
      Hedges*


Under
      U.S. GAAP
      changes in the fair value of derivatives that are designated as cash flow hedges
      are recognized in earnings in the same period as the hedged item. The effective
      portion of the change in fair value is recognized in other comprehensive income
      with any ineffectiveness recognized in net income.





A
      U.S. GAAP difference exists as the Fund’s certain interest rate and electricity
      swaps are designated as cash flow hedges under Canadian and U.S. GAAP.





Page
          22 of
          26










Effective
      December
      31, 2005 the Fund stopped designating commodity financial contracts as cash
      flow
      hedges in accordance with CICA AcG-13, “Hedging Relationships”. As a result of
      this change, a deferred credit and deferred financial asset of $49,874,000
      were
      recognized representing the fair value of these financial contracts. The
      deferred asset was amortized to income during 2006 over the remaining term
      of
      the contracts. Under U.S. GAAP, the fair value these contracts was recorded
      on
      the balance sheet at fair value with the offset recorded in accumulated other
      comprehensive income as at December 31, 2005. The amount recognized in
      accumulated other comprehensive income will be reclassified to earnings in
      the
      same period as the corresponding gains or losses associated with the hedged
      item. In 2006, $49,874,000 was reclassified from accumulated other comprehensive
      income to earnings.





*Fair
      Value
      Hedges*


For
      derivative
      instruments designated as fair value hedges under U.S. GAAP, both the derivative
      instrument and the underlying commitment are recognized on the balance sheet
      at
      their fair value. The change in fair value of both items is reflected in
      earnings.





A
      U.S. GAAP difference exists as the Fund’s cross-currency and interest rate swap
      is designated as a fair value hedge under Canadian GAAP and U.S.
      GAAP.








**(c)
      Interest Capitalization**


U.S.
      GAAP requires
      interest cost to be capitalized for development projects that have not reached
      commercial production. A U.S. GAAP difference exists as there is not a similar
      requirement under Canadian GAAP. For the year ended December 31, 2006 the Fund
      capitalized interest of $3,436,000 ($2,431,000 net of tax) (2005 - nil) related
      to projects under development.








**(d)
      Unit-based Compensation**





On
      January 1, 2005 the Fund adopted Statement of Financial Accounting Standards
      (“SFAS”) 123R, “Share-Based Payment” using the modified prospective application
      of this standard and adopted the fair value method of accounting for all rights
      granted under the rights plan. In 2003 and 2004 the Fund accounted for the
      rights plan using the intrinsic method. As a result of this change, on January
      1, 2005 the Fund recorded a trust unit rights liability of $12,208,000 which
      represented the fair value of all outstanding rights on that date, in proportion
      to the requisite service period rendered to that date. In addition, contributed
      surplus was reduced by $13,961,000, representing previously recognized
      compensation cost for all outstanding rights, and a recovery of $1,753,000
      was
      recorded to cumulative effect of a change in accounting principle.





A
      U.S. GAAP difference exists as rights granted under our rights plan are
      considered liability awards for U.S. GAAP and equity awards under Canadian
      GAAP.
      The distinction between a liability award and an equity award has an impact
      on
      the related accounting treatment.





Under
      Canadian GAAP
      rights are accounted for using the fair value method for an equity award. Under
      this method, the fair value of the right is determined using a binomial lattice
      option-pricing model on the grant date and is not subsequently remeasured.
      This
      amount is charged to earnings over the vesting period of the rights, with a
      corresponding increase in contributed surplus. When rights are exercised, the
      fair value recorded in contributed surplus is recorded to unitholders’
capital.





Under
      U.S. GAAP
      rights are accounted for using the fair value method for a liability award.
      Under this method, the trust unit rights liability is calculated based on the
      rights fair value determined using a binomial lattice option-pricing model
      at
      each reporting date until the date of settlement. Compensation cost for each
      period is based on the change in the fair value of the rights for each reporting
      period. When rights are exercised, the proceeds, together with the amount
      recorded as a trust unit rights liability, are recorded to mezzanine
      equity.




Page
          23 of
          26







The
      following
      assumptions were used to arrive at the estimate of fair value as at December
      31
      for each the respective years:





**2006**
            
            
            2005Dividend
                yield
            
            
            **9.53**
            **%**
            
            8.85
            %Right’s
                exercise price reduction
            
            **$**
            **1.67**
            
            $
            1.49Volatility
            
            
            **27.88**
            **%**
            
            21.58
            %Risk-free
                interest rate
            
            
            **3.94**
            **%**
            
            3.85
            %Forfeiture
                rate
            
            
            **2.80**
            **%**
            
            4.60
            %








The
      weighted
      average grant date fair value of trust unit rights granted in 2006 was $6.83
      per
      trust unit right (2005 - $5.17). The total intrinsic value of trust unit rights
      exercised during 2006 was $14,900,000 (2005 - $14,300,000).





As
      at December 31, 2006, 809,000 trust unit rights were exercisable at a weighted
      average reduced exercise price of $39.81 with a weighted average remaining
      contractual term of 3.9 years, giving an aggregate intrinsic value of
      $9,700,000.





The
      following chart
      details the U.S. GAAP differences related to our trust unit rights plan for
      the
      years ended December 31, 2006 and 2005.





**2006**
            2005**CDN
                GAAP**
            
            
            **U.S.
                GAAP**
            
            
            **Difference**
            
            
            CDN
                GAAP
            
            
            U.S.
                GAAP
            
            
            DifferenceCompensation
                expense
            
            **$**
            **6,323,000**
            
            **$**
            **8,560,000**
            
            **$**
            **2,237,000**
            
            $
            3,040,000
            
            $
            22,772,000
            
            $
            19,732,000Contributed
                Surplus
            
            **$**
            **6,305,000**
            
            **$**
            **-**
            
            **$**
            **(6,305,000**
            **)**
            $
            3,047,000
            
            $
            -
            
            $
            (3,047,000
            )Trust
                unit
                rights liability
            
            **$**
            **-**
            
            **$**
            **14,298,000**
            
            **$**
            **14,298,000**
            
            $
            -
            
            $
            20,654,000
            
            $
            20,654,000








**(e)
      Marketable Securities**





Under
      Canadian GAAP
      the Fund accounts for its marketable securities using the cost method and only
      discloses the fair value.





Under
      U.S. GAAP
      marketable securities that have a readily determinable fair value are considered
      available for sale and are recorded on the balance sheet at fair value with
      changes in fair value recognized in comprehensive income.





As
      at December 31, 2006 available for sale marketable securities included in other
      current assets had a fair value of $16,758,000 (2005 - $21,713,000) and an
      amortized cost of $2,265,000 (2005 - $10,815,000), resulting in a gross
      unrealized holding gain of $14,493,000 (2005 - $10,898,000). Available for
      sale
      marketable securities included in other assets had a fair value of $13,231,000
      (2005 - nil) and an amortized cost of $10,000,000 (2005 - nil), resulting in
      a
      gross unrealized holding gain of $3,231,000 (2005 - nil).





For
      the year ended
      December 31, 2006, the unrealized holding gain on available for sale securities
      included in accumulated other comprehensive income increased by $6,826,000
      (2005
      - $9,230,000).





For
      the year ended
      December 31, 2006, the Fund disposed of available for sale marketable securities
      for proceeds of $5,154,000 (2005 - $1,539,000) resulting in a gain of $1,425,000
      (2005 - $1,158,000) being included in net income. The Fund uses the average
      cost
      method in computing realized gains or losses on sale of marketable securities.





Under
      U.S. GAAP
      securities whose fair value is not readily determinable, such as investments
      in
      private companies, are carried at cost. For the year ended December 31, 2006,
      the Fund had securities totaling $38,700,000 that were carried at cost (2005
      -
      $5,440,000).


Page
          24 of
          26







**(f)
      Unitholders’ Mezzanine Equity**





U.S.
      GAAP
      difference exists as a result of the redemption feature in the Fund’s trust
      units, which is required for the Fund to retain its Canadian mutual fund trust
      status. The trust units are redeemable at the option of the holder for
      approximately 85% of the current trading price. The amount of trust units that
      are redeemable for cash is limited to $500,000 in any two consecutive months.
      Any redemption in excess of the limit may be honored with promissory notes
      or
      other investments of the Fund. For Canadian GAAP, the trust units are considered
      to be permanent equity and are presented as unitholders’ capital. Under U.S.
      GAAP, the redemption feature of the trust units excludes them from
      classification as permanent equity and results in the trust units being
      classified as mezzanine equity.





For
      U.S. GAAP the
      Fund has recorded unitholders’ mezzanine equity in the amount of $5,305,098,000
      for 2006 (2005 - $5,580,869,000), which represents the estimated redemption
      value of the trust units at 85% of the year-end market price. In addition,
      the
      Fund has recognized a deficit of $3,015,590,000 for 2006 (2005- $3,551,509,000)
      resulting from eliminating unitholders’ capital and replacing it with
      unitholders’ mezzanine equity at redemption value. Changes in unitholders’
mezzanine equity in excess of trust units issued, net of redemptions, net income
      and cash distributions in any period are recognized as charges to the
      deficit.





**(g)
      Cumulative Translation Adjustment**





A
      U.S. GAAP difference exists relating to the cumulative translation adjustment
      that is generated upon translating the financial statements of the Fund’s U.S.
      subsidiaries. For Canadian GAAP the cumulative translation adjustment is
      deferred and included as a separate component of equity. For U.S. GAAP this
      amount is recognized in comprehensive income.





The
      Fund’s
      comprehensive income for the year ended December 31, 2006 includes a net
      decrease in the cumulative translation adjustment of $6,589,000 (2005 - increase
      of $15,568,000).








**(h)
      Additional Disclosures Required under U.S. GAAP**





**i.
      The
      components of accounts receivable are as follows:**





**As
                at
                December 31 ($ thousands)**
            
            
            **2006**
            
            
            2005Oil
&
Gas
                Sales and Accruals
            
            **$**
            **111,049**
            
            $
            117,853Joint
                Venture
            
            
            **62,311**
            
            
            48,920Other
            
            
            **3,552**
            
            
            5,070Less:
                Allowance for Doubtful Accounts
            
            
            **(1,458**
            **)**
            
            (1,220
            )**$**
            **175,454**
            
            $
            170,623








**ii.
      The
      components of accounts payable are as follows:**





**As
                at
                December 31 ($ thousands)**
            
            
            **2006**
            
            
            2005Contractors
                and Vendors
            
            **$**
            **137,539**
            
            $
            151,435Accrued
                Liabilities
            
            
            **146,747**
            
            
            165,440**$**
            **284,286**
            
            $
            316,875








**iii.
      Net
      Oil and Gas Sales**





Under
      U.S. GAAP oil
      and gas sales are presented net of royalties.





**For
                the year ended December 31 ($ thousands)**
            
            
            **2006**
            
            
            2005Oil
                and Gas
                Sales
            
            **$**
            **1,595,324**
            
            $
            1,550,569Royalties
            
            
            **(293,161**
            **)**
            
            (296,983
            )Net
                Oil and
                Gas Sales
            
            **$**
            **1,302,163**
            
            $
            1,253,586





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**iv.
      Consolidated Cash Flows:**





The
      consolidated
      statements of cash flows prepared in accordance with Canadian GAAP present
      operating cash flow before changes in non-cash working capital items. This
      total
      cannot be presented under U.S. GAAP.





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





**($
                thousands)**
            
            
            **2006**
            
            
            2005Accounts
                Receivable
            
            **$**
            **(4,831**
            **)**
            $
            (62,627
            )Other
                current
            
            
            **20,036**
            
            
            (17,149
            )Accounts
                Payable
            
            
            **(32,589**
            **)**
            
            137,307Distributions
                Payable to Unitholders
            
            
            **2,356**
            
            
            12,924Other
            
            
            **(472**
            **)**
            
            (26,263
            )Total
                Change
                in non-cash working capital
            
            **$**
            **(15,500**
            **)**
            $
            44,192Relating
                to:Operating
                Activities
            
            **$**
            **(14,321**
            **)**
            $
            (19,777
            )Financing
                Activities
            
            
            **2,356**
            
            
            12,924Investing
                Activities
            
            
            **(3,535**
            **)**
            
            51,045**$**
            **(15,500**
            **)**
            $
            44,192








**v.
      Business
      Combinations:**





For
      our business
      combinations completed during 2005 U.S. GAAP requires supplemental information
      on a pro forma basis as though the business combinations had been completed
      at
      the beginning of the period. The Fund did not complete any business combinations
      during 2006.





The
      following
      unaudited pro forma results are based on U.S. GAAP revenues, net income and
      earnings per trust unit adjusted as if the respective business combinations
      occurred on January 1, 2005. These results are not necessarily indicative of
      actual results or future performance.




**For
                the year ended December 31, 2005 ($ thousands)**
            
            
            Lyco
            
            
            TriLochRevenues
            
            $
            1,267,385
            
            $
            1,167,788Net
                Income
            
            $
            477,840
            
            $
            455,662Earnings
                per
                trust unit - Basic ($/unit)
            
            $
            4.13
            
            $
            4.15Earnings
                per
                trust unit - Diluted ($/unit)
            
            $
            4.12
            
            $
            4.14







**U.S.
      Pronouncements**





In
      September 2006 the Financial Accounting Standards Board (“FASB”) issued SFAS 157
      - Fair Value Measurements. This statement defines fair value, establishes a
      framework for measuring fair value and expands disclosures about fair value
      measurements. This statement is effective for fiscal years beginning after
      November 15, 2007. The Fund does not expect there to be a material impact on
      the
      Consolidated Financial Statements upon adoption of the Statement.





In
      June 2006 the FASB issued FASB Interpretation No. 48 - Accounting for
      Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109.
      This
      guidance seeks to reduce the diversity in practice associated with certain
      aspects of the recognition and measurement related to accounting for income
      taxes. This interpretation is effective for fiscal years beginning after
      December 15, 2006. The Fund is in the process of assessing the impact of this
      Interpretation.





In
      February 2006 the FASB issued SFAS 155 - Accounting for certain hybrid financial
      instruments. This Statement amends SFAS 133 on derivatives and hedging and
      SFAS 140 on transfers and servicing of financial assets and extinguishments
      of
      liabilities. The Statement provides a fair value measurement option for
      certain hybrid financial instruments containing an embedded derivative that
      would otherwise require bifurcation. The Statement is effective for all
      instruments acquired, issued or subject to a re-measurement event occurring
      in
      years beginning after September 15, 2006. The Fund does not expect there to
      be a material impact on the Consolidated Financial Statements upon adoption
      of
      the Statement.






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