Dear Unitholder,

It certainly has been a pivotal year for Canadian Oil Sands Trust. In 2006, the largest expansion in our history came on stream, our production rose 21% from 2005 and we reported strong financial results and industry-leading returns. We now have the infrastructure in place to produce about 129,000 barrels per day (net to the Trust) and our capital costs are declining, positioning us to optimize Unitholder value over the long-term.

I am very encouraged by the prospects for our Trust and the oil sands industry.

Canada’s oil sands remained in the spotlight in 2006. The opportunity to access vast, long-life reserves in an economically and politically stable region of the world, combined with strong crude oil prices, continued to attract investment.

However, the aggressive projections for growth – expectations by 2020 that the oil sands industry will have invested $100 billion and be producing four million barrels of crude oil per day – can raise some challenges. A limited supply of skilled labour can make it difficult to complete projects on time and on budget. As well, the regional infrastructure needs continuous support to ensure it can meet the growing demand for services in order to realize the full potential of the oil sands. But perhaps the issue that is getting the most attention recently is the environmental implications of oil sands development.

I believe the oil sands sector will work through these challenges to capitalize on its ability to be a growing, long-term source of energy for ever-rising global demand. The companies best positioned to succeed, however, will need to demonstrate these key attributes: a quality resource, expanded infrastructure, and experienced operatorship.

We believe Syncrude leads in all of these areas and this report explores the opportunities and challenges ahead of us, and how we intend to continue to be an oil sands industry leader.

Expanding operations

Our Syncrude operations achieved a major milestone last year with the completion of the Stage 3 expansion. I very much appreciate the hard work of Syncrude’s employees and  contractors who helped to design, construct and implement this facility. A major and challenging undertaking of this kind demanded the best efforts of all those involved.

While the project incurred a substantial cost overrun and completion delay, we have nonetheless added productive capacity for about $85,000 per daily barrel. This includes spending beyond adding incremental capacity, such as the improvement in product quality and pre-investment in future growth. It would be very difficult to add production for that amount today, given the current cost environment.

Stage 3 expands Syncrude’s productive capacity to average 350,000 barrels per day from the previous 250,000 barrels per day. We began to record incremental production from the project on August 30, 2006 and now Syncrude is focusing on reaching design as quickly as possible. We expect it will take time to ramp up to full design as we stabilize the operation of this new facility and achieve optimum performance from the various units.

The Stage 3 project also helped to improve our environmental performance by reducing total sulphur dioxide emissions, even though we increased our productive capacity by about 100,000 barrels per day. Further investment in sulphur scrubbing technology should result late this decade in a 60% reduction in sulphur dioxide emissions from today’s approved levels.

Optimizing operations

With our newly expanded and modernized infrastructure in place, Syncrude can return its focus to maintaining reliable operations. Reliability is the key to our business, which is essentially a manufacturing operation – the costs are largely fixed so increases in volumes contribute to lower unit operating costs and higher margins.

To support Syncrude in its efforts to optimize performance, a Management Services Agreement between Imperial Oil Resources and Syncrude Canada Ltd. was signed in November 2006. This long-term agreement provides Syncrude, as operator, access to the global expertise and resources of Imperial Oil Resources and its association with ExxonMobil. I share the confidence of Syncrude and the other Joint Venture Owners that this initiative has the potential to provide dramatic bottom line results.

Building long-life, strategic resource assets

With a reinforced confidence in Syncrude’s future, we were pleased to grow our ownership in the project by acquiring Talisman Energy Inc.’s (“Talisman”) 1.25% indirect interest in January 2007. This acquisition provided accretion of about 2% in production and reserves per Unit and with Talisman taking half of the purchase price in equity units, our balance sheet ratios remained relatively unchanged.

In 2006 we also acquired another strategic long-term asset. The purchase of Canada Southern Petroleum Ltd., although a relatively small financial transaction, has tremendous upside potential and limited downside. The purchase provides Canadian Oil Sands with interests in an estimated 927 billion cubic feet equivalent of natural gas resource in Canada’s Arctic Islands. These interests do not have any exploration obligations or lease renewals associated with them, and with the majority being “carried”, very limited requirement to contribute to any field development costs. Given that natural gas is a significant cost in our Syncrude operations, this acquisition acts like a financial hedge to provide protection against significant future natural gas price increases.

Our financial plan going forward

Canadian Oil Sands has revised its financial plan to consider the federal government’s proposed tax changes for income trusts. The current proposed changes call for taxation of income at the trust level, essentially removing the previous tax efficiency and reducing the amount directly available for distribution to Unitholders.

In order to allow us to accelerate fuller payout of free cash flow until the new tax rules take effect in 2011, we have revised our net debt target to $1.6 billion from $1.2 billion. We remain committed to our objective of fuller payout of free cash flow now that we have reached our net debt target, unless investment growth opportunities exist that offer Unitholders better value. Naturally, investors also should appreciate that, at this fuller payout, distributions will likely reflect the variability of our free cash flow, due to volatility in global crude oil prices and other factors.

We feel the income trust structure is beneficial to the Canadian economy and are very disappointed by the government’s plans to eliminate it. Our investors, however, should take comfort that we are not dependent on the trust structure to sustain our business. We are a robust oil sands business with long-life reserves and a virtually non-declining production profile.

We continue to express our concerns and objections to the federal government regarding the proposed income trust tax changes. Working with organizations such as the Canadian Coalition of Energy Trusts and the Canadian Association of Income Funds, we are seeking a better solution that preserves this investment choice for Canadians. A new organization also was formed in late 2006 to provide a voice for individual investors called the Canadian Association of Income Trust Investors. I would encourage you to learn more about CAITI and become a member by visiting their website at www.caiti.info.

In January 2007, the House of Commons Finance Committee held two days of hearings to explore both ends of the debate on income trust taxation. I believe the most compelling point was made by HLB Decision Economics who, using the same methodology as the Finance Department, provided data that largely refuted the Finance Minister’s figures regarding tax loss. We are hopeful that, as the weakness of the federal government’s case is exposed, the proposed legislation will at least be modified to more reasonable terms, such as that being proposed by the Liberal Opposition for a lower 10% tax.

Frankly, a more logical outcome should include an immediate exemption of energy trusts, given their much stronger contributions to federal tax revenue, as was enunciated during the Finance Committee deliberations.

Financial and operating results

Canadian Oil Sands recorded healthy financial results in 2006, reflecting our unhedged exposure to strong crude oil prices and the uplift in our production from the start-up of our Stage 3 expansion. Cash from operating activities grew 20% from 2005, exceeding $1.1 billion, and net income reached $834 million.

We also provided our investors with excellent returns in 2006. We introduced a 50% increase in the quarterly distribution amount early in the year and, together with the appreciation in our Unit price, our investors enjoyed a total return of about 34% - outperforming our oil sands peers. In 2006 we also split our Units five for one, making the purchase of Canadian Oil Sands Units more accessible to smaller investors. In addition, Canadian Oil Sands Trust was added to the S&P/TSX 60 and the Morgan Stanley Capital International indices, increasing our importance to institutional investors and, potentially further improving liquidity.

In recognition of our outstanding financial and industry performance, Platts, a worldwide provider of energy information, named Canadian Oil Sands Trust one of the Top 250 Global Energy Companies in 2006.

We also continue to take a rigorous approach to risk management. A comprehensive insurance program is in place to help protect our assets and cash flow. We believe one of our key investment attributes is our exposure to long-term crude oil prices and therefore, at this time, we intend to remain unhedged. We strive to demonstrate best practices in reporting and disclosure. In addition to complying with CEO/CFO certification requirements relating to disclosure controls and design of internal control over financial reporting, Canadian Oil Sands evaluated the effectiveness of internal control over financial reporting. Our evaluation concluded that such controls are effective in providing reasonable assurance regarding the reliability of our financial reporting, which was attested to by PricewaterhouseCoopers, our external auditors.

At the operating level, there are obviously other risks that need to be managed and Syncrude has proven capability in that regard. Syncrude has long been recognized as an economic, environmental and social leader, and in the past year, they again received external confirmation of this when Canadian Oil Sands Trust was added to the Jantzi Social Index. We were added because of Syncrude’s strong performance in several key areas, most notably environment, health and safety, and aboriginal relations. More information on this performance can be found in Syncrude’s sustainability report available at www.syncrude.ca.

Outstanding team performance

I am proud of the tangible results the Canadian Oil Sands team delivered yet again in 2006. This dedicated team of only 19 people worked tirelessly to enhance investor returns by making disciplined investment decisions, exercising prudent financial management and capturing new opportunities to build long-term value. This approach has enabled us to successfully deliver on the many objectives we set out last year (see our objectives).

The Canadian Oil Sands team underwent some fundamental changes in 2006. We hired five professionals to form our new marketing group, and they quickly set upon the task of establishing our own crude oil marketing function – from the ground up. Today, they are successfully putting a face to Canadian Oil Sands for our largest refinery customers. They also play a critical role in helping our customers understand the attributes of our high-quality product and our ability to deliver large volumes. This will be of particular importance as we expect to transition to SyncrudeTM Sweet Premium later this year.

On the executive front, Ryan Kubik will be promoted to Chief Financial Officer when Allen Hagerman transitions to a part-time function as Executive Vice President, effective April 25, 2007. I am deeply grateful to Allen for his dedication to the Trust, and pleased that he will have the opportunity to now pursue his other interests while still allowing us to benefit from his strong leadership. At the same time, I am very much looking forward to working with Ryan in his new capacity. Ryan has been a proven member of our executive team since 2002 and has the financial acumen and industry knowledge to make a significant contribution in his new role.

Canadian Oil Sands Trust benefits from a very strong, cohesive board of directors who demonstrate some of the highest standards of corporate governance. Our corporate governance practices are described more fully in our 2007 management proxy circular and  on our website at: www.cos-trust.com/corporate.

Our board’s broad experience in the capital markets and the energy industry was further strengthened in 2006 with the appointment of Mr. Brant Sangster. Brant was previously responsible for Petro-Canada’s oil sands division and brings to the Board a strong understanding of the Syncrude project through his past participation on the Syncrude Management Committee, as well as in-depth knowledge of the oil sands and downstream refining industries.

Effective April 25, 2007, one of our longest-standing board members will be retiring. Mr. Walter O’Donoghue has been a key member of our board since 1995, and served as Board Chairman of one of the two predecessor trusts for five  years  prior to their merger in 2001. His keen insight and direction have shaped much of our success over the years. I am very thankful to him for his contribution to the Trust and his mentorship, and wish him the best in his retirement.

Finally, I would like to thank you –­ our investors – for your support. We have seen crude oil prices decrease from the levels reached in 2006, which I believe has contributed to the decline in our Unit price since the beginning of this year and leaves us more vulnerable in our ability to increase distributions. Our view is that over the long-term, which is the horizon of our investment opportunity, crude oil prices should be robust, given the tight supply and demand fundamentals and the projections for continued demand growth. As such, I share your appreciation for the long-term value of our business and seek to maintain your confidence by protecting and enhancing that value. I believe you have a talented team dedicated to that mission, which together with our superior asset base, will enable us to continue to provide long-term value.

Marcel R. Coutu
President and CEO
February 22, 2007