ENTERRA
      ENERGY TRUST







MANAGEMENT’S REPORT




The
consolidated financial statements of Enterra Energy Trust were prepared by
management in accordance with accounting principles generally accepted in
Canada.  In preparing the consolidated financial statements,
management has made estimates because of precise determination of certain assets
and liabilities are dependent on future events.  The financial and
operating information presented in the reporting is consistent with that show in
the consolidated financial statements. The consolidated financial statements
have been examined by the external auditors and approved by the Board of
Directors.





Management
of Enterra Energy Trust is responsible for establishing and maintaining adequate
internal control over financial reporting for the Trust.  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, 2009, 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.





The
effectiveness of the Trust’s internal control over financial reporting as of
December 31, 2009, has been audited by KPMG LLP, the Trust’s Independent
Registered Chartered Accountants, who also audited the Trust’s consolidated
financial statements for the year ended December 31, 2009.





The Board
of Directors’ financial statement related responsibilities are fulfilled through
the Audit Committee.  The Audit Committee is composed entirely of
independent directors.  The Audit Committee recommends appointment of
the external auditors to the Board of Directors, ensures their independence and
approves their fees.  The Audit Committee meets regularly with
management and the external auditors to discuss reporting and control issues and
to ensure each partly is properly discharging its
responsibilities.  The auditors have full and unrestricted access to
the Audit Committee to discuss their audit and their related
findings









Signed
“Don
Klapko”                                                                           Signed
“Blaine
Boerchers”





President
and Chief Executive OfficerChief Financial Officer


March 25,
2010                                                                March
25, 2010


ENTERRA
      ENERGY TRUST




AUDITORS’
REPORT






To the
Unitholders of Enterra Energy Trust





We have
audited the consolidated balance sheets of Enterra Energy Trust ("the Trust") as
at December 31, 2009 and 2008 and the consolidated statements of income (loss)
and comprehensive income (loss), deficit, and cash flows for the years then
ended.  These financial statements are the responsibility of the
Trust's management.  Our responsibility is to express an opinion on
these financial statements based on our audits.





We
conducted our audits in accordance with Canadian generally accepted auditing
standards and in accordance with the standards of the Public Company Accounting
Oversight Board (United States).  Those standards require that we plan
and perform an audit to obtain reasonable assurance 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.





In our
opinion, these consolidated financial statements present fairly, in all material
respects, the financial position of the Trust as at December 31, 2009 and 2008
and the results of its operations and its cash flows for each of the years then
ended in accordance with Canadian generally accepted accounting
principles.





We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Trust's internal control over financial
reporting as of December 31, 2009 based on the criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO), and our report dated March 25, 2010 expressed
an unqualified opinion on the effectiveness of the Trust’s internal control over
financial reporting.









Signed
“KPMG LLP”





Chartered
Accountants


Calgary,
Canada


March 25,
2010








ENTERRA
      ENERGY TRUST




REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To the
Board of Directors of Enterra Energy Corp., as Administrator of Enterra Energy
Trust and the Unitholders of Enterra Energy Trust





We have
audited Enterra Energy Trust’s ("the Trust") internal control over financial
reporting as of December 31, 2009 based on the criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO).  The Trust's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management’s Report to the
Unitholders.  Our responsibility is to express an opinion on the
Trust's internal control over financial reporting based on our
audit.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects.  Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk.  Our
audit also included performing such other procedures as we considered necessary
in the circumstances.  We believe that our audit provides a reasonable
basis for our opinion.





An
entity's internal control over financial reporting is a process designed 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.  An entity'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 entity;
(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 entity are
being made only in accordance with authorizations of management and directors of
the entity; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the entity's
assets that could have a material effect on the financial
statements.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.





In our
opinion, the Trust maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2009 based on the criteria
established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).





We also
have conducted our audits on the consolidated financial statements of the Trust
in accordance with Canadian generally accepted auditing standards and in
accordance with the standards of the Public Company Accounting Oversight Board
(United States).  Our report dated March 25, 2010, expressed an
unqualified opinion on those consolidated financial statements.









Signed
“KPMG LLP”





Chartered
Accountants


Calgary,
Canada


March 25,
2010











ENTERRA
      ENERGY TRUSTCONSOLIDATED
      BALANCE SHEETS


As at December
      31(in thousands
      of Canadian dollars)
            
            2009
            
            
            2008AssetsCurrent
      assetsCash and cash
      equivalents
            
            
            19,680
            
            
            
            13,638Accounts receivable (note 12)
            
            
            23,677
            
            
            
            35,359Prepaid expenses, deposits and
      other
            
            
            1,998
            
            
            
            1,959Current portion of long-term
      receivables (note
      4)
            
            
            11,196
            
            
            
            10,760Commodity contracts (note 12)
            
            
            993
            
            
            
            14,33857,544
            
            
            
            76,054Long-term
      receivables (note
      4)
            
            
            5,491
            
            
            
            19,310Property,
      plant and equipment (note
      5)
            
            
            399,237
            
            
            
            491,654462,272
            
            
            
            587,018LiabilitiesCurrent
      liabilitiesCurrent portion of long-term
      debt (note
      6)
            
            
            -
            
            
            
            95,466Accounts payable and accrued
      liabilities
            
            
            27,997
            
            
            
            37,949Commodity contracts (note 12)
            
            
            755
            
            
            
            -Future income tax liability
      (note
    9)
            
            
            69
            
            
            
            4,18728,821
            
            
            
            137,602Long-term
      debt (note
      6)
            
            
            70,000
            
            
            
            -Convertible
      debentures (note
      7)
            
            
            114,863
            
            
            
            113,420Asset
      retirement obligations (note 8)
            
            
            21,055
            
            
            
            22,151Future
      income tax liability (note
      9)
            
            
            8,487
            
            
            
            19,429243,226
            
            
            
            292,602Unitholders’
      equity (note
      10)Unitholders’
    capital
            
            
            674,106
            
            
            
            669,667Equity component of convertible
      debentures (note
      7)
            
            
            3,951
            
            
            
            3,977Contributed
    surplus
            
            
            11,064
            
            
            
            8,620Accumulated other comprehensive
      income (loss) (note
      11)
            
            
            (22,474
            )
            
            
            18,471Deficit
            
            
            (447,601
            )
            
            
            (406,319
            )(470,075
            )
            
            
            (387,848
            )219,046
            
            
            
            294,416462,272
            
            
            
            587,018


Commitments and
contingencies(notes
14 and 15)


Subsequent events(note 19)





See
accompanying notes to the consolidated financial statements.











Approved
on behalf of the Board:





Signed
“Peter Carpenter”Signed “Victor Dusik”


Director                                                      Director


ENTERRA
      ENERGY TRUSTCONSOLIDATED
      STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME
  (LOSS)


For
      the year ended December 31
              (in
      thousands of Canadian dollars except per unit amounts)
            
            2009
            
            
            2008RevenuesOil and natural
    gas
            
            
            126,828
            
            
            
            275,497Royalties
            
            
            (26,570
            )
            
            
            (58,350
            )100,258
            
            
            
            217,147ExpensesProduction
            
            
            39,659
            
            
            
            55,123Transportation
            
            
            2,519
            
            
            
            3,215General and
      administrative
            
            
            15,707
            
            
            
            15,858Provision (recovery) for
      receivables (note
      12)
            
            
            (2,110
            )
            
            
            8,522Interest expense (note 13)
            
            
            11,461
            
            
            
            17,466Unit-based compensation expense
      (note
      10)
            
            
            3,580
            
            
            
            4,415Depletion, depreciation and
      accretion (notes 5 and
      8)
            
            
            86,877
            
            
            
            99,377Foreign exchange
      loss
            
            
            1,441
            
            
            
            1,279159,134
            
            
            
            205,255Income
      (loss) before income taxes
            
            
            (58,876
            )
            
            
            11,892Income
      taxesCurrent
            
            
            -
            
            
            
            344Future
      taxes (reduction) (note
      9)
            
            
            (17,594
            )
            
            
            4,487(17,594
            )
            
            
            4,831Net
      income (loss)
            
            
            (41,282
            )
            
            
            7,061Other
      comprehensive income (loss)Foreign currency translation
      adjustment (note
      11)
            
            
            (40,945
            )
            
            
            63,449Comprehensive
      income (loss)
            
            
            (82,227
            )
            
            
            70,510Net income (loss) per trust unit(note 10)
              –Basic
            
            
            (0.65
            )
            
            
            0.11–Diluted
            
            
            (0.65
            )
            
            
            0.11CONSOLIDATED
      STATEMENTS OF DEFICIT(in
      thousands of Canadian dollars)Deficit,
      beginning of year
            
            
            (406,319
            )
            
            
            (413,380
            )Net
      income (loss)
            
            
            (41,282
            )
            
            
            7,061Deficit, end of
    year
            
            
            (447,601
            )
            
            
            (406,319
            )


See accompanying notes to the
consolidated financial statements.








ENTERRA
      ENERGY TRUSTCONSOLIDATED
      STATEMENTS OF CASH FLOWS


For
      the year ended December 31
              (in
      thousands of Canadian dollars)
            
            2009
            
            
            2008Cash
      provided by (used in):OperatingNet income (loss)
            
            
            (41,282
            )
            
            
            7,061Depletion, depreciation and
      accretion (notes 5 and 8)
            
            
            86,877
            
            
            
            99,377Future income tax (reduction)
      (note 9)
            
            
            (17,594
            )
            
            
            4,487Amortization of financing
      charges
            
            
            -
            
            
            
            548Commodity contracts loss (gain)
      (note 12)
            
            
            14,127
            
            
            
            (20,072
            )Foreign exchange
    loss
            
            
            1,159
            
            
            
            1,279Unit-based compensation (note 10)
            
            
            3,580
            
            
            
            4,415Non-cash interest expense on
      convertible debentures
            
            
            1,888
            
            
            
            1,728Cash paid on asset retirement
      obligations (note
      8)
            
            
            (2,533
            )
            
            
            (1,771
            )46,222
            
            
            
            97,052Changes in non-cash working
      capital items (note
      16)
            
            
            5,248
            
            
            
            (5,492
            )51,470
            
            
            
            91,560FinancingRepayment of long-term debt
      (note
    6)
            
            
            (25,466
            )
            
            
            (76,487
            )Repayment of notes,
      net
            
            
            -
            
            
            
            (742
            )Redemption of convertible
      debentures (note
      7)
            
            
            (147
            )
            
            
            -Issue of trust units, net of
      issuance costs
            
            
            -
            
            
            
            (97
            )(25,613
            )
            
            
            (77,326
            )InvestingProperty, plant and equipment
      additions
            
            
            (22,206
            )
            
            
            (32,891
            )Capital expenditure to be
      recovered (note
      4)
            
            
            (1,744
            )
            
            
            (19,976
            )Long-term receivable (note 4)
            
            
            11,004
            
            
            
            5,049Proceeds on disposal of
      property, plant
      and                                                                                   equipment
            
            
            -
            
            
            
            39,553Changes in non-cash working
      capital items (note
      16)
            
            
            (5,345
            )
            
            
            4,465(18,291
            )
            
            
            (3,800
            )Foreign
      exchange on financial balances
            
            
            (1,524
            )
            
            
            (350
            )Change
      in cash and cash equivalents
            
            
            6,042
            
            
            
            10,084Cash
      and cash equivalents, beginning of year
            
            
            13,638
            
            
            
            3,554Cash
      and cash equivalents, end of year
            
            
            19,680
            
            
            
            13,638


See accompanying notes to the
consolidated financial statements.











ENTERRA
      ENERGY TRUSTNOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS


1.
            Basis
      of presentation




Enterra
Energy Trust (the “Trust” or “Enterra”) was established in November
2003.  Enterra is an open-end unincorporated investment trust governed
by the laws of the province of Alberta and created pursuant to a trust indenture
(the “Trust Indenture”).  The purpose of the Trust is to indirectly
hold interests in petroleum and natural gas properties, through notes from, and
investments in securities of its subsidiaries.  The beneficiaries of
the Trust are the holders of trust units issued by the Trust (the
“unitholders”).




These
consolidated financial statements include the accounts of the Trust and its
subsidiaries (collectively the “Trust” or “Enterra” for purposes of the
following notes to the consolidated financial statements).  All
inter-company accounts and transactions have been eliminated.





2.
            Significant
      accounting policies





Management
      has prepared the consolidated financial statements in accordance with
      Canadian generally accepted accounting principles (“GAAP”).  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)
            Basis
      of accounting





Substantially
all exploration, development and production activities related to the oil and
gas business are conducted jointly with others and the accounts reflect only
Enterra’s interest therein.





(b)
            Cash
      and cash equivalents




Cash and
cash equivalents consists of cash on hand and balances invested in short-term
securities with original maturities less than 90 days at the date of
acquisition.





(c)
            Revenue
      recognition





Revenue
associated with the sale of crude oil, natural gas and natural gas liquids is
recognized when title passes from Enterra to its customers based on contracts
which establish the price of products sold and when collection is reasonably
assured.





(d)
            Petroleum
      and natural gas properties





Enterra
follows the “full cost” method of accounting for petroleum and natural gas
properties.  All costs related to the exploration for and the
development of oil and gas reserves are capitalized into one of two cost
centers, Canada or the United States.  Costs capitalized include land
acquisition costs, geological and geophysical expenditures, lease rentals on
undeveloped properties and costs of drilling productive and non-productive wells
and production equipment.





General
and administrative costs are capitalized if they are directly related to
development or exploration projects.





Proceeds
from the disposal of oil and natural gas properties are applied as a reduction
of cost without recognition of a gain or loss except where such disposals would
result in a 20% change in the depletion rate.





Repair
and maintenance costs are expensed as incurred.





(e)
            Impairment
      test





Enterra
places a limit on the carrying value of property and equipment referred to as
the ceiling test.  The ceiling test is conducted separately for each
cost center, Canada and the United States.  The carrying value is
assessed to be recoverable when the sum of the undiscounted cash flows expected
from the production of proved reserves, the lower of cost and market of unproved
properties and the cost of major development projects exceeds the carrying value
of the cost center.  When the carrying value is not assessed to be
recoverable, an impairment loss is recognized to the extent that the carrying
value of petroleum and natural gas properties exceeds the sum of the discounted
cash flows expected from the production of proved and probable reserves, the
lower of cost and market of unproved properties and the cost of major
development projects.  The cash flows are estimated using expected
future product prices and costs and are discounted using a risk-free interest
rate.





(f)  Use
of estimates





The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, and the disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenue and expenses during the reporting
periods.





The
amounts recorded for depletion, depreciation and the asset retirement obligation
are based on estimates.  The ceiling test calculation is based on
estimates of reserves, oil and natural gas prices, future costs and other
relevant assumptions.  By their nature, these estimates are subject to
measurement uncertainty and may impact the consolidated financial statements of
future periods.





The
amounts recorded for financial derivatives are based on estimates of the price
for oil and natural gas in future periods.  These estimates are
subject to fluctuations in market prices and will impact the consolidated
financial statements of future periods.





(g)  Depletion
and depreciation





The
provision for depletion of petroleum and natural gas properties is calculated,
by cost center, using the unit-of-production method based on the Enterra’s share
of estimated proved reserves before royalties.  Natural gas reserves
and production are converted to equivalent units of crude oil using their
approximate relative energy content.





Office
furniture and equipment is depreciated on a 20% declining balance
basis.





(h)  Asset
retirement obligations





Enterra
initially recognizes a liability for the estimated fair value of the future
retirement obligations associated with property and equipment.  The
fair value of the estimated asset retirement obligations is recorded as a
liability with a corresponding increase in the carrying amount of the related
asset.  The capitalized amount is depleted on the unit-of-production
method based on proved reserves.  Enterra 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.





(i)  Income
taxes





Enterra
follows the asset and liability method of accounting for income
taxes.  Under this method, income tax liabilities and assets are
recognized based on the differences between the amounts reported in the
financial statements and their respective tax bases, using enacted or
substantively enacted income tax rates.  The effect of a change in
income tax rates on future income tax liabilities and assets is recognized in
income in the period that the change occurs.  Future tax assets are
recognized to the extent they are more likely than not to be
realized.





Enterra
is a taxable entity under the Canadian Income Tax Act and is currently taxable
only on income that is not distributed or distributable to the
unitholders.  In 2007, changes to Canadian tax legislation resulted in
a new tax on distributions from publicly traded income trusts commencing in
2011.  This has resulted in the recognition of future income taxes at
the trust level.





(j)  Financial
instruments





•  Enterra
has policies and procedures in place with respect to the required documentation
and approvals for the use of derivative financial instruments and their use is
limited to mitigating market price risk associated with expected cash
flows.


•


•  Financial
instruments are measured at fair value on the balance sheet upon initial
recognition of the instrument.  Measurement in subsequent years
depends on whether the financial instrument has been classified in one of the
following categories: held-for-trading, available-for-sale, held-to-maturity,
loans and receivables, or other financial liabilities.


•


•  Subsequent
measurement and changes in fair value will depend on initial classification, as
follows: held-for-trading  financial assets are measured at fair value
and changes in fair value are recognized in net income; available-for-sale
financial instruments are measured at fair value with changes in fair value
recorded in Other Comprehensive Income (“OCI”) until the instrument or a portion
thereof is derecognized or impaired at which time the amounts would be recorded
in net income; and held to maturity financial assets, loans and receivables and
other financial liabilities are measured at amortized cost.  Enterra
currently has no available-for-sale financial instruments.


•


•  Cash and
cash equivalents are designated as held-for-trading and are measured at cost,
which approximates fair value due to the short-term nature of these
instruments.  Accounts receivable are designated as loans and
receivables.  Accounts payable and accrued liabilities, the liability
component of convertible debentures and long-term debt are designated as other
financial liabilities.  All commodity contract assets and liabilities
are derivative financial instruments designated as
held-for-trading.





(k)  Trust
unit compensation plans





•  Enterra
has multiple unit based compensation plans, which are described in note
10.  Compensation expense associated with each unit based compensation
plan is recognized in earnings over the vesting period of the plan with a
corresponding increase in contributed surplus.  Any consideration
received upon the exercise of the unit based compensation together with the
amount of non-cash compensation expense recognized in contributed surplus is
recorded as an increase in unitholders’ capital.  Compensation expense
is based on the estimated fair value of the unit based compensation at the date
of grant.


•


(l)  Foreign
currency transactions





Transactions
completed in foreign currencies are reflected in Canadian dollars at the foreign
currency exchange rates prevailing at the time of the
transactions.  Monetary assets and liabilities denominated in foreign
currencies are reflected in the financial statements at the Canadian equivalent
at the rate of exchange prevailing at the balance sheet date.  Gains
and losses are included in earnings.





The U.S.
subsidiaries of Enterra are considered to be "self sustaining operations" and
have a U.S. dollar functional currency.  As a result, the revenues and
expenses are translated to Canadian dollars using average exchange rates for the
period.  Assets and liabilities are translated at the period-end
exchange rate.  Gains or losses resulting from the translation are
included in accumulated other comprehensive income (loss) in unitholders’
equity.





(m)  Per
unit amounts





Per unit
amounts are calculated using the weighted average number of units
outstanding.  Enterra follows the treasury stock method to determine
dilutive effect of options, warrants and other dilutive
instruments.  Under the treasury stock method, only “in-the-money”
dilutive instruments impact the diluted calculations.  Convertible
debentures are included in the calculation of diluted income per unit based on
the number of trust units that would be issued on conversion of the convertible
debentures at the end of the year and an add-back of the associated interest
expense for the year as long as the conversion results in dilution to Enterra
unitholders.





(n)  Environmental
liabilities





Enterra
records liabilities on an undiscounted basis for environmental remediation
efforts that are likely to occur and where the cost can be reasonably
estimated.  The estimates, including legal costs, are based on
available information using existing technology and enacted laws and
regulations.  The estimates are subject to revision in future periods
based on actual costs incurred or new circumstances.  Any amounts
expected to be recovered from others, including insurance coverage, are recorded
as an asset separate from the associated liability.





(o)  Comparative
figures


•


Certain
comparative figures have been reclassified to conform with the presentation
adopted in the current year.








ENTERRA
      ENERGY TRUSTNOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS


3.
            New
      accounting standards




Effective
December 31, 2009, Enterra adopted CICA issued amendments to Handbook Section
3862 “Financial Instruments – Disclosures”.  The amendments include
enhanced disclosures relating to the fair value of financial instruments and the
liquidity risk associated with financial instruments.  Section 3862
now requires that all financial instruments measured at fair value be
categorized into one of three hierarchy levels.





Future
accounting policies and pronouncements





The CICA
issued Handbook Section 1582 "Business Combinations" that replaces the previous
business combinations standard.  Under this guidance, the purchase
price used in a business combination is based on the fair value of shares
exchanged at the market price at acquisition date.  Under the current
standard, the purchase price used is based on the market price of shares for a
reasonable period before and after the date the acquisition is agreed upon and
announced.  In addition, the guidance generally requires all
acquisition costs to be expensed.  Current standards allow for the
capitalization of these costs as part of the purchase price.  This new
Section also addresses contingent consideration, which will be required to be
recognized at fair value on acquisition, and generally subsequently remeasured
at each reporting period until settled.  Currently, standards require
only certain contingent liabilities to be recognized.  The new
guidance requires negative goodwill to be recognized in earnings rather than the
current standard of deducting from non-current assets in the purchase price
allocation.  This standard applies prospectively to business
combinations on or after January 1, 2011 with earlier application
permitted.  This standard will effect business combinations completed
after the date of adoption.





The CICA
issued Handbook Sections 1601 "Consolidated Financial Statements", and 1602
"Non-controlling Interests", which replaces existing guidance under Section 1600
"Consolidated Financial Statements".  Section 1601 establishes
standards for the preparation of Consolidated Financial
Statements.  Section 1602 provides guidance on accounting for a
non-controlling interest in a subsidiary.  These standards will be
effective for Enterra for business combinations occurring on or after January 1,
2011 with early application permitted.  Enterra currently does not
anticipate these standards to have a significant impact on the financial
statements as all of Enterra’s subsidiaries are wholly owned.





In
January 2006, the Canadian Accounting Standards Board (the “AcSB”) announced its
decision to replace Canadian GAAP with IFRS for all Canadian Publicly
Accountable Enterprises (“PAEs”), including Enterra.  On February 13,
2008, the AcSB confirmed January 1, 2011 as the changeover date for PAEs to
commence reporting under IFRS.  Although IFRS is principles-based and
uses a conceptual framework similar to Canadian GAAP, there are significant
differences and choices in accounting policies, as well as increased disclosure
requirements under IFRS.





In July
2009, the International Accounting Standards Board (“IASB”) issued amendments to
IFRS 1 “First-time adoption of IFRS” allowing additional exemptions for
first-time adopters.  Under these amendments, oil and gas companies
can elect to use historical cost under a previous GAAP as the deemed cost for
oil and gas assets on the transition date to IFRS.








4.
            Long-term
      receivable





In 2006
Enterra entered into a farm-out agreement with Petroflow Energy Ltd. (“JV
Partner”), a public oil and gas company, to fund the drilling and completion
costs of the undeveloped lands in Oklahoma.  Per the agreement, JV
Partner paid 100% of the drilling and completion costs to earn 70% of Enterra’s
interest in each well and Enterra was required to pay 100% of the infrastructure
costs to support these wells, such as pipelines and salt water disposal
wells.  These infrastructure costs were recoverable from JV Partner
over three years with interest charged at a rate of 12% per
annum.  Infrastructure costs paid by Enterra are accounted for as a
finance lease, therefore, the capital costs incurred are not included in
property, plant and equipment but are recorded as current and long-term
receivables.  The interest income on the long-term receivables is
recorded as a reduction in interest expense.  A director of Enterra
who previously owned less than 2% of the outstanding shares of JV Partner no
longer has any ownership interest in JV Partner.





In
December 2009 Enterra delivered a notice of termination for non-performance
under the terms of the farm-out agreement with JV Partner.  JV Partner
was required to maintain a certain pace of drilling to continue its right to
drill on lands owned by Enterra but ceased drilling in February 2009 and has not
indicated that it will be able to continue drilling with any
certainty.  Final notice of termination of the farm-out agreement was
delivered in January 2010.  Enterra owns undeveloped land of
approximately 41,600 acres which had been subject to the farm-out agreement
which it now plans to drill on its own or with another suitable
partner.  If amounts owing under the long-term receivable are not
recovered from JV Partner, then the balance owing will be reclassified to the
property, plant and equipment, net of impairment, if any, as the receivable
relates to infrastructure assets which are majority owned and operated by
Enterra.  A fee will be charged to JV Partner for use of the
infrastructure assets upon termination of the existing arrangement as a capital
recovery fee against production from the producing wells.  The
recovery of this fee has been secured by placing liens against the producing
wells.





As at
December 31, 2009, a total of $16.7 million, split between $11.2 million of
current receivables and $5.5 million of long-term receivables (December 31, 2008
– $10.8 million and $19.3 million, respectively), relate to infrastructure costs
incurred by Enterra that are due from JV Partner.





For the
year ended December 31, 2009, $2.7 million of interest income was earned on the
long-term receivables from JV Partner (2008 – $1.7 million) and $11.0 million of
principal payments have been received (2008 – $5.0 million).  For the
year ended December 31, 2009, $1.7 million in new capital expenditures were made
by Enterra that are expected to be recovered under the farm-out agreement (2008
– $20.0 million).








5.      Property,
plant and equipment





(in
      thousands of Canadian dollars)
            
            December
      31, 2009
            
            
            December
      31, 2008Petroleum
      and natural gas properties, including production and processing
      equipment
            
            
            1,076,903
            
            
            
            1,107,992Accumulated
      depletion and depreciation
            
            
            (677,666
            )
            
            
            (616,338
            )Net
      book value
            
            
            399,237
            
            
            
            491,654





For the Canadian operations, at
December 31, 2009, costs of undeveloped land and seismic of $9.8 million
(December 31, 2008 - $11.8 million) were excluded from and $1.8 million
(December 31, 2008 - $3.0 million) of future development costs were added for
purposes of the calculation of depletion expense.  For the U.S.
operations, at December 31, 2009, costs of undeveloped land of $10.3 million
(December 31, 2008 – $11.9 million) were excluded from and $67.6 million
(December 31, 2008 - $3.7 million) of future development costs were added for
purposes of the calculation of depletion expense.





Depletion and depreciation expense
related to the Canadian and the U.S. cost centers in 2009 were $49.8 million and
$35.3 million respectively (2008 – $61.7 million and $35.8 million,
respectively).





During
2009, Enterra acquired additional working interests in certain wells in the
Oklahoma area from non-operated working interest partners.  The
combined consideration for the transaction was cash and cash equivalents of
US$6.0 million and 2.0 million trust units.  The trust units issued on
the acquisition were valued at $1.36 per unit, being the trading price of the
units on the closing date of the acquisition.





During
2009, $1.6 million of general and administrative expenses (2008 – $1.8 million)
and $0.3 million (2008 – $0.6 million) of unit-based compensation were
capitalized and included in the cost of the petroleum and natural gas
properties.


ENTERRA
      ENERGY TRUSTNOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS


The
following table summarizes the benchmark prices used in the ceiling test
calculation. The petroleum and natural gas prices are based on the December 31,
2009 commodity price forecast of Enterra’s independent reserve
engineers.





Year
            WTI
      Oil
              ($U.S./bbl)
            Edmonton
      Light
              Crude
      Oil
              ($Cdn/bbl)
            AECO
      Gas
              ($Cdn/MMBtu)
            Henry
      Hub
              ($U.S./Mmbtu)
            Foreign
              Exchange
              Rate
      (US$/CAD)2010
            80.00
            83.20
            6.05
            6.05
            0.9502011
            83.60
            87.00
            6.75
            6.90
            0.9502012
            87.40
            91.00
            7.15
            7.30
            0.9502013
            91.30
            95.00
            7.45
            7.70
            0.9502014
            95.30
            99.20
            7.80
            8.15
            0.9502015
            99.40
            103.50
            8.15
            8.50
            0.950Escalate
              Thereafter
            Average
              2%
      per year
            Average
              2%
      per year
            Average
              2%
      per year
            Average
              2%
      per year
            0.950





Enterra
completed ceiling test calculations for the Canadian and U.S. cost centers at
December 31, 2009 and 2008 to assess the recoverability of costs recorded in
respect of the petroleum and natural gas properties.  The ceiling test
calculations did not result in a write down of the U.S. or Canadian cost centres
in 2009 or 2008.








6.      Long-term debt





(in
      thousands of Canadian dollars)
            
            December
      31, 2009
            
            
            December
      31, 2008Revolving
      credit facility
            
            
            70,000
            
            
            
            90,000Operating
      credit facility
            
            
            -
            
            
            
            5,466Long
      term debt
            
            
            70,000
            
            
            
            95,466Less
      current portion of long-term debt
            
            
            -
            
            
            
            (95,466
            )Non-current
      portion of long-term debt
            
            
            70,000
            
            
            
            -





In
January 2010, Enterra’s Bank Syndicate completed a borrowing base review and
affirmed the borrowing base to $110.0 million.  Included in the
borrowing base of $110.0 million is an operating credit facility of $20.0
million.  The next scheduled annual review of the borrowing base is
anticipated to be completed in the first half of 2010.  Changes to the
amount of credit available may be made after this review is
completed.  The revolving and operating credit facilities are secured
with a first priority charge over the assets of Enterra.  The maturity
date of the revolving and operating credit facilities is June 25, 2010 and
should the lenders decide not to renew the facility, the debt must be repaid on
June 25, 2011.





Interest
rates for the credit facilities are set quarterly according to a grid based on
the ratio of bank debt to cash flow with the lowest rates in the grid being
Canadian dollar BA (“Bankers Acceptance”) or U.S. dollar LIBOR rates plus a
margin of 3.00%, effective with the June 2009 renewal of the credit
facilities.





As at
December 31, 2009, all borrowings under the facilities were denominated in
Canadian dollars and interest was being accrued at a rate of 3.25% per annum
(December 31, 2008 – 3.75%).  At December 31, 2009, letters of credit
totaling $0.5 million reduced the amount that can be drawn under the operating
credit facility (December 31, 2008 – $0.5 million).





Enterra
is required to maintain several financial and non-financial covenants and an
interest coverage ratio of 3.0:1.0 as calculated pursuant to the terms of the
credit agreement.  For the year ended December 31, 2009, the interest
coverage ratio was 4.89 (2008 – 6.46).  Enterra is in compliance with
the terms and covenants of the credit facilities as at December 31, 2009 and
2008.





At
December 31, 2008, Enterra had a revolving extendible credit facility of $135.0
million which included an operating credit facility of $20.0
million.  Also as at December 31, 2008, Enterra had a second-lien
credit facility with a maximum limit of $12.0 million which was undrawn and
cancelled in June 2009 at Enterra’s option.


7.      Convertible
debentures





On April
26, 2007, Enterra issued $40.0 million of convertible debentures with a face
value of $1,000 per convertible debenture that mature on June 30, 2012, bear
interest at 8.25% per annum paid semi-annually on June 30 and December 31 of
each year and are subordinated to the bank credit facilities.  The
convertible debentures are convertible at the option of the holder into trust
units at any time prior to the maturity date at the conversion price of $6.80
per trust unit.  During 2009, $0.3 million in face value of these
convertible debentures were converted (2008 – nil).





On
November 21, 2006, Enterra issued $138.0 million of convertible debentures that
mature on December 31, 2011, bear interest at 8% per annum paid semi-annually on
June 30 and December 31 of each year and are subordinated to the bank credit
facilities.  The convertible debentures are convertible at the option
of the holder into trust units at any time prior to the maturity date at the
conversion price of $9.25 per trust unit.  During 2009 and 2008, there
were no conversions of these debentures.





At the
option of Enterra, the repayment of the principal portion of the convertible
debentures may be settled in trust units.  The number of trust units
issued upon redemption by Enterra will be calculated by dividing the principal
by 95% of the weighted average trading price of trust units.  The
8.25% convertible debentures are not redeemable on or before June 30, 2010 (8% -
December 31, 2009). On or after July 1, 2010 and prior to maturity, the
convertible debentures may be redeemed in whole or in part from time to time at
the option of the Trust on not more than 60 days and not less than 30 days
notice, at a redemption price of $1,050 per convertible debenture on or after
July 1, 2010  (8% - January 1, 2010) and, on or before June 30, 2011
(8% - January 1, 2010), at a redemption price of $1,025 per convertible
debenture and on or after July 1, 2011  (8% - January 1, 2011) and
prior to maturity, in each case, plus accrued and unpaid interest thereon, if
any.





At
December 31, 2009, Enterra had $80.2 million in 8% convertible debentures (2008
- $80.3 million) outstanding with an estimated fair value of $77.0 million (2008
- $50.6 million) and $39.6 million in 8.25% convertible debentures (2008 - $40.0
million) outstanding with an estimated fair value of $37.8 million (2008 - $25.4
million).





During Q2
2009, Enterra made the necessary filings, and received the necessary approvals,
to make a normal course issuer bid for its 8.00% convertible debentures and its
8.25% convertible debentures.  Under the normal course issuer bid,
Enterra redeemed $0.1 million in convertible debentures during
2009.  The normal course issuer bid is effective until May 31,
2010.





(in
      thousands of Canadian dollars)
            
            8%
      Series
            
            
            8.25%
      Series
            
            
            Total
            
            
            Equity
      ComponentBalance,
      December 31, 2007
            
            
            76,032
            
            
            
            35,660
            
            
            
            111,692
            
            
            
            3,977Accretion
            
            
            930
            
            
            
            798
            
            
            
            1,728
            
            
            
            -Balance,
      December 31, 2008
            
            
            76,962
            
            
            
            36,458
            
            
            
            113,420
            
            
            
            3,977Accretion
            
            
            995
            
            
            
            893
            
            
            
            1,888
            
            
            
            -Converted
            
            
            -
            
            
            
            (298
            )
            
            
            (298
            )
            
            
            (22
            )Redeemed
            
            
            (117
            )
            
            
            (30
            )
            
            
            (147
            )
            
            
            (4
            )Balance
      at December 31, 2009
            
            
            77,840
            
            
            
            37,023
            
            
            
            114,863
            
            
            
            3,951








8.      Asset
retirement obligations





The asset
retirement obligations were estimated by management based on Enterra’s working
interests in its wells and facilities, estimated costs to remediate, reclaim and
abandon the wells and facilities and the estimated timing of the costs to be
incurred.  At December 31, 2009, the asset retirement obligation is
estimated to be $21.1 million (December 31, 2008 – $22.2 million), based on a
total future liability of $38.5 million (December 31, 2008 - $39.2
million).  These obligations will be settled at the end of the useful
lives of the underlying assets, which currently averages six years, but extends
up to 17 years into the future. This amount has been calculated using an
inflation rate of 2.0% and discounted using a credit-adjusted interest rate of
8.0% to 10.0%.











The
following table reconciles the asset retirement obligations:





(in
      thousands of Canadian dollars)
            
            2009
            
            
            2008Balance,
      beginning of year
            
            
            22,151
            
            
            
            29,939Additions
            
            
            51
            
            
            
            223Accretion
      expense
            
            
            1,754
            
            
            
            1,892Acquisitions
            
            
            24
            
            
            
            -Dispositions
            
            
            -
            
            
            
            (8,712
            )Costs
      incurred
            
            
            (2,533
            )
            
            
            (1,771
            )Foreign
      exchange
            
            
            (392
            )
            
            
            580Balance,
      end of year
            
            
            21,055
            
            
            
            22,151








9.      Income
taxes





The
income tax provision differs from the amount of tax expense calculated by
applying federal and provincial statutory tax rates to the income (loss) before
taxes as follows:




(in
      thousands of Canadian dollars)
            
            2009
            
            
            2008Income
      (loss) before income taxes
            
            
            (58,876
            )
            
            
            11,892Combined
      Canadian federal and provincial income tax rate
            
            
            29.2
            %
            
            
            29.7
            %Computed
      income tax expense (reduction)
            
            
            (17,192
            )
            
            
            3,532Increase
      (decrease) resulting from:Other
      non-deductible items
            
            
            1,604
            
            
            
            5,406Difference
      between U.S. and Canadian tax rates and foreign exchange
            
            
            166
            
            
            
            2,528Change
      in tax rates
            
            
            749
            
            
            
            (4,950
            )Capital
      tax
            
            
            -
            
            
            
            344Other
            
            
            (2,921
            )
            
            
            (2,029
            )(17,594
            )
            
            
            4,831





The
components of the net future income tax liability at December 31 were as
follows:





(in
      thousands of Canadian dollars)
            
            2009
            
            
            2008Future
      income tax assets:Non-capital
      loss carry-forwards and other
            
            
            25,175
            
            
            
            42,867Valuation
      allowance on non-capital losses
            
            
            -
            
            
            
            (16,612
            )Asset
      retirement obligations
            
            
            5,741
            
            
            
            6,123Attributed
      Canadian royalty income
            
            
            1,317
            
            
            
            1,317Commodity
      contracts
            
            
            212
            
            
            
            -Financing
      charges
            
            
            740
            
            
            
            48033,185
            
            
            
            34,175Future
      income tax liabilities:Property,
      plant and equipment
            
            
            (41,460
            )
            
            
            (53,604
            )Commodity
      contracts
            
            
            (281
            )
            
            
            (4,187
            )Net
      future income tax liability
            
            
            (8,556
            )
            
            
            (23,616
            )Current
      portion of net future income tax liability
            
            
            (69
            )
            
            
            (4,187
            )Non-current
      portion of net future income tax liability
            
            
            (8,487
            )
            
            
            (19,429
            )





Non-capital
loss carry-forwards, excluding those for which a valuation allowance has been
taken, amongst Canadian and U.S. subsidiaries, totaled $85.3 million (2008 –
$61.3 million) and expire from 2010 to 2026.








10.           Unitholders’
equity





Authorized
trust units


An
unlimited number of trust units may be issued.





The trust
units are redeemable at the option of the holder based on the lesser of 90% of
the average market trading price of the trust units for the 10 trading days
after the date of redemption or the closing market price of the trust units on
the date of redemption.  Trust units can be redeemed to a cash limit
of $0.1 million per year or a greater limit at the discretion of
Enterra.  Redemptions in excess of the cash limit shall be satisfied
first by the issuance of notes by a subsidiary of Enterra and second by issuance
of promissory notes by Enterra.





Issued trust
units





(in
      thousands of Canadian dollars except unit amounts)
            
            Number
      of Units
            
            
            AmountBalance
      at December 31, 2007
            
            
            61,435,895
            
            
            
            667,690Issued
      under restricted unit plan
            
            
            723,092
            
            
            
            2,074Unit
      issue costs
            
            
            -
            
            
            
            (97
            )Balance
      at December 31, 2008
            
            
            62,158,987
            
            
            
            669,667Issued
      under restricted unit plan
            
            
            701,870
            
            
            
            951Issued
      under performance unit plan
            
            
            194,774
            
            
            
            448Issued
      on property acquisition (note 5)
            
            
            2,000,000
            
            
            
            2,720Issued
      on conversion of debentures
            
            
            47,058
            
            
            
            320Balance
      at December 31, 2009
            
            
            65,102,689
            
            
            
            674,106





Contributed
surplus





(in
      thousands of Canadian dollars)Balance
      at December 31, 2007
            
            
            4,660Trust
      unit option based compensation
            
            
            110Restricted
      and performance unit compensation
            
            
            4,709Transfer
      to trust units on restricted and performance unit
exercises
            
            
            (2,074
            )Expired
      warrants
            
            
            1,215Balance
      at December 31, 2008
            
            
            8,620Trust
      unit option based compensation
            
            
            106Restricted
      and performance unit compensation
            
            
            3,737Transfer
      to trust units on restricted and performance unit
exercises
            
            
            (1,399
            )Balance
      at December 31, 2009
            
            
            11,064





ENTERRA
      ENERGY TRUSTNOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS


Trust
unit options





Enterra
has granted trust unit options to its directors, officers and
employees.  Each trust unit option permits the holder to purchase one
trust unit at the stated exercise price.  All options vest over a 1 to
3 year period and have a term of 4 to 5 years. At the time of grant, the
exercise price is equal to the market price.  The forfeiture rate is
estimated to be 60%.  The following options have been
granted:





(in
      Canadian dollars, except for number of options)
            
            2009
            
            
            2008Number
      of options
            
            
            Weighted-average
      exercise price
            
            
            Number
      of options
            
            
            Weighted-average
      exercise priceOptions
      outstanding, beginning of year
            
            
            1,042,000
            
            
            $
            7.75
            
            
            
            1,474,334
            
            
            $
            14.51Granted
            
            
            -
            
            
            
            -
            
            
            
            210,000
            
            
            
            2.81Forfeited
            
            
            (336,000
            )
            
            
            10.17
            
            
            
            (642,334
            )
            
            
            21.65Options
      outstanding, end of year
            
            
            706,000
            
            
            
            6.60
            
            
            
            1,042,000
            
            
            
            7.75Options
      exercisable at end of year
            
            
            676,000
            
            
            $
            6.77
            
            
            
            685,336
            
            
            $
            8.45





(in
      Canadian dollars, except for number of options)Exercise
      price range
            
            
            Number
      of options
            
            
            Weighted
      average exercise price
            
            
            Weighted
      average remaining contract life in years
            
            
            Number
      of options exercisable
            
            
            Weighted
      average price of exercisable options$
            1.65
      to $2.81
            
            
            
            510,000
            
            
            $
            2.13
            
            
            
            1.97
            
            
            
            480,000
            
            
            $
            2.09$
            15.49
      to $17.74
            
            
            
            146,000
            
            
            
            16.53
            
            
            
            1.36
            
            
            
            146,000
            
            
            
            16.53$
            20.12
      to $26.80
            
            
            
            50,000
            
            
            
            23.30
            
            
            
            0.22
            
            
            
            50,000
            
            
            
            23.30Balance
      at December 31, 2009
            
            
            
            706,000
            
            
            $
            6.60
            
            
            
            1.72
            
            
            
            676,000
            
            
            $
            6.77





Estimated
fair value of stock options





The
estimated grant date fair value of options was determined using the
Black-Scholes model under the following assumptions:





2009
            
            
            2008Weighted-average
      fair value of options granted ($/option)
            
            
            -
            
            
            
            0.70Risk-free
      interest rate (%)
            
            
            0.5
            
            
            
            2.5Estimated
      hold period prior to exercise (years)
            
            
            4
            
            
            
            4Expected
      volatility (%)
            
            
            40
            
            
            
            90Expected
      cash distribution yield (%)
            
            
            -
            
            
            
            -





During
2009, Enterra did not grant any options (2008 – 210,000).





Restricted
and performance units





Enterra
has granted restricted and performance units to directors, officers, and
employees.  Restricted units vest over a contracted period ranging
from vesting on grant to 3 years and provide the holder with trust units on the
vesting dates of the restricted units.  The units granted are the
product of the number of restricted units times a multiplier.  The
multiplier starts at 1.0 and is adjusted each month based on the monthly
distribution of Enterra divided by the five-day weighted average price of the
trust units based on the New York Stock Exchange for the period preceding the
distribution date.  Performance units vest at the end of two years and
provide the holder with trust units based on the same multiplier as the
restricted units as well as a payout multiplier.  The payout
multiplier ranges between 0.0 and 2.0 based on Enterra’s total unitholder return
compared to its peers.  The forfeiture rate is estimated to be 16% for
2009 and 2008.





ENTERRA
      ENERGY TRUSTNOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS


The
following restricted and performance units have been granted:





Number
      of restricted units
            
            
            Weighted-average
      grant date fair value
            
            
            Number
      of performance units
            
            
            Weighted-average
      grant date fair valueUnits
      outstanding at December 31, 2007
            
            
            1,057,483
            
            
            $
            4.77
            
            
            
            454,171
            
            
            $
            6.29Granted
            
            
            2,070,683
            
            
            
            3.77
            
            
            
            -
            
            
            
            -Forfeited
            
            
            (130,269
            )
            
            
            4.37
            
            
            
            -
            
            
            
            -Exercised
            
            
            (718,111
            )
            
            
            3.99
            
            
            
            (279,773
            )
            
            
            7.61Units
      outstanding at December 31, 2008
            
            
            2,279,786
            
            
            $
            4.13
            
            
            
            174,398
            
            
            $
            4.17Granted
            
            
            337,337
            
            
            
            1.64
            
            
            
            -
            
            
            
            -Forfeited
            
            
            (343,283
            )
            
            
            3.38
            
            
            
            (77,011
            )
            
            
            6.53Exercised
            
            
            (669,515
            )
            
            
            4.85
            
            
            
            (97,387
            )
            
            
            2.30Units
      outstanding at December 31, 2009
            
            
            1,604,325
            
            
            $
            3.47
            
            
            
            -
            
            
            $
            -





The
estimated value of the restricted units and performance units is based on the
trading price of the trust units on the grant date.  For performance
units the compensation cost is adjusted for the estimated payout multiple, which
at December 31, 2009 was 2.0 based on Enterra’s total unitholder return compared
to its peers (2008 – nil).








Reconciliation
of earnings per unit calculations





For
      the year ended December 31, 2009(in
      thousands of Canadian dollars except units and per unit
      amounts)
            
            Loss
            
            
            Weighted
      Average Units Outstanding
            
            
            Per
      UnitBasic
      and diluted
            
            
            (41,282
            )
            
            
            63,358,135
            
            
            $
            (0.65
            )





For the
calculation of the weighted average number of diluted units outstanding for
2009, all options, restricted and performance units and convertible debentures
were excluded, as they were anti-dilutive to the calculation.





For
      the year ended December 31, 2008(in
      thousands of Canadian dollars except units and per unit
      amounts)
            
            Net
      Income
            
            
            Weighted
      Average Units Outstanding
            
            
            Per
      UnitBasic
            
            
            7,061
            
            
            
            61,660,971
            
            
            $
            0.11Dilution
      effect from:Restricted
      trust units
            
            
            
            
            
            
            1,173,141Trust
      unit options
            
            
            
            
            
            
            177,433Diluted
            
            
            7,061
            
            
            
            63,011,545
            
            
            $
            0.11





For the
calculation of the weighted average number of diluted units outstanding for
2008, 382,000 options, 174,398 performance units and all convertible debentures
and warrants were excluded as they were anti-dilutive.














Trust
unit savings plan





Enterra
established a trust unit savings plan whereby it will match an employee’s
contributions to the plan to a maximum of 9.0% of their salary.  Both
the contributions of the employee and Enterra were used to purchase trust units
on the Toronto Stock Exchange.  During the year ended December 31,
2009, Enterra expensed approximately $0.5 million (2008 - $0.4 million) relating
to its contributions to the plan.








11.           Accumulated
other comprehensive income (loss)





(in
      thousands of Canadian dollars)Balance
      at December 31, 2007
            
            
            (44,978
            )Cumulative
      translation of self-sustaining operations
            
            
            61,378Foreign
      exchange gain realized
            
            
            2,071Balance
      at December 31, 2008
            
            
            18,471Cumulative
      translation of self-sustaining operations
            
            
            (40,775
            )Foreign
      exchange gain realized
            
            
            (170
            )Balance
      at December 31, 2009
            
            
            (22,474
            )





Accumulated
other comprehensive income (loss) is comprised entirely of currency translation
adjustments on the U.S. operations.








12.
            Risk
      management





(a)  Fair
value of financial instruments





Enterra
classifies the fair value measurements of its financial instruments recognized
at fair value in the balance sheet according to the following hierarchy based on
the amount of observable inputs used to value the instrument.


·
            Level
      1 – Quoted prices are available in active markets for identical assets or
      liabilities as of the reporting date.  Active markets are those
      in which transactions occur in sufficient frequency and volume to provide
      pricing information on an ongoing
basis.


·
            Level
      2 – Pricing inputs are other than quoted prices in active markets included
      in Level 1.  Prices in Level 2 are either directly or indirectly
      observable as of the reporting date.  Level 2 valuations are
      based on inputs, including quoted forward prices for commodities, time
      value and volatility factors, which can be substantially observed or
      corroborated in the marketplace.


·
            Level
      3 - Valuations in this level are those with inputs for the asset or
      liability that are not based on observable market
  data.





The
carrying values of cash and cash equivalents, accounts receivable, long-term
debt and accounts payable and accrued liabilities approximated fair value at
December 31, 2009 and 2008 as the amounts were short term in nature or bore
interest at floating rates.  The fair value of the convertible
debentures is disclosed in Note 7.  These assets and liabilities are
not presented in the following tables.





As at
December 31, 2009, the only asset or liability measured at fair value on a
recurring basis are respect to the commodity contracts.  The following
tables provide fair value measurement information for such assets and
liabilities as of December 31, 2009 and 2008.


ENTERRA
      ENERGY TRUSTNOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS





As
      at December 31, 2009Fair
      Value Measurements Using:Carrying
      Amount
            
            
            Fair
              Value
            
            
            Level
      1
            
            
            Level
      2
            
            
            Level
      3Commodity
      contracts asset
            
            
            993
            
            
            
            993
            
            
            
            -
            
            
            
            993
            
            
            
            -Commodity
      contracts liability
            
            
            (755
            )
            
            
            (755
            )
            
            
            -
            
            
            
            (755
            )
            
            
            -Commodity
      contracts (net)
            
            
            238
            
            
            
            238
            
            
            
            -
            
            
            
            238
            
            
            
            -





As
      at December 31, 2008Fair
      Value Measurements Using:Carrying
      Amount
            
            
            Fair
              Value
            
            
            Level
      1
            
            
            Level
      2
            
            
            Level
      3Commodity
      contracts
            
            
            14,338
            
            
            
            14,338
            
            
            
            -
            
            
            
            14,338
            
            
            
            -








(b)  Financial
risk management





In the
normal course of operations, Enterra is exposed to various market risks such as
liquidity, credit, interest rate, foreign exchange and commodity
risk.  To manage these risks, management determines what activities
must be undertaken to minimize potential exposure to risks.  The
objectives of Enterra to managing risk are as follows:





Objectives:


·
            maintaining
      sound financial condition;


·
            financing
      operations; and


·
            ensuring
      liquidity in the Canadian and U.S.
operations.





In order
to satisfy the objectives above, Enterra has adopted the following
policies:


·
            prepare
      budget documents at prevailing market rates to ensure clear, corporate
      alignment to performance management and achievement of
      targets;


·
            recognize
      and observe the extent of operating risk within the
    business;


·
            identify
      the magnitude of the impact of market risk factors on the overall risk of
      the business and take advantage of natural risk reductions that arise from
      these relationships; and


·
            utilize
      financial instruments, including derivatives to manage the remaining
      residual risk to levels that are within the risk tolerance of
      Enterra.





The
policy objective with respect to the utilization of derivative financial
instruments is to selectively mitigate the impact of fluctuations in commodity
prices.  The use of any derivative instruments is carried out in
accordance with approved limits as authorized by the board of directors and
imposed by external financial covenants.  It is not the intent of
Enterra to use financial derivatives or commodity instruments for trading or
speculative purposes and no financial derivatives have been designated as
accounting hedges.  Enterra’s process to manage changes in risks has
not changed from the prior year.





(i)
Market risks


Oil and gas commodity price
risks


Enterra
is exposed to fluctuations in natural gas and crude oil
prices.  Enterra has entered into commodity contracts and fixed price
physical contracts to minimize the exposure to fluctuations in crude oil and
natural gas prices.  At December 31, 2009, the following financial
derivative contracts are outstanding:





Derivative
      Instrument
            Commodity
            Price
            Volume
      (per day)
            PeriodFixed
            Gas
            6.25
      (US$/mmbtu)
            5,000
      mmbtu
            November
      1, 2009 – December 31, 2010Fixed
      Basis Differential (1)
            Gas
            Differential
      Fixed @ $0.615 US$/mmbtu
            5,000
      mmbtuFixed
            Gas
            5.71
      (US$/mmbtu)
            2,000
      mmbtu
            January
      1, 2010 – March 31, 2010Fixed
      Basis Differential (1)
            Gas
            Differential
      Fixed @ $0.36 US$/mmbtu
            2,000
      mmbtuFixed
            Gas
            5.50
      ($/GJ)
            2,000
      GJ
            January
      1, 2010 – March 31, 2010Fixed
            Gas
            6.22
      (US$/mmbtu)
            2,000
      mmbtu
            April
      1, 2010 –
              October
      31, 2010Fixed
      Basis Differential (1)
            Gas
            Differential
      Fixed @ $0.40 US$/mmbtu
            2,000
      mmbtuFixed
            Gas
            5.70
      (US$/mmbtu)
            2,000
      mmbtu
            April
      1, 2010 –
              October
      31, 2010Fixed
      Basis Differential (1)
            Gas
            Differential
      Fixed @ $0.30 US$/mmbtu
            7,000
      mmbtu
            January
      1, 2010 – December 31, 2010Fixed
            Oil
            85.00
      ($/bbl)
            500
      bbl
            October
      1, 2009 – December 31, 2010Fixed
            Oil
            88.00
      ($/bbl)
            300
      bbl
            January
      1, 2010 – December 31, 2010


(1)
            NYMEX
      / Southern Star (Oklahoma) basis
differential.





Enterra
did not have any fixed price oil or gas physical contracts as at December 31,
2009.





Electricity commodity price
risks


Enterra
is subject to electricity price fluctuations in its operations and previously
had entered into a forward fixed rate electricity derivative contract which
expired on December 31, 2009.  Enterra does not have any forward fixed
rate electricity derivative contracts as of December 31, 2009.





The gains
(losses) during the period from the commodity contracts are summarized in the
table below.





(in
      thousands of Canadian dollars)
            
            Year
      ended
              December
      31, 2009
            
            
            Year
      ended
              December
      31, 2008Realized
      commodity contracts gain
            
            
            15,895
            
            
            
            1,915Unrealized
      commodity contracts gain (loss)
            
            
            (14,127
            )
            
            
            20,072Net
      gain on commodity contracts
            
            
            1,768
            
            
            
            21,987





The
following sensitivities show the impact to pre-tax net income for the year ended
December 31, 2009 related to commodity contracts of the respective changes in
crude oil prices, natural gas and electricity.





Increase
      (decrease) to pre-tax net income(in
      thousands of Canadian dollars)
            
            Decrease
      in market price
              ($1.00
      per bbl and
              $0.50
      per mcf)
            
            
            Increase
      in market price
              ($1.00
      per bbl and
              $0.50
      per mcf)Crude
      oil derivative contracts (bbl)
            
            
            153
            
            
            
            (153
            )Natural
      gas derivative contracts (mcf)
            
            
            1,598
            
            
            
            (1,598
            )Decrease
      in differential price
              ($0.02
      per mcf)
            
            
            Increase
      in differential price
              ($0.02
      per mcf)Fixed
      basis differential contracts (mcf)
            
            
            92
            
            
            
            (92
            )





Foreign exchange currency
risks


Enterra
is exposed to foreign currency risk as approximately 55% of its production is
from the U.S. division.  In addition, the Canadian division has
commodity derivatives denominated in U.S. dollars.  Enterra has not
entered into any foreign exchange derivative contracts to mitigate its currency
risks as at December 31, 2009.





Changes
in the U.S. to Canadian foreign exchange rates with respect to the U.S. division
affect other comprehensive income as the division is considered a
self-sustaining foreign operation.  The following financial
instruments were denominated in U.S. dollars as at December 31,
2009:





(in
      thousands of dollars)
            
            Canadian
      division
              (in
      U.S. dollars)
            
            
            U.S.
      division
              (in
      U.S. dollars)Cash
      and cash equivalents
            
            
            4,955
            
            
            
            9,687Accounts
      receivable
            
            
            -
            
            
            
            14,998Long-term
      receivable (includes current portion)
            
            
            -
            
            
            
            15,877Commodity
      contracts
            
            
            -
            
            
            
            (718
            )Accounts
      payable
            
            
            (328
            )
            
            
            (13,942
            )Net
      exposure
            
            
            4,627
            
            
            
            25,902Effect
      of a $0.02 increase in U.S. to Cdn
    exchange  rate:Increase
      to pre-tax net income
            
            
            93
            
            
            
            -Increase
      to other comprehensive income
            
            
            -
            
            
            
            518Effect
      of a $0.02 decrease in U.S. to Cdn exchange rate:Decrease
      to pre-tax net income
            
            
            (93
            )
            
            
            -Decrease
      to other comprehensive income
            
            
            -
            
            
            
            (518
            )





Interest rate
risk


Interest
rate risk arises on the outstanding long-term debt that bears interest at
floating rates.  The results of Enterra are impacted by fluctuations
in interest rates as its outstanding long-term debt carries floating interest
rates.





Enterra
has not entered into any derivative contracts to mitigate the risks related to
fluctuations in interest rates as at December 31, 2009.   The
following sensitivities show the impact to pre-tax net income for the year ended
December 31, 2009 of the respective changes in interest rates (increase /
(decrease)) based on the average debt balance during the year.





Change
      to pre-tax net income(in
      thousands of Canadian dollars)
            
            1%
      decrease in market interest rates
            
            
            1%
      increase in market interest ratesInterest
      on long-term debt
            
            
            790
            
            
            
            (790
            )





The
convertible debentures bear interest at fixed rates.





(ii)  Credit
risk


Credit
risk is the risk of loss if counterparties do not fulfill their contractual
obligations and arises principally from trade, joint venture receivables,
long-term receivables as well as any derivative financial instruments in a
receivable position.  Enterra does not hold any collateral from
counterparties.  The maximum exposure to credit risk is the carrying
amount of the related amounts receivable.





The
significant balances receivable are set out below.  Accounts
receivable include trade receivables, joint venture receivables and non-aging
accounts such as cash calls, taxes receivable and operating
advances.





(in
      thousands of Canadian dollars)
            
            December
      31, 2009
            
            
            December
      31, 2008Accounts
      receivable – trade
            
            
            15,398
            
            
            
            39,178Accounts
      receivable – joint venture
            
            
            1,033
            
            
            
            2,882Accounts
      receivable – other
            
            
            8,400
            
            
            
            3,580Allowance
      for doubtful accounts
            
            
            (1,154
            )
            
            
            (10,281
            )23,677
            
            
            
            35,359Current
      portion of long-term receivables
            
            
            11,196
            
            
            
            10,760Long-term
      receivables
            
            
            5,491
            
            
            
            19,310Commodity
      contracts
            
            
            993
            
            
            
            14,338


Should
Enterra determine that the ultimate collection of a receivable is in doubt based
on the processes for managing credit risk, it will provide the necessary
provision in its allowance for doubtful accounts with a corresponding charge to
earnings.  If Enterra subsequently determines an account is
uncollectible, the account is written off with a corresponding charge to
allowance for doubtful accounts.





During
2009, Enterra recovered $2.1 million of an $8.5 million receivable that was
fully provided for in 2008.  On July 22, 2008, SemGroup, a midstream
and marketing company through which Enterra marketed a portion of its
production, filed a voluntary petition for reorganization under Chapter 11 of
the Bankruptcy Code in the U.S. and the Canadian units of SemGroup filed for
protection under the Companies’ Creditors Arrangement Act.  In 2008,
Enterra recorded a provision for receivables for the full amount owed by
SemGroup of $8.5 million.  In 2009, Enterra recovered $2.1 million of
the previously written off amount from SemGroup and management does not
anticipate to recover any further amounts.





The aging
of accounts receivable is set out below:





(in
      thousands of Canadian dollars)As
      at December 31, 2009
            
            Trade
            
            
            Joint
      VentureCurrent
            
            
            14,561
            
            
            
            380Over
      30 days
            
            
            60
            
            
            
            356Over
      60 days
            
            
            117
            
            
            
            80Over
      90 days
            
            
            660
            
            
            
            21715,398
            
            
            
            1,033





The
credit quality of financial assets that are neither past due nor impaired has
been assessed and adequately evaluated for impairment based on historical
information about the nature of the counterparties.





Purchasers
of the natural gas, crude oil and natural gas liquids of Enterra comprise a
substantial portion of accounts receivable.  A portion of accounts
receivable are with joint venture partners in the oil and gas
industry.  Enterra takes the following precautions to reduce credit
risk:





·
            the
      financial strength of the counterparties is
  assessed;


·
            the
      total exposure is reviewed regularly and extension of credit is limited;
      and


·
            collateral
      may be required from some
counterparties.





As
described in note 4, Enterra has a long-term receivable with a joint venture
partner.  The credit risk as a result of this arrangement is mitigated
by the ability of Enterra to withhold a portion of the joint venture partner’s
share of production until such time as the amounts receivable are
paid.





(iii)  Liquidity
risks


Liquidity
risk is the risk that Enterra will not be able to meet its financial obligations
as they are due.  Enterra mitigates this risk through actively
managing its capital, which it defines as unitholders’ equity, convertible
debentures and long-term debt less cash and cash
equivalents.  Management of liquidity risk over the short and longer
term, includes continual monitoring of forecasted and actual cash flows to
ensure sufficient liquidity to meet financial obligations when due and
maintaining a flexible capital management structure.  Enterra strives
to balance the proportion of debt and equity in its capital structure given its
current oil and gas assets and planned investment opportunities.





ENTERRA
      ENERGY TRUSTNOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS


All
financial liabilities have short-term maturities with the exception of the
long-term debt (note 6) and the convertible debentures (note 7), as set out
below:





Financial
      Instrument – Liability(in
      thousands of Canadian dollars)
            
            2010
            
            
            2011
            
            
            2012
            
            
            
            2013
      – 2014
            
            
            Total
            
            
            Fair
      ValueLong-term
      debt (1)
            
            
            -
            
            
            
            70,000
            
            
            
            -
            
            
            
            -
            
            
            
            70,000
            
            
            
            70,000Interest
      on long-term debt (2)
            
            
            2,275
            
            
            
            1,138
            
            
            
            -
            
            
            
            -
            
            
            
            3,413
            
            
            
            3,413Convertible
      debentures
            
            
            -
            
            
            
            80,210
            
            
            
            39,648
            
            
            
            -
            
            
            
            119,858
            
            
            
            114,764Interest
      on convertible debentures
            
            
            9,688
            
            
            
            9,688
            
            
            
            1,635
            
            
            
            -
            
            
            
            21,011
            
            
            
            21,011Accounts
      payable & accrued liabilities
            
            
            27,997
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            27,997
            
            
            
            27,997Commodity
      contracts
            
            
            755
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            755
            
            
            
            755Total
      obligations
            
            
            40,715
            
            
            
            161,036
            
            
            
            41,283
            
            
            
            -
            
            
            
            243,034
            
            
            
            237,940


(1)  Assumes
the credit facilities are not renewed on June 25, 2010.


(2)  Assumes
an interest rate of 3.25% (the rate on December 31, 2009).








13.           Interest
expense





During
2009 and 2008, Enterra’s interest expense was comprised of the following
below.





(in thousands of Canadian
      dollars)
            2009
            2008Interest
      on long-term debt
            2,814
            8,362Interest
      on convertible debentures
            11,607
            11,454Interest
      income
            (2,960)
            (2,350)11,461
            17,466








14.           Commitments





During
2009, total rental expense was $1.1 million (2008 – $1.1
million).  Enterra has commitments for the following payments over the
next five years:





(in
      thousands of Canadian dollars)
            
            2010
            
            
            2011
            
            
            2012
            
            
            
            2013
      – 2014
            
            
            TotalOffice
      leases (1)
            
            
            1,608
            
            
            
            2,139
            
            
            
            453
            
            
            
            538
            
            
            
            4,738Vehicle
      and other operating leases
            
            
            306
            
            
            
            146
            
            
            
            18
            
            
            
            -
            
            
            
            470Total
      obligations
            
            
            1,914
            
            
            
            2,285
            
            
            
            471
            
            
            
            538
            
            
            
            5,208


(1)  Future office lease
commitments may be reduced by sublease recoveries totaling $1.1
million.








15.           Contingencies




Certain
claims have been brought against Enterra in the ordinary course of
business.  In the opinion of management, all such claims are
adequately covered by insurance, or if not so covered, are not expected to
materially affect its financial position.







ENTERRA
      ENERGY TRUSTNOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS


16.           Changes
in non-cash working capital





(in thousands  of
      Canadian dollars)
            
            2009
            
            
            2008Accounts
      receivable
            
            
            11,682
            
            
            
            (15,728
            )Prepaid
      expenses, deposits and other
            
            
            (39
            )
            
            
            311Accounts
      payable and accrued liabilities
            
            
            (9,952
            )
            
            
            2,186Foreign
      exchange on working capital
            
            
            (1,788
            )
            
            
            12,204Changes
      in non-cash working capital
            
            
            (97
            )
            
            
            (1,027
            )Changes
      in non-cash operating working capital
            
            
            5,248
            
            
            
            (5,492
            )Changes
      in non-cash investing working capital
            
            
            (5,345
            )
            
            
            4,465





During
the year ended December 31, 2009, Enterra paid interest of $9.6 million (2008 -
$15.2 million) and no taxes (2008 – $0.3 million).








17.
            Capital
      disclosures





The
capital structure of Enterra consists of unitholders’ equity, convertible
debentures, long-term debt and cash and cash equivalents as noted
below.





(in
      thousands  of Canadian dollars)
            
            December
      31, 2009
            
            
            December
      31, 2008Components
      of capital:Unitholders’
      equity
            
            
            219,046
            
            
            
            294,416Convertible
      debentures
            
            
            114,863
            
            
            
            113,420Long-term
      debt
            
            
            70,000
            
            
            
            95,466Less:Cash
      and cash equivalents
            
            
            (19,680
            )
            
            
            (13,638
            )384,229
            
            
            
            489,664





The
objectives of Enterra when managing capital are:


·
            to
      reduce debt, with the long term goal to improve the balance
      sheet;


·
            to
      manage capital in a manner which balances the interest of equity and debt
      holders;


·
            to
      manage capital in a manner that will maintain compliance with its
      financial covenants; and


·
            to
      maintain a capital base so as to maintain investor, creditor and market
      confidence and to sustain future exploration and
    development.





Enterra
manages its capital structure as determined by management and approved by the
board of directors.  Adjustments are made to the capital structure
based on changes in economic conditions and planned
requirements.  Enterra has the ability to adjust its capital structure
by issuing new equity or debt, selling assets to reduce debt
or   balance equity, controlling the amount it returns to
unitholders, and making adjustments to its capital expenditures
program.





Enterra
monitors capital using an interest coverage ratio that has been externally
imposed as part of the credit agreement.  Enterra is required to
maintain an interest coverage ratio greater than 3.00 to 1.00; this ratio is
calculated as follows:





(in
      thousands of Canadian dollars except for ratios)
            
            December
      31, 2009
            
            
            December
      31, 2008Interest
      coverage (1):Cash flow over the prior four
      quarters
            
            
            61,288
            
            
            
            116,911Interest expenses over the prior
      four quarters
            
            
            12,533
            
            
            
            18,0884.89
      : 1.00
            
            
            6.46
      : 1.00


(1)
            Note
      these amounts are defined terms within the credit
    agreements.





As at
December 31, 2009 and 2008, Enterra complied with the terms of the credit
facilities.  There have been no changes to Enterra’s capital
structure, objectives, policies and processes since December 31, 2008 other than
the changes to its credit facilities as described in note 6.








18.           Segmented
information




Enterra
has one operating segment that is divided amongst two geographical
areas.  The following is selected financial information from the two
geographic areas.





(in
      thousands of Canadian dollars)
            
            2009
            
            
            2008RevenueCanada
            
            
            61,650
            
            
            
            170,534U.S.
            
            
            65,178
            
            
            
            104,963126,828
            
            
            
            275,497Property,
      plant and equipmentCanada
            
            
            192,277
            
            
            
            232,335U.S.
            
            
            206,960
            
            
            
            259,319399,237
            
            
            
            491,654







19.           Subsequent
events




On
January 18, 2010, Enterra Energy Trust announced that the Board of Directors of
Enterra Energy Corp., on behalf of the Trust, unanimously approved the
conversion of the Trust to a corporation to be named Equal Energy
Ltd.  The corporate conversion will be subject to receipt of all
required regulatory, stock exchange and Court of Queen's Bench of Alberta
approvals including approval of at least 66 2/3 percent of the votes by
unitholders present in person or by proxy in a duly convened special meeting of
the Trust’s unitholders.  All regulatory approvals for Enterra’s
conversion to a corporation are scheduled to be in place by late May
2010.




On
January 28, 2010, Enterra entered into a purchase and sale agreement to acquire
reserves and an interest in the Caroline Swan Hills Gas Unit # 1 and associated
processing facilities.  The acquisition closed on March 8,
2010.  The purchase price, prior to adjustments, was $12.7
million.