---

|MANAGEMENTS
      DISCUSSION AND ANALYSIS
|------------------------------------------

March 11, 2011

The following discussion and analysis is managements opinion
of TransGlobes historical financial and operating results and should be read in
conjunction with the message to shareholders and the audited consolidated
financial statements of the Company for the years ended December 31, 2010 and
2009, together with the notes related thereto. The consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in Canada in the currency of the United States (except where otherwise
noted). The effect of significant differences between Canadian and United States
accounting principles is disclosed in Note 20 of the consolidated financial
statements. Additional information relating to the Company, including the
Companys Annual Information Form, is on SEDAR at www.sedar.com. The Companys
annual report on Form 40-F may be found on EDGAR at www.sec.gov.

READER ADVISORIES

Forward-Looking Statements

This Managements Discussion and Analysis (MD&A) may
include certain statements that may be deemed to be forward-looking statements
within the meaning of the U.S. Private Securities Litigation Reform Act of 1995.
Such statements relate to possible future events. All statements other than
statements of historical fact may be forward-looking statements. Forward-looking
statements are often, but not always, identified by the use of words such as
seek, anticipate, plan, continue, estimate, expect, may, will,
project, predict, potential, targeting, intend, could, might,
should, believe and similar expressions. These statements involve known and
unknown risks, uncertainties and other factors that may cause actual results or
events to differ materially from those anticipated in such forward-looking
statements. Although TransGlobes forward-looking statements are based on the
beliefs, expectations, opinions and assumptions of the Companys management on
the date the statements are made, such statements are inherently uncertain and
provide no guarantee of future performance. Actual results may differ materially
from TransGlobes expectations as reflected in such forward-looking statements
as a result of various factors, many of which are beyond the control of the
Company. These factors include, but are not limited to, unforeseen changes in
the rate of production from TransGlobes oil and gas properties, changes in
price of crude oil and natural gas, adverse technical factors associated with
exploration, development, production or transportation of TransGlobes crude oil
and natural gas reserves, changes or disruptions in the political or fiscal
regimes in TransGlobes areas of activity, changes in tax, energy or other laws
or regulations, changes in significant capital expenditures, delays or
disruptions in production due to shortages of skilled manpower, equipment or
materials, economic fluctuations, and other factors beyond the Companys
control. TransGlobe does not assume any obligation to update forward-looking
statements, other than as required by law, if circumstances or managements
beliefs, expectations or opinions should change and investors should not
attribute undue certainty to, or place undue reliance on, any forward-looking
statements. Please consult TransGlobes public filings at www.sedar.com and
www.sec.gov for further, more detailed information concerning these matters.

Use of Barrel of Oil Equivalents

The calculation of barrels of oil equivalent (Boe) is
based on a conversion rate of six thousand cubic feet of natural gas (Mcf) to
one barrel (Bbl) of crude oil. Boes may be misleading, particularly if used
in isolation. A Boe conversion ratio of 6 Mcf:1 Bbl is based on an energy
equivalency conversion method primarily applicable at the burner tip and does
not represent a value equivalency at the wellhead.

Non-GAAP Measures

Funds
Flow from OperationsThis document contains the term funds flow from
operations, which should not be considered an alternative to or more meaningful
than cash flow from operating activities as determined in accordance with
Generally Accepted Accounting Principles (GAAP). Funds flow from operations is
a non-GAAP measure that represents cash generated from operating activities
before changes in non-cash working capital. Management considers this a key
measure as it demonstrates TransGlobes ability to generate the cash flow
necessary to fund future growth through capital investment. Funds flow from
operations may not be comparable to similar measures used by other
companies.

Reconciliation of Funds Flow from Operations

|($000s)                                   |  | 2010   |  |  | 2009   | 
|----------------------------------------- |  | ------ |  |  | ------ | 
|Cash flow from operating activities       |  | 51,504 |  |  | 36,799 | 
|Changes in
      non-cash working capital |  | 23,065 |  |  | 8,265  | 
|Funds flow from operations                |  | 74,569 |  |  | 45,064 | 

Debt-to-funds flow ratioDebt-to-funds flow is a non-GAAP measure that is
used to set the amount of capital in proportion to risk. The Companys
debt-to-funds flow ratio is computed as long-term debt, including the current
portion, over funds flow from operations for the trailing twelve months.
Debt-to-funds flow may not be comparable to similar measures used by other
companies.

NetbackNetback is a non-GAAP measure that represents sales net of
royalties (all government interests, net of income taxes), operating expenses
and current taxes. Management believes that netback is a useful supplemental
measure to analyze operating performance and provide an indication of the
results generated by the Companys principal business activities prior to the
consideration of other income and expenses. Netback may not be comparable to
similar measures used by other companies.

|2010 | 2
|---- | -

---

|MANAGEMENTS
      DISCUSSION AND ANALYSIS
|------------------------------------------

TRANSGLOBES BUSINESS

TransGlobe is a Canadian-based, publicly traded, oil
exploration and production company whose activities are concentrated in two main
geographic areas, the Arab Republic of Egypt (Egypt) and the Republic of Yemen
(Yemen). Egypt and Yemen include the Companys exploration, development and
production of crude oil. TransGlobe disposed of its Canadian oil and gas
operations in 2008 to reposition itself as 100% oil, Middle East/North Africa
growth company.

SELECTED ANNUAL INFORMATION

|($000s, except per share, price and volume             |  |         |  |  |                |  |  |         |   |  |                |   |  |         | 
|------------------------------------------------------ |  | ------- |  |  | -------------- |  |  | ------- | - |  | -------------- | - |  | ------- | 
|amounts)                                               |  | 2010    |  |  | %
      Change |  |  | 2009    |   |  | %
      Change |   |  | 2008    | 
|Total Operations                                       |  |         |  |  |                |  |  |         |   |  |                |   |  |         | 
|Average production volumes (Boepd)                     |  | 9,960   |  |  | 11             |  |  | 8,980   |   |  | 22             |   |  | 7,342   | 
|Average sales volumes (Boepd)                          |  | 9,960   |  |  | 11             |  |  | 8,980   |   |  | 22             |   |  | 7,342   | 
|Average price ($/Boe)                                  |  | 73.97   |  |  | 45             |  |  | 51.19   |   |  | (41            | ) |  | 86.96   | 
|Oil and gas sales                                      |  | 268,901 |  |  | 60             |  |  | 167,798 |   |  | (28            | ) |  | 233,695 | 
|Oil and gas sales, net of royalties and other          |  | 157,220 |  |  | 53             |  |  | 102,805 |   |  | (22            | ) |  | 132,393 | 
|                                                       |  |         |  |  |                |  |  |         |   |  |                |   |  |         | 
|Cash flow from operating activities                    |  | 51,504  |  |  | 40             |  |  | 36,799  |   |  | (36            | ) |  | 57,793  | 
|Funds flow from operations*                            |  | 74,569  |  |  | 65             |  |  | 45,064  |   |  | (24            | ) |  | 59,267  | 
|Funds flow from operations per share                   |  |         |  |  |                |  |  |         |   |  |                |   |  |         | 
|- Basic                                                |  | 1.12    |  |  |                |  |  | 0.70    |   |  |                |   |  | 0.99    | 
|- Diluted                                              |  | 1.08    |  |  |                |  |  | 0.70    |   |  |                |   |  | 0.98    | 
|                                                       |  |         |  |  |                |  |  |         |   |  |                |   |  |         | 
|Net income (loss)                                      |  | 37,867  |  |  |                |  |  | (8,417  | ) |  |                |   |  | 31,523  | 
|Net income (loss) per share                            |  |         |  |  |                |  |  |         |   |  |                |   |  |         | 
|- Basic                                                |  | 0.57    |  |  |                |  |  | (0.13   | ) |  |                |   |  | 0.53    | 
|- Diluted                                              |  | 0.55    |  |  |                |  |  | (0.13   | ) |  |                |   |  | 0.52    | 
|                                                       |  |         |  |  |                |  |  |         |   |  |                |   |  |         | 
|Continuing Operations                                  |  |         |  |  |                |  |  |         |   |  |                |   |  |         | 
|Average production volumes (Bopd)                      |  | 9,960   |  |  | 11             |  |  | 8,980   |   |  | 31             |   |  | 6,858   | 
|Average sales volumes (Bopd)                           |  | 9,960   |  |  | 11             |  |  | 8,980   |   |  | 31             |   |  | 6,858   | 
|Average price from continuing operations
      ($/Bbl) |  | 73.97   |  |  | 45             |  |  | 51.19   |   |  | (42            | ) |  | 88.66   | 
|Oil sales                                              |  | 268,901 |  |  | 60             |  |  | 167,798 |   |  | (25            | ) |  | 222,538 | 
|Oil sales, net of royalties and other                  |  | 157,220 |  |  | 53             |  |  | 102,805 |   |  | (17            | ) |  | 123,231 | 
|                                                       |  |         |  |  |                |  |  |         |   |  |                |   |  |         | 
|Cash flow from operating activities                    |  | 51,504  |  |  | 40             |  |  | 36,799  |   |  | (28            | ) |  | 51,090  | 
|Funds flow from continuing
      operations*           |  | 74,569  |  |  | 65             |  |  | 45,064  |   |  | (14            | ) |  | 52,359  | 
|Funds flow from continuing operations per
      share  |  |         |  |  |                |  |  |         |   |  |                |   |  |         | 
|- Basic                                                |  | 1.12    |  |  |                |  |  | 0.70    |   |  |                |   |  | 0.88    | 
|- Diluted                                              |  | 1.08    |  |  |                |  |  | 0.70    |   |  |                |   |  | 0.86    | 
|                                                       |  |         |  |  |                |  |  |         |   |  |                |   |  |         | 
|Net (loss) income                                      |  | 37,867  |  |  |                |  |  | (8,417  | ) |  |                |   |  | 23,173  | 
|Net (loss) income per share                            |  |         |  |  |                |  |  |         |   |  |                |   |  |         | 
|- Basic                                                |  | 0.57    |  |  |                |  |  | (0.13   | ) |  |                |   |  | 0.39    | 
|- Diluted                                              |  | 0.55    |  |  |                |  |  | (0.13   | ) |  |                |   |  | 0.38    | 
|                                                       |  |         |  |  |                |  |  |         |   |  |                |   |  |         | 
|                                                       |  |         |  |  |                |  |  |         |   |  |                |   |  |         | 
|Total assets                                           |  | 341,901 |  |  | 49             |  |  | 228,882 |   |  | -              |   |  | 228,238 | 
|Cash and cash equivalents                              |  | 57,782  |  |  | 257            |  |  | 16,177  |   |  | 112            |   |  | 7,634   | 
|Total long-term debt, including current
      portion  |  | 86,420  |  |  | 74             |  |  | 49,799  |   |  | (13            | ) |  | 57,230  | 
|Debt-to-funds flow ratio**                             |  | 1.2     |  |  |                |  |  | 1.1     |   |  |                |   |  | 1.0     | 
|                                                       |  |         |  |  |                |  |  |         |   |  |                |   |  |         | 
|Reserves                                               |  |         |  |  |                |  |  |         |   |  |                |   |  |         | 
|Total Proved (MMboe)                                   |  | 20.5    |  |  | 6              |  |  | 19.2    |   |  | 53             |   |  | 12.6    | 
|Total Proved plus Probable (MMBoe)                     |  | 30.4    |  |  | 26             |  |  | 24.2    |   |  | 22             |   |  | 19.8    | 

|*  | Funds flow from operations is a non-GAAP measure that
      represents cash generated from operating activities before changes in
      non-cash working capital.                    
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|** | Debt-to-funds flow ratio is a non-GAAP measure that
      represents long-term debt, including the current portion, over funds flow
      from operations for the trailing 12 months.

In 2010 compared with 2009, TransGlobe,

- Increased Proved reserves by 1.3 MMBbl, representing a production
  replacement of 133%, primarily from the development of its operated West
  Gharib concession in Egypt;
- Increased total production by 11%, as a result of a 25% increase in
  production from Egypt offset by a 14% decline in production in Yemen;
- Funds flow increased by 65% primarily due to a 45% increase in realized
  oil prices combined with increased production;
- Realized a net income of $37.9 million due to increased revenues combined
  with an 84% decrease in derivative loss and a 29% decrease in depreciation and
  depletion due to increased Proved reserves; and
- Increased debt by $36.6 million while maintaining a debt-to-funds flow
  ratio of 1.2 at December 31, 2010 (December 31, 2009  1.1).

|3 | 2010
|- | ----

---

|MANAGEMENTS
      DISCUSSION AND ANALYSIS
|------------------------------------------

2010 TO 2009 NET INCOME (LOSS) VARIANCES

|                                         |  | $000s   |   |  | $Per Share Diluted |   |  | Variance % |  
|---------------------------------------- |  | ------- | - |  | ------------------ | - |  | ---------- | -
|2009 net loss                            |  | (8,417  | ) |  | (0.13              | ) |  |            |  
|Cash items                               |  |         |   |  |                    |   |  |            |  
|Volume variance                          |  | 26,439  |   |  | 0.40               |   |  | 314        |  
|Price variance                           |  | 74,664  |   |  | 1.08               |   |  | 887        |  
|Royalties                                |  | (46,688 | ) |  | (0.68              | ) |  | (555       | )
|Expenses:                                |  |         |   |  |                    |   |  |            |  
|Operating                                |  | (2,085  | ) |  | (0.03              | ) |  | (25        | )
|Realized derivative loss                 |  | (595    | ) |  | (0.01              | ) |  | (7         | )
|Cash
      general and administrative    |  | (2,423  | ) |  | (0.04              | ) |  | (29        | )
|Current income taxes                     |  | (17,954 | ) |  | (0.26              | ) |  | (213       | )
|Realized
      foreign exchange loss     |  | (1,248  | ) |  | (0.02              | ) |  | (15        | )
|Interest on long-term debt               |  | (589    | ) |  | (0.01              | ) |  | (7         | )
|Other income                             |  | (16     | ) |  | -                  |   |  | -          |  
|Total cash
      items variance          |  | 29,505  |   |  | 0.43               |   |  | 350        |  
|Non-cash items                           |  |         |   |  |                    |   |  |            |  
|Unrealized derivative gain               |  | 4,138   |   |  | 0.06               |   |  | 50         |  
|Depletion and depreciation               |  | 13,646  |   |  | 0.20               |   |  | 162        |  
|Stock-based compensation                 |  | (738    | ) |  | (0.01              | ) |  | (9         | )
|Amortization of deferred financing costs |  | (267    | ) |  | -                  |   |  | (3         | )
|Total non-cash
      items variance      |  | 16,779  |   |  | 0.25               |   |  | 200        |  
|                                         |  |         |   |  |                    |   |  |            |  
|2010 net income                          |  | 37,867  |   |  | 0.55               |   |  | 550        |  

Net income increased to $37.9 million in 2010 compared to a
loss of $8.4 million in 2009, which was mostly due to significant increases in
commodity prices and production volumes along with a decrease in depletion and
depreciation, which was partially offset by higher royalties and income taxes.

BUSINESS ENVIRONMENT

The Companys financial results are significantly influenced by
fluctuations in commodity prices, including price differentials. The following
table shows select market benchmark prices and foreign exchange rates:

|                                                 |  | 2010   |  |  | 2009   | 
|------------------------------------------------ |  | ------ |  |  | ------ | 
|                                                 |  |        |  |  |        | 
|Dated Brent average oil price ($/Bbl)            |  | 79.42  |  |  | 61.51  | 
|U.S./Canadian
      Dollar average exchange rate |  | 1.0301 |  |  | 1.1415 | 

The price of Dated Brent oil averaged 29% higher in 2010
compared with 2009. Global markets are currently in a period of economic
recovery with improved liquidity and access to capital, in addition to
strengthening oil prices. Conversely, the recent political instability in Egypt
and Yemen could present challenges to the Company if the issues persist over an
extended period of time. TransGlobes management believes the Company is well
positioned to adapt to current political situations in Egypt and Yemen due to
its increasing production, manageable debt levels, positive cash generation from
operations and the availability of cash and cash equivalents.

The Company designed its 2011 budget to be flexible, allowing
spending to be adjusted up or down depending upon the business environment in
Egypt and Yemen.

|2010 | 4
|---- | -

---

|MANAGEMENTS
      DISCUSSION AND ANALYSIS
|------------------------------------------

SELECTED QUARTERLY FINANCIAL INFORMATION

|                                                      |  | 2010    |  |  | 2009    | 
|----------------------------------------------------- |  | ------- |  |  | ------- | 
|($000s, except per share, price                       |  |         |  |  |         | 
|and volume amounts)                                   |  | Q-4     |  |  | Q-3     | 
|Total Operations                                      |  |         |  |  |         | 
|Average sales volumes (Bopd)                          |  | 10,789  |  |  | 10,138  | 
|Average price ($/Bopd)                                |  | 79.83   |  |  | 71.27   | 
|Oil and gas sales                                     |  | 79,240  |  |  | 66,470  | 
|Oil and gas sales, net of
      royalties and other   |  | 45,198  |  |  | 38,980  | 
|                                                      |  |         |  |  |         | 
|Cash flow from operating
      activities             |  | 19,326  |  |  | 12,297  | 
|Funds flow from operations*                           |  | 18,934  |  |  | 19,535  | 
|Funds flow from operations
      per share            |  |         |  |  |         | 
|- Basic                                               |  | 0.28    |  |  | 0.29    | 
|- Diluted                                             |  | 0.26    |  |  | 0.28    | 
|                                                      |  |         |  |  |         | 
|Net income (loss)                                     |  | 8,026   |  |  | 8,805   | 
|Net income (loss) per share                           |  |         |  |  |         | 
|- Basic                                               |  | 0.12    |  |  | 0.13    | 
|- Diluted                                             |  | 0.11    |  |  | 0.13    | 
|                                                      |  |         |  |  |         | 
|                                                      |  |         |  |  |         | 
|Total assets                                          |  | 341,901 |  |  | 275,885 | 
|Cash and cash equivalents                             |  | 57,782  |  |  | 15,412  | 
|Total long-term debt,
      including current portion |  | 86,420  |  |  | 46,045  | 
|Debt-to-funds flow ratio**                            |  | 1.2     |  |  | 0.7     | 

|*  | Funds flow from operations is non-GAAP measure that
      represents cash generated from operating activities before changes in
      non-cash working capital.                      
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|** | Debt-to-funds flow ratio is a non-GAAP measure that
      represents long-term debt, including the current portion, over funds flow
      from operations for the trailing 12 months.

During the fourth quarter of 2010, TransGlobe:

- Maintained a strong financial position, reporting a debt-to-funds flow
  ratio of 1.2 at December 31, 2010 (December 31, 2009  1.1), with available
  cash of $57.8 million;
- Funded capital programs with funds flow from operations and working
  capital;
- Reported a 95% increase in funds flow from operations due to a 27%
  increase in commodity prices along with a 25% increase in sales volumes
  compared to Q4-2009; and
- Reported net income in Q4-2010 of $8.0 million (Q4-2009  $2.5 million)
  mainly due to higher commodity prices and production volumes in the quarter
  compared with the same period in 2009.

|5 | 2010
|- | ----

---

|MANAGEMENTS
      DISCUSSION AND ANALYSIS
|------------------------------------------

OPERATING RESULTS AND NETBACK

Daily Volumes, Working Interest, Before Royalties and
Other

|                                    |  |                   |      |  |      |       |  | 2010  |       |  | 2009  | 
|----------------------------------- |  | ----------------- | ---- |  | ---- | ----- |  | ----- | ----- |  | ----- | 
|Egypt                               |  | - Oil sales       |      |  | Bopd |       |  | 7,259 |       |  | 5,828 | 
|Yemen                               |  | - Oil
      sales |      |  | Bopd |       |  | 2,701 |       |  | 3,152 | 
|Total Company  daily sales volumes |  |                   | Bopd |  |      | 9,960 |  |       | 8,980 | 

Netback

|Consolidated                         |  |         |  |  |       |  |  |         |  |  |       | 
|------------------------------------ |  | ------- |  |  | ----- |  |  | ------- |  |  | ----- | 
|                                     |  | 2010    |  |  | 2009  | 
|(000s,
      except per Bbl amounts) |  | $       |  |  | $/Bbl |  |  | $       |  |  | $/Bbl | 
|Oil sales                            |  | 268,901 |  |  | 73.97 |  |  | 167,798 |  |  | 51.19 | 
|Royalties and other                  |  | 111,681 |  |  | 30.72 |  |  | 64,993  |  |  | 19.83 | 
|Current taxes                        |  | 39,807  |  |  | 10.95 |  |  | 21,853  |  |  | 6.67  | 
|Operating
      expenses             |  | 26,850  |  |  | 7.39  |  |  | 24,765  |  |  | 7.56  | 
|                                     |  |         |  |  |       |  |  |         |  |  |       | 
|Netback                              |  | 90,563  |  |  | 24.91 |  |  | 56,187  |  |  | 17.13 | 

|Egypt                                |  |         |  |  |       |  |  |        |  |  |       | 
|------------------------------------ |  | ------- |  |  | ----- |  |  | ------ |  |  | ----- | 
|                                     |  | 2010    |  |  | 2009  | 
|(000s,
      except per Bbl amounts) |  | $       |  |  | $/Bbl |  |  | $      |  |  | $/Bbl | 
|Oil sales                            |  | 190,234 |  |  | 71.80 |  |  | 98,801 |  |  | 46.45 | 
|Royalties and other                  |  | 75,339  |  |  | 28.43 |  |  | 34,684 |  |  | 16.30 | 
|Current taxes                        |  | 29,686  |  |  | 11.20 |  |  | 13,980 |  |  | 6.57  | 
|Operating
      expenses             |  | 16,464  |  |  | 6.21  |  |  | 14,703 |  |  | 6.91  | 
|                                     |  |         |  |  |       |  |  |        |  |  |       | 
|Netback                              |  | 68,745  |  |  | 25.96 |  |  | 35,434 |  |  | 16.67 | 

The netback per Bbl in Egypt increased 56% in 2010 compared
with 2009, mainly as a result of oil prices increasing by 55%, which was
partially offset by higher royalty and tax rates. In 2010, the average realized
oil price for the West Gharib crude had a gravity/quality adjustment of
approximately $7.62/Bbl (10%) to the average Dated Brent oil price versus a
$15.06/Bbl (24%) differential in 2009.

Royalties and taxes as a percentage of revenue increased to 55%
in 2010, compared with 49% in 2009. Royalty and tax rates fluctuate in Egypt due
to changes in the cost oil whereby the Production Sharing Contract (PSC)
allows for recovery of operating and capital costs through a reduction in
government take.

Operating expenses for 2010 decreased 10% on a per Bbl basis,
which is mainly due to a significant increase in production in Egypt combined
with fewer workovers in 2010 as compared to 2009.

|Yemen                                |  |        |  |  |       |  |  |        |  |  |       | 
|------------------------------------ |  | ------ |  |  | ----- |  |  | ------ |  |  | ----- | 
|                                     |  | 2010   |  |  | 2009  | 
|(000s,
      except per Bbl amounts) |  | $      |  |  | $/Bbl |  |  | $      |  |  | $/Bbl | 
|Oil sales                            |  | 78,667 |  |  | 79.79 |  |  | 68,997 |  |  | 59.97 | 
|Royalties and other                  |  | 36,342 |  |  | 36.86 |  |  | 30,309 |  |  | 26.34 | 
|Current taxes                        |  | 10,121 |  |  | 10.27 |  |  | 7,873  |  |  | 6.84  | 
|Operating
      expenses             |  | 10,386 |  |  | 10.53 |  |  | 10,062 |  |  | 8.75  | 
|                                     |  |        |  |  |       |  |  |        |  |  |       | 
|Netback                              |  | 21,818 |  |  | 22.13 |  |  | 20,753 |  |  | 18.04 | 

In Yemen, the netback per Bbl increased 23% in 2010 compared
with 2009, primarily as a result of the 33% increase in oil prices, which was
partially offset by higher royalty and tax rates along with increased operating
expenses.

Royalties and taxes as a percentage of revenue increased to 59%
in 2010 compared with 55% in 2009. Royalty and tax rates fluctuate in Yemen due
to changes in the amount of cost oil, whereby the Block 32 and Block S-1
Production Sharing Agreements (PSAs) allow for the recovery of operating and
capital costs through a reduction in the Ministry of Oil and Minerals take of
oil production.

Operating expenses on a per Bbl basis increased 20% in 2010,
which is mainly due to lower production volumes and increased selling costs in
2010.

|2010 | 6
|---- | -

---

|MANAGEMENTS
      DISCUSSION AND ANALYSIS
|------------------------------------------

DERIVATIVE COMMODITY CONTRACTS

TransGlobe uses hedging arrangements as part of its risk
management strategy to manage commodity price fluctuations and to stabilize cash
flows for future exploration and development programs. The hedging program is
actively monitored and adjusted as deemed necessary to protect the cash flows
from the risk of commodity price exposure.

The estimated fair value of unrealized commodity contracts is
reported on the Consolidated Balance Sheets with any change in the unrealized
positions recorded to income. The fair values of these transactions are based on
an approximation of the amounts that would have been paid to, or received from,
counter-parties to settle the transactions outstanding as at the Consolidated
Balance Sheet date with reference to forward prices and market values provided
by independent sources. The actual amounts realized may differ from these
estimates.

The realized loss on commodity contracts in 2010 relates mostly
to the purchase of new financial floor derivative commodity contracts, whereas
the loss in 2009 was lower due to depressed oil prices. The mark-to-market
valuation of TransGlobes future derivative commodity contracts increased from a
$0.5 million liability at December 31, 2009 to a $0.3 million asset at December
31, 2010, thus resulting in a $0.8 million unrealized gain on future derivative
commodity contracts being recorded in the year.

|($000s)                                               |  | 2010   |   |  | 2009   |  
|----------------------------------------------------- |  | ------ | - |  | ------ | -
|Realized cash (loss) on commodity
      contracts*    |  | (1,486 | ) |  | (891   | )
|Unrealized gain
      (loss) on commodity contracts** |  | 816    |   |  | (3,322 | )
|Total derivative (loss) on commodity contracts        |  | (670   | ) |  | (4,213 | )

|*  | Realized cash loss represents actual cash settlements or
      receipts under the respective contracts.                                       
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------
|** | The unrealized gain (loss) on derivative commodity
      contracts represents the change in fair value of the contracts during the
      year.

If the Dated Brent oil prices in 2011 are consistent with the
estimated Dated Brent forward curve prices at the end of 2010, the derivative
asset will be realized over the year. However, a 10% decrease in Dated Brent oil
prices would result in a $0.3 million increase in the derivative commodity
contract asset, thus increasing the unrealized gain by the same amount.
Conversely, a 10% increase in Dated Brent oil prices would decrease the
unrealized gain on commodity contracts by $0.1 million. The following commodity
contracts are outstanding immediately following December 31, 2010:

|                                  |  |                  |  |  |                 |  |   | Dated Brent Pricing | 
|--------------------------------- |  | ---------------- |  |  | --------------- |  | - | ------------------- | 
|Period                            |  | Volume           |  |  | Type            |  |   | Put                 | 
|Crude Oil                         |  |                  |  |  |                 |  |   |                     | 
|January 1, 2011-December 31, 2011 |  | 40,000 Bbl/month |  |  | Financial Floor |  | $ | 65.00               | 
|April 1, 2011-December 31, 2011*  |  | 20,000 Bbl/month |  |  | Financial Floor |  | $ | 75.00               | 

* Contract entered into in January 2011.

The total volumes hedged for 2011 are:

|     |  | 2011    | 
|---- |  | ------- | 
|Bbls |  | 660,000 | 
|Bopd |  | 1,808   | 

At December 31, 2010, all of the derivative commodity contracts
were classified as current assets.

GENERAL AND ADMINISTRATIVE EXPENSES (G&A)

|                                        |  | 2010   |   |  | 2009  |  
|--------------------------------------- |  | ------ | - |  | ----- | -
|(000s, except per
      Bbl amounts)    |  | $      |   |  | $/Bbl |  
|G&A (gross)                             |  | 14,513 |   |  | 4.00  |  
|Stock-based compensation                |  | 2,749  |   |  | 0.76  |  
|Capitalized G&A and overhead recoveries |  | (2,674 | ) |  | (0.74 | )
|                                        |  |        |   |  |       |  
|G&A (net)                               |  | 14,588 |   |  | 4.02  |  

G&A expenses (net) increased 16% on a per Bbl basis in 2010
compared with 2009 partly due to a strengthening Canadian dollar which accounted
for approximately 46% of the increase as the majority of TransGlobes G&A
costs are incurred in Canadian dollars. The remainder of the increase was due to
increased insurance, staffing and office costs in Egypt.

INTEREST ON LONG-TERM DEBT

Interest expense includes interest on long-term debt and
amortization of transaction costs associated with long-term debt. Interest
expense for 2010 increased to $3.3 million (2009 - $2.5 million), as a result of
higher interest rates in 2010 combined with higher amortization of transaction
costs. In 2010, the Company expensed $0.8 million of transaction costs (2009 -
$0.6 million). The Company had $90.0 million of debt outstanding at December 31,
2010 (December 31, 2009 - $50.0 million). The long-term debt that was
outstanding at December 31, 2010 bore interest at LIBOR plus an applicable
margin that varies from 3.75% to 4.75% depending on the amount drawn under the
facility. The long-term debt that was outstanding at December 31, 2009 bore
interest at the Eurodollar Rate plus three per cent under the terms of the previous credit facility that was terminated in July
2010 and replaced with a new Borrowing Base Facility.

|7 | 2010
|- | ----

---

|MANAGEMENTS
      DISCUSSION AND ANALYSIS
|------------------------------------------

DEPLETION AND DEPRECIATION (DD&A)

|                                     |  | 2010   |  |  | 2009  | 
|------------------------------------ |  | ------ |  |  | ----- | 
|(000s, except per
      Bbl amounts) |  | $      |  |  | $/Bbl | 
|Egypt                                |  | 26,010 |  |  | 9.82  | 
|Yemen                                |  | 7,683  |  |  | 7.79  | 
|Corporate                            |  | 240    |  |  | -     | 
|                                     |  |        |  |  |       | 
|                                     |  | 33,933 |  |  | 9.33  | 

In Egypt, DD&A decreased 31% in 2010 (45% on a per Bbl
basis) due to significant increases to Proved reserves at year-end 2009 along
with further increases at year end 2010 (181% production replacement).

In Yemen, DD&A decreased 19% in 2010 (5% on a per Bbl
basis) due to a reduction in estimated future capital costs which decreased the
capital base, combined with Proved reserve additions on Block S-1 and Block 32
at year-end 2009 along with further increases at year end 2010 (6% production
replacement).

In Egypt, unproven properties of $9.8 million in 2010 (2009 -
$9.8 million) relating to Nuqra ($8.2 million), West Gharib ($0.5 million) and
East Ghazalat ($1.1 million) were excluded from the costs subject to depletion
and depreciation. In Yemen, unproven property costs of $11.6 million in 2010
(2009 - $10.8 million) relating to Block 72 ($7.8 million) and Block 75 ($3.8
million) were excluded from the costs subject to depletion and depreciation.

Capital costs in the amount of $0.5 million were excluded from
the corporate costs subject to the depreciation for the year ended December 31,
2010.

CAPITAL EXPENDITURES

|($000s)   |  | 2010   |  |  | 2009   | 
|--------- |  | ------ |  |  | ------ | 
|Egypt     |  | 58,435 |  |  | 28,349 | 
|Yemen     |  | 7,684  |  |  | 7,013  | 
|Corporate |  | 813    |  |  | 184    | 
|          |  |        |  |  |        | 
|Total     |  | 66,932 |  |  | 35,546 | 

In Egypt, total capital expenditures for the year ended
December 31, 2010 were up 106% from 2009 due to an increased capital program in
response to higher oil prices in 2010 and the East Ghazalat farm-in. Further
fuelling the increase to the capital program were new discoveries in West Gharib
and East Ghazalat, along with certain drilling activities undertaken to retain
key blocks of land in West Gharib. The Company drilled 31 wells, resulting in 24
oil wells (four at Hana, six at Arta, five at East Arta, two at North Hoshia,
one at each of Hana West, Hoshia and South Rahmi, and four at East Ghazalat), in
addition to three dry holes at East Arta, one at Hoshia, one at West Hoshia, and
two at East Ghazalat.

In Yemen, total capital expenditures in the year ended December
31, 2010 increased by 10% from 2009 due mostly to restarting the drilling
program at Block S-1. Five oil development wells were drilled in 2010 at Block
S-1, along with two oil development wells and one dry hole at Block 32.

Corporate capital expenditures relate mainly to leasehold
improvements and furnishings for new office space in Canada.

FINDING AND DEVELOPMENT COSTS/FINDING, DEVELOPMENT AND NET
ACQUISITION COSTS

Canadian National Instrument 51-101, Standards of Disclosure
for Oil and Gas Activities (NI 51-101), specifies how finding and development
(F&D) costs should be calculated. NI 51-101 requires that exploration and
development costs incurred in the year along with the change in estimated future
development costs be aggregated and then divided by the applicable reserve
additions. The calculation specifically excludes the effects of acquisitions and
dispositions on both reserves and costs. TransGlobe believes that the provisions
of NI 51-101 do not fully reflect TransGlobes ongoing reserve replacement
costs. Since acquisitions can have a significant impact on TransGlobes annual
reserves replacement cost, to not include these amounts could result in an
inaccurate portrayal of TransGlobes cost structure. Accordingly, TransGlobe has
also reported finding, development and acquisition (FD&A) costs that will
incorporate all acquisitions net of any dispositions during the year.

|2010 | 8
|---- | -

---

|MANAGEMENTS
      DISCUSSION AND ANALYSIS
|------------------------------------------

|Proved                                               |  |         |  |  |        |  |  |         |  
|---------------------------------------------------- |  | ------- |  |  | ------ |  |  | ------- | -
|($000s,
      except volumes and $/Boe amounts)      |  | 2010    |  |  | 2009   |  |  | 2008    |  
|Total capital expenditure                            |  | 66,932  |  |  | 35,546 |  |  | 43,292  |  
|Acquisitions                                         |  | -       |  |  | -      |  |  | 58,946  |  
|Dispositions                                         |  | -       |  |  | -      |  |  | (57,295 | )
|Net change
      from previous years future capital |  | 4,776   |  |  | 1,816  |  |  | (6,479  | )
|                                                     |  | 71,708  |  |  | 37,362 |  |  | 38,464  |  
|Reserve additions and revisions (MBoe)               |  |         |  |  |        |  |  |         |  
|Exploration and development                          |  | 4,845   |  |  | 9,921  |  |  | 3,129   |  
|Acquisitions, net of dispositions                    |  | -       |  |  | -      |  |  | 118     |  
|Total reserve additions (MBoe)                       |  | 4,845   |  |  | 9,921  |  |  | 3,247   |  
|                                                     |  |         |  |  |        |  |  |         |  
|Average cost per Boe                                 |  |         |  |  |        |  |  |         |  
|F&D                                                  |  | 14.80   |  |  | 3.77   |  |  | 11.77   |  
|FD&A                                                 |  | 14.80   |  |  | 3.77   |  |  | 11.85   |  
|                                                     |  |         |  |  |        |  |  |         |  
|Three-year weighted average cost per
      Boe       |  |         |  |  |        |  |  |         |  
|F&D                                                  |  | 8.15    |  |  | 7.40   |  |  | 14.97   |  
|FD&A                                                 |  | 8.19    |  |  | 9.75   |  |  | 16.62   |  
|                                                     |  |         |  |  |        |  |  |         |  
|Proved Plus Probable                                 |  |         |  |  |        |  |  |         |  
|($000s,
      except volumes and $/Boe amounts)      |  | 2010    |  |  | 2009   |  |  | 2008    |  
|Total capital expenditure                            |  | 66,932  |  |  | 35,546 |  |  | 43,292  |  
|Acquisitions                                         |  | -       |  |  | -      |  |  | 58,946  |  
|Dispositions                                         |  | -       |  |  | -      |  |  | (57,295 | )
|Net change
      from previous years future capital |  | 42,546  |  |  | 4,112  |  |  | (8,602  | )
|                                                     |  | 109,478 |  |  | 39,658 |  |  | 36,341  |  
|Reserve additions and revisions (MBoe)               |  |         |  |  |        |  |  |         |  
|Exploration and development                          |  | 9,895   |  |  | 7,670  |  |  | 5,200   |  
|Acquisitions, net of dispositions                    |  | -       |  |  | -      |  |  | 709     |  
|Total reserve additions (MBoe)                       |  | 9,895   |  |  | 7,670  |  |  | 5,909   |  
|                                                     |  |         |  |  |        |  |  |         |  
|Average cost per Boe                                 |  |         |  |  |        |  |  |         |  
|F&D                                                  |  | 11.06   |  |  | 5.17   |  |  | 6.67    |  
|FD&A                                                 |  | 11.06   |  |  | 5.17   |  |  | 6.15    |  
|                                                     |  |         |  |  |        |  |  |         |  
|Three-year weighted average cost per
      Boe       |  |         |  |  |        |  |  |         |  
|F&D                                                  |  | 8.07    |  |  | 7.27   |  |  | 12.35   |  
|FD&A                                                 |  | 7.90    |  |  | 8.59   |  |  | 12.14   |  

|Note: | The aggregate of the exploration and development costs
      incurred in the most recent financial year and the change during that year
      in estimated future development costs generally will not reflect total
      finding and development costs related to reserves additions for that year.
|----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|RECYCLE RATIO             |  |            |  |  |       |  |  |       |  |  |       | 
|------------------------- |  | ---------- |  |  | ----- |  |  | ----- |  |  | ----- | 
|                          |  | Three-Year |  |  |       |  |  |       |  |  |       | 
|Proved                    |  | Weighted   |  |  |       |  |  |       |  |  |       | 
|                          |  | Average    |  |  | 2010  |  |  | 2009  |  |  | 2008  | 
|Netback ($/Boe)*          |  | 18.63      |  |  | 20.51 |  |  | 13.75 |  |  | 22.05 | 
|Proved F&D costs ($/Boe)  |  | 8.15       |  |  | 14.80 |  |  | 3.77  |  |  | 11.77 | 
|Proved FD&A costs ($/Boe) |  | 8.19       |  |  | 14.80 |  |  | 3.77  |  |  | 11.85 | 
|F&D Recycle ratio         |  | 2.29       |  |  | 1.39  |  |  | 3.65  |  |  | 1.87  | 
|FD&A Recycle ratio        |  | 2.27       |  |  | 1.39  |  |  | 3.65  |  |  | 1.86  | 

|* | Netback, for the purposes of calculating the recycle
      ratio, is defined as net sales less operating, G&A (excluding non-cash
      items), foreign exchange (gain) loss, interest and current income tax
      expense per Boe of production.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                        |  | Three-Year |  |  |       |  |  |       |  |  |       | 
|--------------------------------------- |  | ---------- |  |  | ----- |  |  | ----- |  |  | ----- | 
|Proved Plus Probable                    |  | Weighted   |  |  |       |  |  |       |  |  |       | 
|                                        |  | Average    |  |  | 2010  |  |  | 2009  |  |  | 2008  | 
|Netback ($/Boe)*                        |  | 18.63      |  |  | 20.51 |  |  | 13.75 |  |  | 22.05 | 
|Proved plus Probable F&D costs ($/Boe)  |  | 8.07       |  |  | 11.06 |  |  | 5.17  |  |  | 6.67  | 
|Proved plus Probable FD&A costs ($/Boe) |  | 7.90       |  |  | 11.06 |  |  | 5.17  |  |  | 6.15  | 
|F&D Recycle ratio                       |  | 2.31       |  |  | 1.85  |  |  | 2.66  |  |  | 3.31  | 
|FD&A Recycle ratio                      |  | 2.36       |  |  | 1.85  |  |  | 2.66  |  |  | 3.59  | 

|* | Netback, for the purposes of calculating the recycle
      ratio, is defined as net sales less operating, G&A (excluding non-cash
      items), foreign exchange (gain) loss, interest and current income tax
      expense per Boe of production.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The 2010 proved recycle ratios decreased from 2009 by 62%,
which is mainly a result of fewer Proved reserve additions in 2010. The proved
plus probable ratios decreased from 2009 mainly due to the low cost of the 2009
reserve additions, which were the result of waterflood simulation and field
response at Hoshia and Hana and the development of the Hana West pool. The
decreased ratios were also impacted by increased future capital associated with
undrilled Proved plus Probable reserve additions in 2010.

Due to the nature of international projects, the Company
considers the three-year weighted average recycle ratios to provide the most
useful information. The three-year weighted average ratios are consistent with
Company expectations and with prior periods.

|9 | 2010
|- | ----

---

|MANAGEMENTS
      DISCUSSION AND ANALYSIS
|------------------------------------------

The recycle ratio measures the efficiency of TransGlobes
capital program by comparing the cost of finding and developing both proved
reserves and proved plus probable reserves with the netback from production. The
ratio is calculated by dividing the netback by the proved and proved plus
probable finding and development cost on a per Boe basis.

|($000s, except
      volumes and per Boe amounts)   |  | 2010   |   |  | 2009   |   |  | 2008   |  
|--------------------------------------------------- |  | ------ | - |  | ------ | - |  | ------ | -
|Net income                                          |  | 37,867 |   |  | (8,417 | ) |  | 31,523 |  
|Adjustments for non-cash items:                     |  |        |   |  |        |   |  |        |  
|Depletion,
      depreciation and accretion         |  | 33,933 |   |  | 47,579 |   |  | 38,056 |  
|Stock-based compensation                            |  | 2,749  |   |  | 2,011  |   |  | 1,830  |  
|Future income
      taxes                           |  | -      |   |  | -      |   |  | (82    | )
|Amortization of deferred
      financing costs      |  | 836    |   |  | 569    |   |  | 1,884  |  
|Unrealized
      (gain) loss on commodity contracts |  | (816   | ) |  | 3,322  |   |  | (9,906 | )
|Gain on sale                                        |  | -      |   |  | -      |   |  | (4,012 | )
|Settlement of asset retirement obligations          |  | -      |   |  | -      |   |  | (25    | )
|Netback*                                            |  | 74,569 |   |  | 45,064 |   |  | 59,268 |  
|Sales volumes (MBoe)                                |  | 3,635  |   |  | 3,278  |   |  | 2,687  |  
|                                                    |  |        |   |  |        |   |  |        |  
|Netback per Boe*                                    |  | 20.51  |   |  | 13.75  |   |  | 22.05  |  

|* | Netback, for the purposes of calculating the recycle
      ratio, is defined as net sales less operating, G&A (excluding non-cash
      items), foreign exchange (gain) loss, interest and current income tax
      expense per Boe of production.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

OUTSTANDING SHARE DATA

As at December 31, 2010, the Company had 67,575,321 common
shares issued and outstanding.

The Company received regulatory approval to purchase, from time
to time, as it considers advisable, up to 6,116,905 common shares under a Normal
Course Issuer Bid, which commenced September 7, 2009 and expired September 6,
2010. During the year ended December 31, 2010 and during the year ended December
31, 2009, the Company did not repurchase any common shares.

Subsequent to December 31, 2010, the Company issued an
additional 5,000,000 common shares in a public offering that closed on February
1, 2011.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity describes a companys ability to access cash.
Companies operating in the upstream oil and gas industry require sufficient cash
in order to fund capital programs necessary to maintain and increase production
and proved reserves, to acquire strategic oil and gas assets and to repay debt.
TransGlobes capital programs are funded principally by cash provided from
operating activities. A key measure that TransGlobe uses to measure the
Companys overall financial strength is debt-to-funds flow from operating
activities (calculated on a 12-month trailing basis). TransGlobes debt-to-funds
flow from operating activities ratio, a key short-term leverage measure,
remained strong at 1.2 times at December 31, 2010. This was within the Companys
target range of no more than 2.0 times.

The following table illustrates TransGlobes sources and uses
of cash during the years ended December 31, 2010 and 2009:

Sources and Uses of Cash

|($000s)                                                |  | 2010    |   |  | 2009   |  
|------------------------------------------------------ |  | ------- | - |  | ------ | -
|Cash sourced                                           |  |         |   |  |        |  
|Funds flow from
      operations*                      |  | 74,569  |   |  | 45,064 |  
|Increase
      in long-term debt                       |  | 95,916  |   |  | -      |  
|Issuance of common shares, net of share issuance costs |  | 9,959   |   |  | 15,374 |  
|                                                       |  | 180,444 |   |  | 60,438 |  
|Cash used                                              |  |         |   |  |        |  
|Capital
      expenditures                             |  | 66,932  |   |  | 35,546 |  
|Bank financing costs                                   |  | 4,216   |   |  | -      |  
|Repayment
      of long-term debt                      |  | 55,916  |   |  | 8,000  |  
|Increase in restricted
      cash                      |  | 3,387   |   |  | -      |  
|Options surrendered for cash
      payments            |  | -       |   |  | 13     |  
|                                                       |  | 130,451 |   |  | 43,559 |  
|Net cash from operations                               |  | 49,993  |   |  | 16,879 |  
|Changes in
      non-cash working capital              |  | (8,388  | ) |  | (8,336 | )
|Increase in cash and cash equivalents                  |  | 41,605  |   |  | 8,543  |  
|Cash and cash
      equivalents  beginning of year    |  | 16,177  |   |  | 7,634  |  
|                                                       |  |         |   |  |        |  
|Cash and cash
      equivalents  end of year          |  | 57,782  |   |  | 16,177 |  

|* | Funds flow from operations is a non-GAAP measure that
      represents cash generated from operating activities before changes in
      non-cash working capital.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

|2010 | 10
|---- | --

---

|MANAGEMENTS
      DISCUSSION AND ANALYSIS
|------------------------------------------

Funding for the Companys capital expenditures was provided by
funds flow from operations for the year ended December 31, 2010. The Company
expects to fund its 2011 exploration and development program of $90.0 million
and contractual commitments through the use of working capital and cash
generated by operating activities. Furthermore, the Company raised C$75.0
million (US$75.6 million), before fees and expenses, in a public offering that
closed on February 1, 2011. The net proceeds of the offering will primarily be
used by the Company to repay existing credit facilities and to evaluate, and if
determined to be in the best interests of the Company, pursue business
development opportunities in Egypt during fiscal 2011, including adding new
acreage through farm-in arrangements, bid rounds or acquisitions from third
parties. Fluctuations in commodity prices, foreign exchange rates, interest
rates and various other risks may impact capital resources.

Working capital is the amount by which current assets exceed
current liabilities. At December 31, 2010, the Company had working capital of
$88.3 million (December 31, 2009  deficiency of $11.8 million). The working
capital deficiency as at December 31, 2009 was primarily the result of the
reclassification of all long-term debt as a current liability. On July 22, 2010,
the Company entered into a new Borrowing Base Facility. Therefore, as at
December 31, 2010 the Borrowing Base Facility was classified as long-term which
eliminated the working capital deficiency. While the reclassification of bank
debt accounts for the majority of the increase in working capital, other
increases to working capital in 2010 are the result of increased accounts
receivable due to higher oil prices and higher sales volumes. These receivables
are not considered to be impaired; however, to mitigate this risk, the Company
insured a portion of the receivable balance.

At December 31, 2009 TransGlobe had a $60.0 million Revolving
Credit Agreement of which $50.0 million was drawn. Amounts drawn under the
Revolving Credit Agreement were set to become due on September 25, 2010. On July
22, 2010, the Company entered into a new five-year $100.0 million Borrowing Base
Facility and paid out the original Revolving Credit Agreement. The new Borrowing
Base Facility is secured by a pledge over certain bank accounts, a pledge over
the Companys subsidiaries, and a fixed and floating charge over certain assets.
As repayments on the new Borrowing Base Facility are not expected to commence
until 2012, the entire balance has been presented as a long-term liability on
the Consolidated Balance Sheet at December 31, 2010. Repayments will be made on
a semi-annual basis according to the scheduled reduction of the facility. As of
December 31, 2010, the Company has incurred financing costs related to the new
Borrowing Base Facility in the amount of $4.2 million.

|($000s)                             |  | December 31, 2010 |   |  | December 31, 2009 |  
|----------------------------------- |  | ----------------- | - |  | ----------------- | -
|Revolving Credit Agreement          |  | 90,000            |   |  | 50,000            |  
|Unamortized
      transaction costs |  | (3,580            | ) |  | (201              | )
|                                    |  | 86,420            |   |  | 49,799            |  
|                                    |  |                   |   |  |                   |  
|Current portion of long-term debt   |  | -                 |   |  | 49,799            |  
|Long-term debt                      |  | 86,420            |   |  | -                 |  

COMMITMENTS AND CONTINGENCIES

As part of its normal business, the Company entered into
arrangements and incurred obligations that will impact the Companys future
operations and liquidity. The principal commitments of the Company are as
follows:

|(000s)                                   |  | Payment Due by Period1,2 | 
|---------------------------------------- |  | ------------------------ | 
|                                         |  | Recognized               | 
|                                         |  | in Financial             | 
|                                         |  | Statements               | 
|Accounts payable and accrued liabilities |  | Yes-Liability            | 
|Long-term debt:                          |  |                          | 
|Borrowing Base Facility                  |  | Yes-Liability            | 
|Office and equipment leases              |  | No                       | 
|Minimum work commitments3                |  | No                       | 
|Total                                    |  |                          | 

|1 | Payments exclude ongoing operating costs related to
      certain leases, interest on long-term debt and payments made to settle
      derivatives.       
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|2 | Payments denominated in foreign currencies have been
      translated at December 31, 2010 exchange rates.                                                
|3 | Minimum work commitments include contracts awarded for
      capital projects and those commitments related to exploration and drilling
      obligations.

Pursuant to the Concession agreement for Nuqra Block 1 in
Egypt, the Contractor (Joint Venture Partners) has a minimum financial
commitment of $5.0 million ($4.4 million to TransGlobe) and a work commitment
for two exploration wells in the second exploration extension. The second,
36-month extension period commenced on July 18, 2009. The Contractor has met the
second extension financial commitment of $5.0 million in the prior periods. At
the request of the Government, the Company provided a $4.0 million production
guarantee from the West Gharib Concession prior to entering the second extension
period.

Pursuant to the PSA for Block 72 in Yemen, the Contractor
(Joint Venture Partners) has a minimum financial commitment of $2.0 million
($0.1 million to TransGlobe) to drill one exploration well during the second
exploration period. The second, 30-month exploration period commenced on January
12, 2009. The Contractor has entered into a farm-in agreement with TOTAL E&P
Yemen which has reduced TransGlobes interest in the concession to 20%.This
commitment was fully satisfied subsequent to December 31, 2010.

|11 | 2010
|-- | ----

---

|MANAGEMENTS
      DISCUSSION AND ANALYSIS
|------------------------------------------

Pursuant to the PSA for Block 75 in Yemen, the Contractor
(Joint Venture Partners) has a remaining minimum financial commitment of $3.0
million ($0.8 million to TransGlobe) for one exploration well. The first,
36-month exploration period commenced March 8, 2008. Subsequent to December 31,
2010, the Company received an extension on the first exploration period to
September 9, 2011. The Company issued a $1.5 million letter of credit (expiring
November 15, 2011) to guarantee the Companys performance under the first
exploration period. The letter is secured by a guarantee granted by Export
Development Canada.

Pursuant to the August 18, 2008 asset purchase agreement for a
25% financial interest in eight development leases on the West Gharib Concession
in Egypt, the Company has committed to paying the vendor a success fee to a
maximum of $2.0 million if incremental reserve thresholds are reached in the
South Rahmi development lease, to be evaluated annually. As at December 31,
2010, no additional fees are due in 2011.

Pursuant to a one-year extension to the West Hoshia development
lease, which is part of the Concession agreement for West Gharib in Egypt, the
Company provided a $1.0 million production guarantee to drill one exploration
well prior to October 14, 2011.

In the normal course of its operations, the Company may be
subject to litigations and claims. Although it is not possible to estimate the
extent of potential costs, if any, management believes that the ultimate
resolution of such contingencies would not have a material adverse impact on the
results of operations, financial position or liquidity of the Company.

OFF BALANCE SHEET ARRANGEMENTS

The Company has certain lease agreements, all of which are
reflected in the Commitments and Contingencies table, which were entered into in
the normal course of operations. All leases have been treated as operating
leases whereby the lease payments are included in operating expenses or G&A
expenses depending on the nature of the lease. No asset or liability value has
been assigned to these leases in the balance sheet as of December 31, 2010.

MANAGEMENT STRATEGY AND OUTLOOK FOR 2011

The 2011 outlook provides information as to managements
expectation for results of operations for 2011. Readers are cautioned that the
2011 outlook may not be appropriate for other purposes. The Companys expected
results are sensitive to fluctuations in the business environment and may vary
accordingly. This outlook contains forward-looking statements that should be
read in conjunction with the Companys disclosure under Forward-Looking
Statements included on the first page of the MD&A.

2011 Outlook Highlights

- Production is expected to average between 13,000 Bopd and 13,500 Bopd, a
  33% increase over the 2010 average production;
- Exploration and development spending is budgeted to be $90 million, a 34%
  increase from 2010 (allocated 85% to Egypt, 13% to Yemen and 2% Corporate) and
  will be funded by funds flow from operations and cash on hand; and
- Using the mid-point of production expectations and an average oil price
  assumption for the year of $75.00/Bbl for Dated Brent oil, funds flow from
  operations is expected to be $101.0 million.

2011 Production Outlook

Production for 2011 is expected to average between 13,000 Bopd
and 13,500 Bopd, representing a 33% increase over the 2010 average production of
9,960 Bopd. Production from Egypt is expected to average approximately 10,350
Bopd during 2011, up 43% from an average of 7,259 Bopd in 2010, with the balance
of approximately 2,900 Bopd coming from the Yemen properties, which represents a
7% increase from an average of 2,701 Bopd in 2010. This forecast excludes any
production contributions from the East Ghazalat project.

|Production Forecast    |  |                |  |  |                   |  |  |                 | 
|---------------------- |  | -------------- |  |  | ----------------- |  |  | --------------- | 
|                       |  | 2011 Guidance  |  |  | 2010
      Actual |  |  | %
      Change* | 
|                       |  |                |  |  |                   |  |  |                 | 
|Barrels of oil per day |  | 13,000 -13,500 |  |  | 9,960             |  |  | 33              | 

|* | % growth based on mid-point of
outlook.
|- | ---------------------------------------

2011 Funds Flow From Operations Outlook

This outlook was developed using the above production forecast
and a Dated Brent oil price of $75.00/Bbl.

|2011 Funds Flow From Operations Outlook |  |               |  |  |                   |  |  |                 | 
|--------------------------------------- |  | ------------- |  |  | ----------------- |  |  | --------------- | 
|($ million)                             |  | 2011 Guidance |  |  | 2010
      Actual |  |  | %
      Change* | 
|                                        |  |               |  |  |                   |  |  |                 | 
|Funds flow from operations**            |  | 101.0         |  |  | 74.6              |  |  | 35              | 

|*  | % growth based on mid-point of outlook.                                                                                                                          
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|** | Funds flow from operations is a non-GAAP measure that
      represents cash generated from operating activities before changes in
      non-cash working capital.

|2010 | 12
|---- | --

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|MANAGEMENTS
      DISCUSSION AND ANALYSIS
|------------------------------------------

Due in part to higher expected prices and higher production,
funds flow from operations is expected to increase by 35% in 2011. Variations in
production and commodity prices during 2011 could significantly change this
outlook. An increase in the Dated Brent oil price of $10.00/Bbl would increase
anticipated funds flow by approximately $14.0 million to $115.0 million for the
year, while a $10.00/Bbl decrease in the Dated Brent oil price would result in
anticipated funds flow decreasing by approximately $14.0 million to $87.0
million for the year.

2011 Capital Budget

|($ million) |  | 2011 | 
|----------- |  | ---- | 
|Egypt       |  | 76.6 | 
|Yemen       |  | 11.7 | 
|Corporate   |  | 1.7  | 
|            |  |      | 
|Total       |  | 90.0 | 

The 2011 capital program is split 80:20 between development and
exploration, respectively. The Company plans to participate in 61 wells in 2011.
The Company will fund its entire 2011 capital budget from funds flow and working
capital. The Company has designed its 2011 budget to be flexible allowing
spending to be adjusted for any unforeseen events and changes in commodity
prices.

RISKS

TransGlobes results are affected by a variety of business
risks and uncertainties in the international petroleum industry including but
not limited to:

- Financial risks including market risks (such as commodity price, foreign
  exchange and interest rates), credit risks and liquidity risks;
- Operational risks including capital, operating and reserves replacement
  risks;
- Safety, environmental and regulatory risks; and
- Political risks.

Many of these risks are not within the control of management,
but the Company has adopted several strategies to reduce and minimize the
effects of these risks:

Financial Risks

Financial risk is the risk of loss or lost opportunity
resulting from financial management and market conditions that could have a
positive or negative impact on TransGlobe.

To mitigate these risks, the Company raised C$75.0 million
(US$75.6 million), before fees and expenses, in a public offering that closed on
February 1, 2011. The Company also actively maintains credit facilities to
ensure it has sufficient available funds to meet current and foreseeable
financial requirements at a reasonable cost. Management believes that future
funds flows from operations, working capital and availability under existing
banking arrangements will be adequate to support these financial liabilities, as
well as its capital programs.

The improving global financial situation of 2010 increased
access to debt, capital, and banking markets, and improved market stability.
These factors have all had a positive impact on TransGlobes ability to obtain
additional funding in the future. To mitigate potential financial risk factors,
management regularly evaluates operational and financial risk strategies and
continues to monitor the 2011 capital budget and the Companys long-term plans.
The Company has designed its 2011 budget to be flexible allowing spending to be
adjusted for any unforeseen events and changes in commodity prices.

Market Risk

Market risk is the risk or uncertainty arising from possible
market price movements and their impact on the future performance of a business.
The market price movements that the Company is exposed to include oil prices
(commodity price risk), foreign currency exchange rates and interest rates, all
of which could adversely affect the value of the Companys financial assets,
liabilities and financial results.

a) Commodity price riskThe Companys
operational results and financial condition are dependent on the commodity
prices received for its oil production. Commodity prices have fluctuated
significantly this year.

Any movement in commodity prices would have an effect on the
Companys financial condition which could result in the delay or cancellation of
drilling, development or construction programs, all of which could have a
material adverse impact on the Company. Therefore, the Company has entered into
various financial derivative contracts to manage fluctuations in commodity
prices in the normal course of operations. The use of derivative instruments is
governed under formal policies and is subject to limits established by the Board
of Directors.

b) Foreign currency exchange riskAs the
Companys business is conducted primarily in U.S. dollars and its financial
instruments are primarily denominated in U.S. dollars, the Companys exposure to
foreign currency exchange risk relates to certain cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities denominated in
Canadian dollars and Egyptian pounds. The Company does not utilize derivatives
to manage this risk. When assessing the potential impact of foreign currency
exchange risk, the Company believes 10% volatility is a
reasonable measure The Company estimates that a 10% increase in the value of the
Canadian dollar against the U.S. dollar would result in an increase in the net
income for the year ended December 31, 2010 of approximately $0.1 million and
conversely a 10% decrease in the value of the Canadian dollar against the U.S.
dollar would decrease the net income by $0.2 million for the same period. The
Company maintains Egyptian pound cash balances to offset the Egyptian pound
liabilities, and therefore, the Company believes its exposure to Egyptian pound
fluctuations is not significant.

|13 | 2010
|-- | ----

---

|MANAGEMENTS
      DISCUSSION AND ANALYSIS
|------------------------------------------

c) Interest rate riskFluctuations in interest
rates could result in a change in the amount the Company pays to service
variable-interest, U.S.-dollar-denominated debt. No derivative contracts were
entered into during 2010 to mitigate this risk. When assessing interest rate
risk applicable to the Companys variable-interest, U.S.-dollar-denominated
debt, the Company believes 1% volatility is a reasonable measure. The effect of
interest rates increasing by 1% would decrease the Companys net income by $0.5
million for the year ended December 31, 2010. The effect of interest rates
decreasing by 1% would increase the Companys net income by $0.5 million for
year ended December 31, 2010.

Credit Risk

Credit risk is the risk of loss if counterparties do not
fulfill their contractual obligations. The Companys exposure to credit risk
primarily relates to accounts receivable, the majority of which are in respect
of oil operations and derivative commodity contracts. The Company is and may in
the future be exposed to third-party credit risk through its contractual
arrangements with its current or future joint venture partners, marketers of its
petroleum production and other parties, including the governments of Egypt and
Yemen. Significant changes in the oil industry, including fluctuations in
commodity prices and economic conditions, environmental regulations, government
policy, royalty rates and other geopolitical factors, could adversely affect the
Companys ability to realize the full value of its accounts receivable. The
Company currently has, and historically has had, a significant account
receivable outstanding from the Government of Egypt. While the Government of
Egypt does make regular payments on these amounts owing, the timing of these
payments has historically been longer than normal industry standard. The recent
political unrest in Egypt has increased the delay in payments. Despite these
factors, the Company still expects to collect this account receivable in full,
although there can be no assurance that this will occur. In the event the
Government of Egypt fails to meet its obligations, or other third-party
creditors fail to meet their obligations to the Company, such failures could
individually or in the aggregate have a material adverse effect on the Company,
its cash flow from operating activities and its ability to conduct its ongoing
capital expenditure program. To mitigate this risk, the Company insured a
portion of the receivable balance. The Company has not experienced any material
credit loss in the collection of accounts receivable to date.

In Egypt, the Company sold all of its 2010 and 2009 production
to one purchaser. In Yemen, the Company sold all of its 2010 and 2009 Block 32
production to one purchaser and all of its 2010 and 2009 Block S-1 production to
one purchaser. Management considers such transactions normal for the Company and
the international oil industry in which it operates.

Liquidity Risk

Liquidity risk is the risk that the Company will not be able to
meet its financial obligations as they become due. Liquidity describes a
companys ability to access cash. Companies operating in the upstream oil and
gas industry require sufficient cash in order to fund capital programs necessary
to maintain and increase production and proved reserves, to acquire strategic
oil and gas assets and to repay debt.

To mitigate these risks, the Company raised C$75.0 million
(US$75.6 million), before fees and expenses, in a public offering in January
2011. The Company also actively maintains credit facilities to ensure it has
sufficient available funds to meet current and foreseeable financial
requirements at a reasonable cost. Management believes that future funds flows
from operations, working capital and availability under existing banking
arrangements will be adequate to support these financial liabilities, as well as
its capital programs.

Operational Risks

The Companys future success largely depends on its ability to
exploit its current reserve base and to find, develop or acquire additional oil
reserves that are economically recoverable. Failure to acquire, discover or
develop these additional reserves will have an impact on cash flows of the
Company.

Third parties operate some of the assets in which TransGlobe
has interests. As a result, TransGlobe may have limited ability to exercise
influence over the operations of these assets and their associated costs. The
success and timing of these activities may be outside of the Companys
control.

To mitigate these operational risks, as part of its capital
approval process, the Company applies rigorous geological, geophysical and
engineering analysis to each prospect. The Company utilizes its in-house
expertise for all international ventures or employs and contracts professionals
to handle each aspect of the Companys business. The Company retains independent
reserve evaluators to determine year-end Company reserves and estimated future
net revenues.

The Company also mitigates operational risks by maintaining a
comprehensive insurance program according to customary industry practice, but
cannot fully insure against all risks.

Safety, Environmental and Regulatory Risks

To mitigate environmental risks, the Company conducts its
operations to ensure compliance with government regulations and guidelines.
Monitoring and reporting programs for environmental health and safety
performance in day-to-day operations, as well as inspections and assessments,
are designed to provide assurance that environmental and regulatory standards are met. Security risks are managed through security
policies designed to protect TransGlobes personnel and assets. The Company has
a Whistleblower Protection Policy which protects employees if they raise any
concerns regarding TransGlobes operations, accounting or internal control
matters.

|2010 | 14
|---- | --

---

|MANAGEMENTS
      DISCUSSION AND ANALYSIS
|------------------------------------------

Regulatory and legal risks are identified and monitored by
TransGlobes corporate team and external legal professionals to ensure that the
Company continues to comply with laws and regulations.

Political Risks

TransGlobe operates in countries with political, economic and
social systems which subject the Company to a number of risks that are not
within the control of the Company. These risks may include, among others,
currency restrictions and exchange rate fluctuations, loss of revenue and
property and equipment as a result of expropriation, nationalization, war,
insurrection and geopolitical and other political risks, increases in taxes and
governmental royalties, changes in laws and policies governing operations of
foreign-based companies, and economic and legal sanctions and other
uncertainties arising from foreign governments.

While the recent civil unrest in Egypt and Yemen has created
uncertainty regarding the Companys political risk, management believes that the
Company is well positioned to adapt to this situation due to its increasing
production, manageable debt levels, positive cash generation from operations and
the availability of cash and cash equivalents. However, if the political issues
in Egypt and Yemen continue for an extended period of time, the Company may be
forced to reduce its capital spending and participate in fewer wells than
anticipated, which will have a negative effect on production volumes.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in accordance with
generally accepted accounting principles requires that management make
appropriate decisions with respect to the selection of accounting policies and
in formulating estimates and assumptions that affect the reported amount of
assets, liabilities, revenues and expenses. The following is included in the
MD&A to aid the reader in assessing the critical accounting policies and
practices of the Company. The information will also aid in assessing the
likelihood of materially different results being reported depending on
managements assumptions and changes in prevailing conditions which affect the
application of these policies and practices. Significant accounting policies are
disclosed in Note 1 of the Consolidated Financial Statements.

Oil and Gas Reserves

TransGlobes Proved and Probable oil and gas reserves are 100%
evaluated and reported on by independent reserve evaluators to the Reserves
Committee comprised of independent directors. The estimation of reserves is a
subjective process. Forecasts are based on engineering data, projected future
rates of production, estimated commodity price forecasts and the timing of
future expenditures, all of which are subject to numerous uncertainties and
various interpretations. The Company expects that its estimates of reserves will
change to reflect updated information. Reserve estimates can be revised upward
or downward based on the results of future drilling, testing, production levels
and economics of recovery based on cash flow forecasts.

Full Cost Accounting for Oil and Gas Activities

a) Depletion and Depreciation
ExpenseTransGlobe follows the Canadian Institute of Chartered
Accountants guideline on full cost accounting in the oil and gas industry to
account for oil and gas properties. Under this method, all costs associated with
the acquisition of, exploration for, and the development of natural gas and
crude oil reserves are capitalized on a country-by-country cost centre basis and
costs associated with production are expensed. The capitalized costs are
depleted, depreciated and amortized using the unit-of-production method based on
estimated proved reserves. Reserve estimates can have a significant impact on
earnings, as they are a key component in the calculation of depletion,
depreciation and amortization. A downward revision in a reserve estimate could
result in a higher DD&A charge to earnings. In addition, if net capitalized
costs are determined to be in excess of the calculated ceiling, which is based
largely on reserve estimates (see Asset Impairment discussion below), the excess
must be written off as an expense charged against earnings. In the event of a
property disposition, proceeds are normally deducted from the full cost pool
without recognition of a gain or loss unless there is a change in the DD&A
rate of 20% or greater.

b) Unproved PropertiesCertain costs related
to unproved properties and major development projects are excluded from costs
subject to depletion and depreciation until the earliest of a portion of the
property becomes capable of production, development activity ceases or
impairment occurs. These properties are reviewed quarterly and any impairment is
transferred to the costs being depleted or, if the properties are located in a
cost centre where there is no reserve base, the impairment is charged directly
to earnings.

c) Asset ImpairmentsUnder full cost
accounting, a ceiling test is performed to ensure that unamortized capitalized
costs in each cost centre do not exceed their fair value. An impairment loss is
recognized in net earnings when the carrying amount of a cost centre is not
recoverable and the carrying amount of the cost centre exceeds its fair value.
The carrying amount of the cost centre is not recoverable if the carrying amount
exceeds the sum of the undiscounted cash flows from proved reserves. If the sum
of the cash flows is less than carrying amount, the impairment loss is limited
to an amount by which the carrying amount exceeds the sum of:

| | i)  | the fair value of reserves; and                                                             
| | --- | --------------------------------------------------------------------------------------------
| | ii) | the costs of unproved properties that have been subject
      to a separate impairment test.

|15 | 2010
|-- | ----

---

|MANAGEMENTS
      DISCUSSION AND ANALYSIS
|------------------------------------------

Production Sharing Agreements

International operations conducted pursuant to PSAs are
reflected in the Consolidated Financial Statements based on the Companys
working interest in such operations. Under the PSAs, the Company and other
non-governmental partners pay all operating and capital costs for exploring and
developing the concessions. Each PSA establishes specific terms for the Company
to recover these costs (Cost Recovery Oil) and to share in the production
sharing oil. Cost Recovery Oil is determined in accordance with a formula that
is generally limited to a specified percentage of production during each fiscal
year. Production sharing oil is that portion of production remaining after Cost
Recovery Oil and is shared between the joint venture partners and the government
of each country, varying with the level of production. Production sharing oil
that is attributable to the government includes an amount in respect of all
income taxes payable by the Company under the laws of the respective country.
Revenue represents the Companys share and is recorded net of royalty payments
to government and other mineral interest owners. For our international
operations, all government interests, except for income taxes, are considered
royalty payments. Our revenue also includes the recovery of costs paid on behalf
of foreign governments in international locations.

Derivative Financial Instruments and Hedging
Activities

a) Financial InstrumentsAll financial
instruments are initially measured in the Consolidated Balance Sheets at fair
value. Subsequent measurement of the financial instruments is based on their
classification. The Company has classified each financial instrument into one of
five categories: held-for-trading, held-to-maturity investments, loans and
receivables, available-for-sale financial assets or other financial liabilities.
Loans and receivables, held-to-maturity investments and other financial
liabilities are measured at amortized cost using the effective interest rate
method. For all financial assets and financial liabilities that are not
classified as held-for-trading, the transaction costs that are directly
attributable to the acquisition or issue of a financial asset or financial
liability are adjusted to the fair value initially recognized for that financial
instrument. These costs are expensed using the effective interest rate method
and are recorded within interest expense. 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 until the instrument is
derecognized or impaired. All derivative instruments are recorded in the
Consolidated Balance Sheets at fair value unless they qualify for the expected
purchase, sale and usage exemption. All changes in their fair value are recorded
in income unless cash flow hedge accounting is used, in which case changes in
fair value are recorded in other comprehensive income.

The Company has classified its derivative commodity contracts,
cash and cash equivalents and restricted cash as held-for-trading, which are
measured at fair value with changes being recognized in net income. Accounts
receivable are classified as loans and receivables; operating bank loans,
accounts payable and accrued liabilities, and long-term debt, including interest
payable, are classified as other liabilities, all of which are measured at
amortized cost. The classification of all financial instruments is the same at
inception and at December 31, 2010. The Company has elected to classify all
derivatives and embedded derivatives as held-for-trading, which are measured at
fair value with changes being recognized in net income.

b) Derivative Instruments and Hedging
ActivitiesDerivative financial instruments are used by the Company
to manage its exposure to market risks relating to commodity prices. The
Companys policy is not to utilize derivative financial instruments for
speculative purposes. The Company does not use hedge accounting.

When derivative instruments do not qualify as hedges, or are
not designated as hedges, they are recorded at their fair values in the
Consolidated Balance Sheet as either an asset or liability with changes in fair
value recognized in net income. Realized gains or losses from financial
derivatives related to commodity prices are recognized in revenues as the
related sales occur. Unrealized gains and losses are recognized in revenues at
the end of each respective reporting period. The estimated fair value of all
derivative instruments is based on quoted market prices and/or third party
market indications and forecasts.

c) Embedded DerivativesEmbedded derivatives
are derivatives embedded in a host contract. They are recorded separately from
the host contract when their economic characteristics and risks are not clearly
and closely related to those of the host contract, the terms of the embedded
derivatives are the same as those of a freestanding derivative and the combined
contract is not classified as held for trading or designated at fair value. The
Company elected January 1, 2003 as the transition date for embedded
derivatives.

d) Comprehensive IncomeComprehensive income
consists of net income and other comprehensive income. Other comprehensive
income refers to items recognized in comprehensive income but that are excluded
from net income calculated in accordance with generally accepted accounting
principles. Foreign exchange gains and losses arising from the translation of
the financial statements of a self-sustaining foreign operation, net of tax, are
recorded in comprehensive income. Accumulated other comprehensive income is an
equity category comprised of the cumulative amounts of other comprehensive
income. Effective May 1, 2008, the Company determined that its foreign
operations were integrated as a result of the sale of the Canadian segment and
its results were translated prospectively using the temporal method from that
date.

|2010 | 16
|---- | --

---

|MANAGEMENTS
      DISCUSSION AND ANALYSIS
|------------------------------------------

CHANGES IN ACCOUNTING POLICIES

New Accounting
  Policies

The Company adopted a share appreciation rights plan in March
2010. Under the share appreciation rights plan, all liabilities must be settled
in cash and, consequently, are classified as liability instruments and measured
at their intrinsic value less any unvested portion. Unvested share appreciation
rights accrue evenly over the vesting period. The intrinsic value is determined
as the difference between the market value of the Companys common shares and
the exercise price of the share appreciation rights. This obligation is revalued
each reporting period and the change in the obligation is recognized as
stock-based compensation expense (recovery).

New Accounting Standards

International Financial Reporting Standards (IFRS)

In October 2009, the Accounting Standards Board issued a third
and final IFRS Omnibus Exposure Draft confirming that publicly accountable
enterprises will be required to apply IFRS, in full and without modification,
for all financial periods beginning on or after January 1, 2011. The adoption of
IFRS will require the restatement, for comparative purposes, of amounts reported
by the Company for the year ended December 31, 2010, including the opening
balance sheet as at January 1, 2010.

The Company commenced its IFRS transition project in 2008 and
has completed the project awareness and engagement phase of the IFRS transition
project. Corporate governance over the project was established and a steering
committee and project team formed. The steering committee is comprised of
members of management and executive and is responsible for final approval of
project recommendations and deliverables to the Audit Committee and Board of
Directors. Communication, training and education are an important aspect of the
Companys IFRS conversion project. Internal and external training and education
sessions have been carried out and will continue throughout each phase of the
project.

TransGlobes IFRS transition project consists of three key
phases after the project awareness and engagement phase described above; the
diagnostic assessment phase, the design, planning and solution development phase
and finally the implementation phase.

The Company completed the diagnostic assessment phase by
performing comparisons of the differences between Canadian GAAP and IFRS and has
assessed the effects of adoption. The Company continues to focus on analyzing
and developing implementation strategies and processes for the key IFRS
transition issues identified. Where applicable, key IFRS transition alternatives
are being considered and evaluated. The Company continues to perform accounting
assessments on less critical IFRS transition issues and is completing its
analysis of IFRS financial statement presentation and disclosure requirements.
These assessments are being further analyzed and will continue to be evaluated
throughout the remainder of the implementation phase of the Companys project,
as new transactions may have different GAAP versus IFRS treatment and ongoing
changes to IFRS may have an impact on the conversion.

Concurrently, the project team is finalizing the design,
planning and solution development phase for a few remaining areas and has
commenced the implementation phase for most critical areas. In the design,
planning and solution development phase, the focus is on determining the
specific qualitative and quantitative impact the application of IFRS
requirements has on the Company. The project team members have been working with
representatives from the various operational areas to develop recommendations
including first-time adoption exemptions available upon initial transition to
IFRS. The results from the consultations with the various operational areas have
been used to draft accounting policies. One of the sections in each of the draft
accounting policies is the disclosure section which includes the financial
statement disclosure as required by IFRS. The Company has analyzed first-time
adoption exemptions and documented which exemptions it intends to utilize. A
detailed implementation plan and timeline has been developed, which also
includes the development of a training plan. Furthermore, the Company has
developed processes and systems to ensure that IFRS comparative data is captured
and to position it for reporting under IFRS in 2011, once the implementation
phase has been completed.

During the third and fourth quarters of 2010, the Company
completed its draft opening balance sheet under IFRS, which is as at January 1,
2010, and commenced the development of draft financial statements concurrently
for all comparative quarters in 2010. Transition to IFRS on the opening balance
sheet date is not expected to result in a material adjustment to the Companys
property and equipment.

The Company also continues to work on calculating IFRS
transition adjustments for the year ended December 31, 2010 for the purpose of
producing IFRS compliant financial statements for these periods. While
quantification of the impact is in progress and cannot currently be estimated
accurately, the Company expects depletion and depreciation expense to decrease
under IFRS as compared to Canadian GAAP as a result of the depletion rate being
calculated based on proved and probable reserves under IFRS compared to proved
reserves only under previous GAAP. At this time, any other potential adjustments
to the Companys financial position and results of operations for the year ended
December 31, 2010 cannot be reliably determined or estimated.

Additionally, the Company is monitoring the IASBs active
projects and all changes to IFRS will be incorporated as required.

|17 | 2010
|-- | ----

---

|MANAGEMENTS
      DISCUSSION AND ANALYSIS
|------------------------------------------

Expected Accounting Policy Impacts

The Company determined that the most significant impact of IFRS
conversion is to property and equipment. IFRS does not prescribe specific oil
and gas accounting guidance other than for costs associated with the exploration
and evaluation phase. The Company currently follows full cost accounting as
prescribed in Accounting Guideline 16, Oil and Gas Accounting  Full
Cost. Conversion to IFRS will have a significant impact on how the Company
accounts for costs pertaining to oil and gas activities, in particular those
related to the pre-exploration and development phases;

| | i)  | Pre-exploration and evaluation costs are defined as
      expenditures incurred prior to obtaining the legal right to explore.
      Currently the Company capitalizes these costs and depletes them at the
      countrylevel. Under IFRS these costs must be expensed when incurred.
      Exploration and evaluation (E&E) costs are defined as expenditures
      incurred on an oil property prior to declaring commercial viability and
      technical feasibility. Currently these costs are included in the property
      and equipment (P&E) balance on the Consolidated Balance Sheet and
      are being depleted at the country level. Under IFRS these costs will be
      moved out of the P&E balance and reported separately as E&E assets
      on the balance sheet. E&E costs will not be depleted but assessed for
      impairment and unrecoverable costs associated with a specific area will be
      expensed. When a project is determined to be technically feasible and
      commercially viable, the costs will be moved to P&E and depletion will
      commence.
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| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ii) | Development and Production (D&P) costs are defined
      as costs incurred on an oil property after declaring commercial viability
      and technical feasibility. Currently these costs are included in the
      P&E balance on the Consolidated Balance Sheets and are being depleted
      using a reserve base of Proved reserves. These costs will continue to be
      capitalized as P&E; however the Company will have the option under
      IFRS to calculate depletion using a reserve base of Proved reserves or
      Proved plus Probable reserves. The Company plans to determine its
      depletion expense using Proved plus Probable reserves as its depletion
      base. Also the level at which impairment tests are performed and the
      impairment testing methodology will differ under
IFRS.                                                                                                                                                                                                                                                                         

The Company does not expect to experience any material
impairment loss on oil and gas assets on transition to IFRS.

The method utilized to account for share-based payment
transactions will also differ under IFRS as compared to Canadian GAAP. The
valuation and expensing of share-based payments will be done using a tranche
method under IFRS whereas current standards allow for stock option issuances to
be valued as a whole and expensed on a straight-line basis over the lives of the
options.

IFRS conversion will also result in other impacts, which may be
significant in nature. The overall impact on the Companys Consolidated
Financial Statements cannot reasonably be determined at this time.

IFRS 1, First-Time Adoption of International Financial
Reporting Standards, permits first time adopters of IFRS a number of
exemptions. The Company has been analyzing the full extent of these exemptions.
The Company expects to utilize the following exemptions:

| | i)   | Business combinations exemption, which allows for an
      implementation of the IFRS business combination rules on a prospective
      basis, therefore, business combinations entered into prior to January 1,
      2010 will not be retrospectively restated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
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| | ii)  | Foreign currency translation adjustments classified in
      accumulated other comprehensive income will be deemed zero and
      reclassified to retained earnings on January 1, 2010, and the
      retrospective restatement of foreign currency translation under IFRS will
      not be performed. This opening balance sheet adjustment results in a
      decrease in accumulated other comprehensive income along with a
      corresponding increase in retained earnings. The Company estimates the
      cumulative impact on the opening balance sheet for this adjustment to be
      approximately $10.9 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | iii) | TransGlobe intends to use the share-based payment
      transactions exemption under which stock options that vest prior to
      January 1, 2010 are not required to be retrospectively restated.
      Therefore, IFRS requirements apply only to those options that were
      unvested at the date of transition. The valuation and expensing of
      share-based payments will be done using a tranche method under IFRS
      whereas under previous GAAP entire stock option issuances were valued as a
      whole and expensed on a straight line over the lives of the options. This
      results in an accelerated expensing of the share-based payments as the
      fair value is weighted more heavily toward the periods closer to the date
      of issuance of the stock options. The adjustment for the change in
      treatment of share-based payments results in an increase in contributed
      surplus with a corresponding decrease in retained earnings. The Company
      estimates the cumulative impact on the opening balance sheet for this
      adjustment to be approximately $1.4 million.                                                                                                                                                                                     
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | iv)  | In July 2009, the International Accounting Standards
      Board (IASB) approved additional exemptions that will allow entities to
      allocate their oil and gas asset balance as determined under full cost
      accounting to the IFRS categories of exploration and evaluation assets and
      development and producing properties. Under the exemption, exploration and
      evaluation assets are measured at the amount determined under an entitys
      previous GAAP. For assets in the development or production phases, the
      amount is also measured at the amount determined under an entitys
      previous GAAP; however, such values must be allocated to the underlying
      IFRS transitional assets on a pro-rata basis using either reserve values
      or reserve volumes as of the entitys IFRS transition date. This exemption
      will relieve entities from significant adjustments resulting from
      retrospective adoption of IFRS. The Company will utilize this exemption.
      The effect on the Companys opening balance sheet will be a split of the
      property and equipment balance between exploration and evaluation assets
      and development and production assets, which will be presented separately
      on the Consolidated Balance Sheet.

|2010 | 18
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|MANAGEMENTS
      DISCUSSION AND ANALYSIS
|------------------------------------------

Any changes in accounting policies required to address
reporting and first-time adoption of IFRS will be made in consideration of the
integrity of internal control over financial reporting and disclosure controls
and procedures. Throughout the remainder of TransGlobes transition project, the
Company will continue to ensure that all changes in accounting polices relating
to IFRS have controls and procedures to ensure that information is captured
appropriately. With respect to internal controls over financial reporting and
disclosure controls and procedures, the Company does not expect that any
material changes in control procedures will be required as a result of the
transition to IFRS.

TransGlobe has completed its assessment of information
technology (IT) systems requirements in order to ready the Company for IFRS
reporting. The IT system modifications will not be significant and will allow
for reporting under both Canadian GAAP and IFRS in 2010.

DISCLOSURE CONTROLS AND PROCEDURES

As of December 31, 2010, an evaluation was carried out under
the supervision, and with the participation, of the Companys management,
including the Chief Executive Officer and Chief Financial Officer, on the
effectiveness of the Companys disclosure controls and procedures. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that as of the end of the fiscal year, the design and operation of these
disclosure controls and procedures were effective to ensure that information
required to be disclosed by the Company in its annual filings is recorded,
processed, summarized and reported within the specified time periods.

INTERNAL CONTROLS OVER FINANCIAL REPORTING

TransGlobes management designed and implemented internal
controls over financial reporting, as defined under National Instrument 52-109
Certification of Disclosure in Issuers Annual and Interim Filings, of
the Canadian Securities Administrators and as defined in Rule 13a-15 under the
US Securities Exchange Act of 1934. Internal controls over financial reporting
is a process designed under the supervision of the Chief Executive Officer and
the Chief Financial Officer and effected by the Board of Directors, management
and other personnel to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with Canadian generally accepted accounting principles,
including a reconciliation to U.S. generally accepted accounting principles,
focusing in particular on controls over information contained in the annual and
interim financial statements.

Due to its inherent limitations, internal controls over
financial reporting may not prevent or detect misstatements on a timely basis. A
system of internal controls over financial reporting, no matter how well
conceived or operated, can provide only reasonable, not absolute, assurance that
the objectives of the internal controls over financial reporting are met. Also,
projections of any evaluation of the effectiveness of internal control over
financial reporting to future periods are subject to the risk that the controls
may become inadequate because of changes in conditions, or that the degree of
compliance with policies or procedures may deteriorate.

Management has assessed the effectiveness of the Companys
internal control over financial reporting based on the Committee of Sponsoring
Organizations of the Treadway Commission framework on Internal Control 
Integrated Framework.Based on this assessment, management concluded that
the Companys internal control over financial reporting was effective as at
December 31, 2010.

As at the date of this report, management is not aware of any
change in the Companys internal control over financial reporting that has
materially affected, or is reasonably likely to materially affect, the Companys
internal control over financial reporting.

|2010 | 19
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