Net ecosystem carbon dioxide (CO2) exchange (NEE) was measured in a northern temperate grassland near Lethbridge, Alberta, Canada for three growing seasons using the eddy covariance technique. The study objectives were to document how NEE and its major component processes—gross photosynthesis (GPP) and total ecosystem respiration (TER)—vary seasonally and interannually, and to examine how environmental and physiological factors influence the annual C budget. The greatest difference among the three study years was the amount of precipitation received. The annual precipitation for 1998 (481.7 mm) was significantly above the 1971–2000 mean (± SD, 377.9 ± 97.0 mm) for Lethbridge, whereas 1999 (341.3 mm) was close to average, and 2000 (275.5 mm) was significantly below average. The high precipitation and soil moisture in 1998 allowed a much higher GPP and an extended period of net carbon gain relative to 1999 and 2000. In 1998, the peak NEE was a gain of 5 g C m−2 d−1 (day 173). Peak NEE was lower and also occurred earlier in the year on days 161 (3.2 g C m−2 d−1) and 141 (2.4 g C m−2 d−1) in 1999 and 2000, respectively. Change in soil moisture was the most important ecological factor controlling C gain in this grassland ecosystem. Soil moisture content was positively correlated with leaf area index (LAI). Gross photosynthesis was strongly correlated with changes in both LAI and canopy nitrogen (N) content. Maximum GPP (Amax: value calculated from a rectangular hyperbola fitted to the relationship between GPP and incident photosynthetic photon flux density (PPFD)) was 27.5, 12.9 and 8.6 µmol m−2 s−1 during 1998, 1999 and 2000, respectively. The apparent quantum yield also differed among years at the time of peak photosynthetic activity, with calculated values of 0.0254, 0.018 and 0.018 during 1998, 1999 and 2000, respectively. The ecosystem accumulated a total of 111.9 g C m−2 from the time the eddy covariance measurements were initiated in June 1998 until the end of December 2000, with most of that C gained during 1998. There was a net uptake of almost 21 g C m−2 in 1999, whereas a net loss of 18 g C m−2 was observed in 2000. The net uptake of C during 1999 was the combined result of slightly higher GPP (287.2 vs. 272.3 g C m−2 year−1) and lower TER (266.6 vs. 290.4 g C m−2 year−1) than occurred in 2000.