Revenues, after crude oil purchases and transportation expense, rose significantly in 2007 relative to the two prior years, reflecting an increase in sales volumes combined with a higher average realized selling price for our SCO product. Daily sales volumes in 2007, which averaged approximately 112,000 barrels, exceeded volumes sold in 2006 and 2005 by 22 percent and 48 percent, respectively. This increase reflected the increase in production volumes as discussed in the preceding "Review of Syncrude Operations" section. A larger Syncrude working interest also contributed to higher sales volumes in 2007 relative to the two prior years. In 2005 the Stage 3 facilities were not yet contributing volumes and production was impacted by extensive turnaround and maintenance activity on several operating units as well as throughput restrictions.

Canadian Oil Sands realized an average selling price prior to foreign currency hedging of $79.02 per barrel in 2007, which was higher than the average price received in 2006 and 2005 of $71.96 per barrel and $70.08 per barrel, respectively. Our 2007 pricing, relative to the prior two years, is indicative of the increase in average WTI prices over the last three years, as well as an improved price differential, as shown in the following table. These positive price increases were offset somewhat in 2007 and 2006 by the strengthening of the Canadian dollar relative to the U.S. dollar.

The premium pricing differential that we received in 2007 primarily reflected the disconnect of the relationship between WTI and other benchmark light, sweet crude oils during the second and third quarters of 2007. The price differential in the prior two years primarily reflected supply/demand fundamentals. Increased supply levels of light synthetic crude oil from new oil sands projects (including Syncrude's Stage 3 expansion) reduced the price in some periods, while higher prices were supported by actual and anticipated supply reductions during producer planned and unplanned maintenance and turnarounds.

NETBACK AFTER HEDGING

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Net income in 2007 of $743 million, or $1.55 per Trust unit ("Unit"), was significantly reduced by a $701 million future income tax charge following the substantive enactment of trust taxation in June 2007. Canadian Oil Sands' annual future income tax and other expense totalled $579 million in 2007, an increase of $562 million and $571 million over 2006 and 2005, respectively. On an earnings before taxes from continuing operations basis, the Trust's 2007 results of $1,321 million exceeded the two prior years by more than 50 percent, primarily reflecting the contribution of the incremental Stage 3 volumes combined with robust crude oil prices and larger foreign exchange gains, partially offset by higher operating, Crown royalties and depreciation, depletion and accretion ("DD&A") expenses. The larger foreign exchange gains in 2007 relative to the two prior years are primarily attributable to an increase in unrealized gains recorded on the revaluation of U.S. dollar denominated debt, reflecting the strengthening Canadian dollar relative to the U.S. dollar. Unrealized foreign exchange gains totalled $153 million, $1 million and $36 million in 2007, 2006 and 2005, respectively.

Operating costs rose to $1,034 million in 2007, up from $907 million and $731 million in 2006 and 2005, respectively, which reflected more equipment and a larger workforce in place at Syncrude to operate the Stage 3 facilities, rising costs for materials and labour in the Fort McMurray area, and a larger Syncrude working interest. In addition, more costs were incurred in 2007 to move additional waste and oil sand, which required Syncrude to utilize contracted equipment and operators in addition to its own equipment and workforce. These cost increases were partially offset by lower natural gas, maintenance and turnaround costs. On a per barrel basis, operating costs in 2007 were lower than the prior two years, averaging $25.23 compared to $27.07 in 2006 and $26.34 in 2005. The lower 2007 per barrel operating costs relative to both 2006 and 2005 were mainly attributable to the increase in sales volumes more than offsetting the increase in total costs. Purchased energy costs accounted for $5.15 per barrel of the operating costs in 2007, compared with $6.10 per barrel and $7.09 per barrel in 2006 and 2005, respectively. Such costs were higher in 2005 than both 2007 and 2006, primarily reflecting natural gas prices of $8.40 per GJ in that year, compared with approximately $6.00 per GJ in each of 2007 and 2006. In 2007 energy consumption was lower relative to 2006 due to improved operational efficiency, reflecting in part more energy used in the operations in 2006 as the Stage 3 units were being brought on-line without an offsetting production increase.

In 2007 Canadian Oil Sands incurred $485 million, or $11.83 per barrel, in Crown royalties expense, more than double the total expense reported in 2006 of $232 million, or $6.93 per barrel. The increase in 2007 Crown royalties relative to 2006 reflects a shift to the higher 25 percent royalty rate that occurred in the second quarter of 2006, higher net revenues and a larger Syncrude working interest. Crown royalties in 2005 totalled $19 million, or $0.71 per barrel, reflecting the rate of one percent of gross plant gate revenue before hedging.

DD&A expense totalled $351 million, an increase of $96 million and $153 million relative to 2006 and 2005, respectively. The larger 2007 expense was attributable to a higher depreciation and depletion ("D&D") rate, reflecting increasing future development cost estimates, as well as larger production volumes. The Trust's 2007 D&D rate also reflected the additional assets and reserves associated with the 1.25 percent working interest acquisition. The per barrel D&D rates were $8.31, $7.34, and $6.11 in 2007, 2006 and 2005, respectively. Discussion of the Trust's future D&D rates is provided in the "Depreciation, Depletion and Accretion Expense" section of this MD&A.

The changes in revenues, operating expenses and Crown royalties also impacted cash from operating activities, unlike the unrealized foreign exchange gains, DD&A expense and future income tax expense, which are all non-cash items. Cash from operating activities totalled $1,377 million, or $2.87 per Unit, compared with $1,142 million, or $2.45 per Unit in 2006, and $949 million, or $2.07 per Unit in 2005. Also impacting cash from operating activities was the increase in non-cash working capital, which reduced 2007 results by $165 million and $56 million in 2005, as shown in the following table. Conversely, decreases in non-cash working capital requirements increased cash from operating activities by $22 million in 2006. Working capital changes and the resulting impact on our cash from operating activities are difficult to predict due to the many variables that influence the changes. Given the nature of the oil and gas industry whereby accounts receivable from customers are typically settled in the following month, working capital can fluctuate significantly resulting from volume and price changes relative to each period end. Inventory movements also can contribute to significant changes in non-cash working capital and are partially dependant on delivery times of crude oil batches to our customers, which can range from one to three months. In addition, Canadian Oil Sands' cash from operating activities is impacted by changes in its accounts payable and accrued liabilities ("A/P") balance, which reflect the timing of significant accruals and payments, such as Crown royalties, operating costs, crude oil purchases and interest payments on long-term debt.

The Trust's assets totalled approximately $7.3 billion at December 31, 2007, increasing substantially over the two prior years primarily due to the acquisition of the 1.25 percent Syncrude working interest in 2007. This acquisition increased capital assets by $668 million. In 2006 we acquired Canadian Arctic Gas Limited ("Canadian Arctic") (formerly Canada Southern Petroleum Ltd.), resulting in a $165 million increase in capital assets and $52 million increase in goodwill relative to the prior year. Accounts receivable rose to $379 million at December 31, 2007, increasing by $135 million and $182 million relative to 2006 and 2005 year-ends, respectively, reflecting higher sales volumes and realized selling prices.

Net debt, comprised of debt less cash and cash equivalents, declined to $950 million at December 31, 2007 from $1.3 billion at December 31, 2006 mainly as a result of cash generated from the operations exceeding capital expenditures and distributions during the year. Net debt was further reduced by the stronger Canadian dollar, which lowered the carrying value of our U.S. dollar denominated debt by $153 million year over year. Relative to December 31, 2005 net debt decreased $0.3 billion by December 31, 2006 mainly as a result of a larger cash balance at year-end 2006 that was used to finance a portion of the 1.25 percent working interest acquisition on January 2, 2007.

Canadian Oil Sands' 2007 asset retirement obligation ("ARO") rose over the two prior years primarily as a result of increased cost estimates to comply with new material handling requirements under Syncrude's new Alberta Environmental Protection and Enhancement Act Approval, as well as the larger Syncrude working interest. The new requirements resulted in higher cost estimates for soil salvage, soil placement thickness and soil layering. In 2006 revised assumptions regarding the volume of reclamation material required and the costs associated with storing and handling the additional material resulted in an increase in the ARO liability relative to 2005. Cost escalation associated with revegetation, landforming, and additional regional drainage requirements also contributed significantly to the estimate increases. Our ARO liability, which represents the present value of our share of the estimated environ-mental reclamation costs of the Syncrude project, totalled $226 million, an increase of $53 million and $78 million relative to the two prior year-ends, respectively.

In our 2006 annual MD&A, we identified cost escalation pressures, especially in the Fort McMurray area, as a significant trend that we anticipated would continue, particularly over the next few years, as other major oil sands projects are constructed and new projects are started. We continue to believe this inflationary environment will persist, as evidenced by the higher D&D rate, ARO liability, and operating costs, as well as upward pressure on our capital projects reported in 2007, which reflected higher costs for materials and labour.

As discussed more fully in the "Unitholder Distributions" section of this MD&A, the Trust paid a total distribution of $1.65 per Unit in 2007, a 50 percent increase over the prior year and more than four times the amount paid in 2005. The substantial rise in distributions reflects strong crude oil prices, higher production volumes and lower capital costs. It also is consistent with the Trust's strategy of increasing its distributions following completion of the Stage 3 expansion. Paying out a fuller portion of cash from operating activities allows the Trust to preserve its tax pools prior to trust taxation coming into effect in 2011.