---





Consolidated Financial Statementsfor the fiscal year ended December 31, 2003



|Independent Auditor's Report                        | F-1
|--------------------------------------------------- | ---
|                                                    |    
|Consolidated Statements of Income And
      Deficit | F-2
|                                                    |    
|Consolidated Balance Sheets                         | F-3
|                                                    |    
|Consolidated Statements of Cash Flows               | F-4
|                                                    |    
|Notes to Consolidated Financial Statements          | F-5



---

INDEPENDENT AUDITORS REPORT

To the Shareholders of TransGlobe Energy Corporation:

We have audited the consolidated balance sheets of TransGlobe
  Energy Corporation as at December 31, 2003 and 2002 and the consolidated
  statements of income and deficit and cash flows for the years then ended. These
  financial statements are the responsibility of the Companys management.
  Our responsibility is to express an opinion on these financial statements based
  on our audits.

We conducted our audits in accordance with auditing standards
  generally accepted in Canada and the United States of America. These standards
  require that we plan and perform an audit to obtain reasonable assurance whether
  the financial statements are free of material misstatement. An audit includes
  examining, on a test basis, evidence supporting the amounts and disclosures
  in the financial statements. An audit also includes assessing the accounting
  principles used and significant estimates made by management, as well as evaluating
  the overall financial statement presentation. We believe that our audits provide
  a reasonable basis for our opinion.

In our opinion, these consolidated financial statements present
  fairly, in all material respects, the financial position of TransGlobe Energy
  Corporation as at December 31, 2003 and 2002 and the results of its operations
  and its cash flows for the years then ended in accordance with Canadian generally
  accepted accounting principles. As required by the Company Act (British Columbia),
  we report that, in our opinion, these principles have been applied on a consistent
  basis.

|Calgary, Alberta, Canada |                      
|------------------------ | ---------------------
|February 27, 2004        | Chartered Accountants

COMMENTS BY AUDITORS FOR U.S. READERS ON CANADA-U.S. REPORTING DIFFERENCES

In the United States of America, reporting standards for auditors
  require the addition of an explanatory paragraph (following the opinion paragraph)
  outlining changes in accounting policies that have been implemented in the financial
  statements. As discussed in Note 1 to the consolidated financial statements,
  in 2002 the Company changed its method of accounting for stock-based compensation
  to conform to the Canadian Institute of Chartered Accountants Handbook recommendations,
  Section 3870.

|Calgary, Alberta, Canada |                      
|------------------------ | ---------------------
|February 27, 2004        | Chartered Accountants

F-1

---

CONSOLIDATEDSTATEMENTSOFINCOMEANDDEFICIT

(Expressed in U.S. Dollars)

|                                    | Year Ended        |             | Year Ended        |  
|----------------------------------- | ----------------- | ----------- | ----------------- | -
|                                    | December 31, 2003 |             | December 31, 2002 |  
|                                    |                   |             |                   |  
|                                    |                   |             |                   |  
|REVENUE                             |                   |             |                   |  
|Oil and gas sales, net of royalties | $                 | 17,161,710  |                   | $
|Other income                        |                   | 374,239     |                   |  
|                                    |                   |             |                   |  
|                                    |                   | 17,535,949  |                   |  
|                                    |                   |             |                   |  
|                                    |                   |             |                   |  
|EXPENSES                            |                   |             |                   |  
|Operating                           |                   | 3,706,096   |                   |  
|General and administrative          |                   | 1,206,337   |                   |  
|Foreign exchange (gain) loss        |                   | 157,133     |                   |  
|Interest                            |                   | 1,173       |                   |  
|Depletion and depreciation          |                   | 6,253,000   |                   |  
|                                    |                   |             |                   |  
|                                    |                   | 11,323,739  |                   |  
|                                    |                   |             |                   |  
|                                    |                   |             |                   |  
|Income before income taxes          |                   | 6,212,210   |                   |  
|                                    |                   |             |                   |  
|Income taxes (Note 6)               |                   |             |                   |  
|- future                            |                   | (2,448,085  | )                 |  
|- current                           |                   | 2,755,067   |                   |  
|                                    |                   |             |                   |  
|                                    |                   | 306,982     |                   |  
|                                    |                   |             |                   |  
|NET INCOME                          |                   | 5,905,228   |                   |  
|                                    |                   |             |                   |  
|deficit, beginning of year          |                   | (12,298,309 | )                 |  
|                                    |                   |             |                   |  
|                                    |                   |             |                   |  
|deficit, end of year                | $                 | (6,393,081  | )                 | $
|                                    |                   |             |                   |  
|                                    |                   |             |                   |  
|Net income per share (Note 8)       |                   |             |                   |  
|Basic                               | $                 | 0.11        |                   | $
|Diluted                             | $                 | 0.11        |                   | $

F-2

---

CONSOLIDATEDBALANCESHEETS

(Expressed in U.S. Dollars)

|                                               | December 31, 2003 |            | December 31, 2002 |  
|---------------------------------------------- | ----------------- | ---------- | ----------------- | -
|                                               |                   |            |                   |  
|                                               |                   |            |                   |  
|ASSETS                                         |                   |            |                   |  
|Current                                        |                   |            |                   |  
|Cash and cash equivalents                      | $                 | 4,451,751  |                   | $
|Accounts receivable                            |                   | 2,383,459  |                   |  
|Prepaid expenses                               |                   | 161,011    |                   |  
|                                               |                   |            |                   |  
|                                               |                   | 6,996,221  |                   |  
|                                               |                   |            |                   |  
|Property and equipment                         |                   |            |                   |  
|Canada (Note 2)                                |                   | 8,083,428  |                   |  
|Republic of Yemen (Note 3)                     |                   | 18,562,857 |                   |  
|                                               |                   |            |                   |  
|                                               |                   | 26,646,285 |                   |  
|                                               |                   |            |                   |  
|Future income tax asset (Note 6)               |                   | 1,572,310  |                   |  
|                                               |                   |            |                   |  
|                                               |                   |            |                   |  
|                                               | $                 | 35,214,816 |                   | $
|                                               |                   |            |                   |  
|                                               |                   |            |                   |  
|LIABILITIES                                    |                   |            |                   |  
|Current                                        |                   |            |                   |  
|Accounts payable and accrued liabilities       | $                 | 4,458,852  |                   | $
|                                               |                   |            |                   |  
|Provision for site restoration and abandonment |                   | 153,209    |                   |  
|                                               |                   |            |                   |  
|                                               |                   |            |                   |  
|                                               |                   | 4,612,061  |                   |  
|                                               |                   |            |                   |  
|Commitments and Contingencies (Note 10)        |                   |            |                   |  
|                                               |                   |            |                   |  
|SHAREHOLDERS EQUITY                           |                   |            |                   |  
|Share capital (Note 5)                         |                   | 36,995,836 |                   |  
|deficit                                        |                   | (6,393,081 | )                 |  
|                                               |                   |            |                   |  
|                                               |                   | 30,602,755 |                   |  
|                                               |                   |            |                   |  
|                                               |                   |            |                   |  
|                                               | $                 | 35,214,816 |                   | $
|                                               |                   |            |                   |  
|APPROVED BY THE BOARD                          |                   |            |                   |  

|                           |                           
|-------------------------- | --------------------------
|Ross G. Clarkson, Director | Lloyd W. Herrick, Director

F-3

---

CONSOLIDATEDSTATEMENTSOFCASHFLOWS

(Expressed in U.S. Dollars)

|                                                        | Year Ended        |             | Year Ended        |  
|------------------------------------------------------- | ----------------- | ----------- | ----------------- | -
|                                                        | December 31, 2003 |             | December 31, 2002 |  
|                                                        |                   |             |                   |  
|CASH FLOWS RELATED TO THE                               |                   |             |                   |  
|FOLLOWING ACTIVITIES:                                   |                   |             |                   |  
|                                                        |                   |             |                   |  
|OPERATING                                               |                   |             |                   |  
|Net income                                              | $                 | 5,905,228   |                   | $
|Adjustments for:                                        |                   |             |                   |  
|Depletion and depreciation                              |                   | 6,253,000   |                   |  
|Gain on sale of property and equipment                  |                   | (363,142    | )                 |  
|Performance bonus expense paid in
      shares (Note 5) |                   | -           |                   |  
|Future income
      taxes                               |                   | (2,448,085  | )                 |  
|                                                        |                   |             |                   |  
|Cash flow from operations                               |                   | 9,347,001   |                   |  
|                                                        |                   |             |                   |  
|Changes in non-cash working capital
      (Note 7)      |                   | 3,117,398   |                   |  
|                                                        |                   |             |                   |  
|                                                        |                   | 12,464,399  |                   |  
|                                                        |                   |             |                   |  
|                                                        |                   |             |                   |  
|FINANCING                                               |                   |             |                   |  
|Issue of share capital (Note 5)                         |                   | 2,269,705   |                   |  
|Repurchase of share capital                             |                   | (41,267     | )                 |  
|                                                        |                   |             |                   |  
|                                                        |                   | 2,228,438   |                   |  
|                                                        |                   |             |                   |  
|                                                        |                   |             |                   |  
|INVESTING                                               |                   |             |                   |  
|Purchase of property and equipment                      |                   |             |                   |  
|Yemen                                                   |                   | (9,012,022  | )                 |  
|Canada                                                  |                   | (5,217,084  | )                 |  
|Proceeds on disposal of property and equipment          |                   | 442,103     |                   |  
|Changes in non-cash working capital
      (Note 7)      |                   | 950,747     |                   |  
|                                                        |                   |             |                   |  
|                                                        |                   | (12,836,256 | )                 |  
|                                                        |                   |             |                   |  
|                                                        |                   |             |                   |  
|NET INCREASE IN CASH AND CASH                           |                   |             |                   |  
|EQUIVALENTS                                             |                   | 1,856,581   |                   |  
|                                                        |                   |             |                   |  
|CASH AND CASH EQUIVALENTS,                              |                   |             |                   |  
|BEGINNING OF YEAR                                       |                   | 2,595,170   |                   |  
|                                                        |                   |             |                   |  
|                                                        |                   |             |                   |  
|CASH AND CASH EQUIVALENTS, END OF YEAR                  | $                 | 4,451,751   |                   | $

F-4

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NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS

Years Ended December 31, 2003 and December 31, 2002 
  (Expressed in U.S. Dollars, unless otherwise stated)

1. SIGNIFICANT ACCOUNTING POLICIES

Basis of consolidation 
  These consolidated financial statements include the accounts of the Company
  and its wholly-owned subsidiaries, TransGlobe Oil and Gas Corporation, TransGlobe
  Petroleum International Inc. and TG Holdings Yemen Inc.

Accounting principles 
  These consolidated financial statements are prepared in accordance with accounting
  principles generally accepted in Canada, which conform in all material respects
  with accounting principles generally accepted in the United States of America,
  except as disclosed in Note 14.

Property and equipment 
  The Company follows the full cost method of accounting for oil and gas operations
  whereby all costs associated with the exploration for and development of oil
  and gas reserves are capitalized on a country-by-country basis. Such costs include
  land acquisition costs, geological and geophysical expenses, carrying charges
  on non-producing properties, costs of drilling both productive and non-productive
  wells and overhead charges directly related to acquisition, exploration and
  development activities.

The capitalized costs, together with the costs of production equipment, are
  depleted and depreciated on the unit-of-production method based on the estimated
  gross proven reserves and determined by independent petroleum engineers. Oil
  and gas reserves and production were converted into equivalent units of 6,000
  cubic feet of natural gas to one barrel of oil.

Costs of acquiring and evaluating unproved properties and major development
  projects are initially excluded from the depletion and depreciation calculation.
  These costs are assessed periodically to ascertain whether impairment has occurred.

The capitalized costs less accumulated depletion and depreciation, future
  income taxes and the provision for future site restoration costs in each cost
  centre are limited to an amount equal to the estimated future net revenue from
  proven reserves plus the cost (net of impairment) of unproven properties.

The total capitalized costs less accumulated depletion and depreciation, future
  income taxes and the provision for future site restoration costs of all cost
  centres is further limited to an amount equal to the estimated future net revenue
  from proven reserves plus the cost (net of impairment) of unproven properties
  of all costs centres less estimated future site restoration costs, general and
  administrative expenses, financing costs and income taxes.

Proceeds from the sale of oil and gas properties are applied against capitalized
  costs, with no gain or loss recognized, unless such a sale would alter the rate
  of depletion and depreciation by more than 20 percent, in which case a gain
  or loss on disposal is recorded.

Substantially all of the Companys exploration, development and production
  activities are conducted jointly with others and accordingly, these consolidated
  financial statements reflect only the Companys proportionate interest
  in such activities.

Estimated future site restoration costs are provided for using the unit-of-production
  method and remaining proven reserves. Costs are estimated by the Company based
  on current regulations, costs, technology and industry standards. The annual
  charge is included in the provision for depletion and depreciation. Actual site
  restoration expenditures are charged to the accumulated provision account as
  incurred.

Furniture and fixtures are depreciated at declining balance rates of 20 to
  30 percent.

F-5

---

Foreign currency 
  The Company uses the United States dollar as its reporting currency since the
  majority of the Companys business is transacted in United States dollars.
  The Company and its subsidiaries are considered to be integrated operations
  and the accounts are translated using the temporal method. Under this method,
  monetary assets and liabilities are translated at the rates of exchange in effect
  at the balance sheet date; non-monetary assets at historical rates and revenue
  and expense items at the average rates for the period, other than depletion
  and depreciation which are translated at the same rates of exchange as the related
  asset. The net effect of the foreign currency translation is included in current
  operations.

Cash and cash equivalents 
  Cash includes actual cash held and short-term investments such as treasury bills
  with original maturity of less than three months.

Revenue recognition 
  The Company records oil and gas revenue at the time of physical transfer to
  purchaser.

Income taxes 
  The Company records income taxes using the liability method. Under this method,
  future income tax assets and liabilities are measured using the enacted tax
  rates expected to apply to taxable income in the years in which the temporary
  differences are expected to be recovered or settled.

Flow through shares 
  The Company has financed a portion of its exploration and development activities
  in Canada through the issue of flow through shares. Under the terms of these
  share issues, the tax attributes of the related expenditures are renounced to
  subscribers. To recognize the foregone tax benefits, share capital is reduced
  and a future income tax liability is recorded by the income tax amount related
  to the renounced deductions.

Stock options 
  The Company has a stock option plan as described in Note 5. No compensation
  expense has been recorded upon the granting of the options at market prices.
  Effective January 1, 2002, the Company adopted CICA 3870 Stock Based Compensation
  and Other Stock Based Payments. As permitted by CICA 3870, the Company
  has applied this change prospectively for new awards granted on or after January
  1, 2002. For 2003 and 2002 the Company has calculated the impact on net earnings
  and earnings per share on a proforma basis (Note 5(h)). For periods prior to
  January 1, 2002 the Company did not recognize any compensation expense when
  stock options were issued to employees.

Per share amounts 
  Net income per share is calculated using the weighted average number of shares
  outstanding during the year. Diluted net income per share is calculated using
  the treasury stock method. The treasury stock method assumes that the proceeds
  received from the exercise of in-the-money stock options are used
  to repurchase common shares at the average market price.

Measurement uncertainty 
  The amounts recorded for depletion and depreciation of property and equipment,
  the provision for site restoration costs and the ceiling test calculation are
  based on estimates of proved reserves, production rates, oil and natural gas
  prices, future costs and other relevant assumptions. By their nature, these
  estimates are subject to measurement uncertainty and the effect on the consolidated
  financial statements of changes in such estimates in future periods could be
  significant.

F-6

---

2. PROPERTY AND EQUIPMENT - CANADA

|                                       | 2003 |            | 2002 |  
|-------------------------------------- | ---- | ---------- | ---- | -
|                                       |      |            |      |  
|Oil and gas properties                 | $    | 9,707,851  |      | $
|Furniture and fixtures                 |      | 250,296    |      |  
|Accumulated depletion and depreciation |      | (1,874,719 | )    |  
|                                       |      |            |      |  
|                                       | $    | 8,083,428  |      | $

During the year the Company capitalized overhead costs relating
  to exploration and development activities of $206,153 (2002 - $153,569).

Depletion and depreciation expense includes $31,000 (2002
  - $16,000) related to the provision for site restoration which is calculated
  based on a total future estimated cost of $551,104 (2002 - $319,000).

3. PROPERTY AND EQUIPMENT - REPUBLIC OF YEMEN

|                                       | 2003 |             | 2002 |  
|-------------------------------------- | ---- | ----------- | ---- | -
|                                       |      |             |      |  
|Oil and gas properties                 |      |             |      |  
|- Block 32                             | $    | 17,953,690  |      | $
|- Block S-1                            |      | 12,650,485  |      |  
|- Other                                |      | 81,682      |      |  
|Accumulated depletion and depreciation |      | (12,123,000 | )    |  
|                                       |      |             |      |  
|                                       | $    | 18,562,857  |      | $

The Company commenced production on Block 32 in November 2000.
  This represented the early stages of a major development program contracted
  under the Production Sharing Agreement (PSA) which continues to
  2020, with provision for a five year extension. In October 2003, the Yemen Ministry
  of Oil and Minerals approved the Development Plan and Development Area for the
  Block S-1 PSA which will have a 20 year term with provision for a five year
  extension. Unproven properties in the amount of $11,683,986 were excluded from
  costs subject to depletion and depreciation representing a portion of the costs
  incurred in Block S-1. During the year the Company capitalized overhead costs
  relating to exploration and development activities of $239,717 (2002 - $238,834).

Block 32 (13.81087% working interest) 
  The PSA provides for the Ministry of Oil and Mineral Resources (MOM)
  in the Republic of Yemen to receive a royalty of 3% (10% over 25,000 barrels
  of oil per day (Bopd)) of gross production with the remaining 97%
  of revenue split between cost recovery oil and production sharing oil. Cost
  recovery oil is up to a maximum of 60% of 97% of the revenue limited to operating
  costs and allocated recoverable exploration and development expenditures as
  outlined in the PSA. Cost recovery oil is 100% for the account of the Block
  32 Contractor (Joint Venture Partners) to recover operating costs and exploration
  and development expenditures. The remaining production sharing oil is shared
  65% by MOM and 35% by the Block 32 Contractor which is further shared 5% Yemen
  Oil Company (YOC)/95% Block 32 Contractor. These terms remain in
  place as long as proven recoverable reserves do not exceed 30 million barrels
  of oil (gross) or production of 25,000 Bopd.

Block S-1 (25% working interest) 
  The PSA provides MOM with a sliding scale royalty of 3%-10% based on daily oil
  production between 0-100,000 Bopd with the remaining revenue split between cost
  recovery oil and production sharing oil. Cost recovery oil is up to a maximum
  of 50% of after royalty revenue limited to operating costs and allocated recoverable
  exploration and development expenditures, as outlined in the PSA, to be utilized
  100% by the Block S-1 Contractor. The balance of the revenue is allocated to
  production sharing oil and is shared 65%-80% by MOM and 35%-20% by the Block
  S-1 Contractor (which is further shared 17.5% YOC/82.5% Block S-1 Contractor)
  based on the production level.

F-7

---

4. LONG-TERM DEBT

The Company has a Cdn$2,500,000 revolving loan facility and
  a Cdn$2,000,000 non-revolving acquisition/development facility with a Canadian
  chartered bank. The loan facilities bear interest at the banks Canadian
  prime rate plus three quarters of one percent and Canadian prime rate plus one
  percent, respectively, and are secured by a first floating charge debenture
  over all Canadian assets of the Company, a general assignment of book debts
  and certain negative pledges. At December 31, 2003 $nil (2002 - $nil) was drawn
  on these loan facilities.

5. SHARE CAPITAL

a) Authorized

The authorized share capital is 500,000,000 common shares with no par value.

b) Issued

|                                             | Number     |   |   |            |  
|-------------------------------------------- | ---------- | - | - | ---------- | -
|                                             | of shares  |   |   | Amount     |  
|                                             |            |   |   |            |  
|Balance, December 31, 2001                   | 51,244,801 |   | $ | 35,637,019 |  
|Future tax effect (c)                        | -          |   |   | (67,168    | )
|Share issue costs                            | -          |   |   | (309       | )
|Performance bonus expense paid in shares (d) | 250,000    |   |   | 73,631     |  
|                                             |            |   |   |            |  
|Balance, December 31, 2002                   | 51,494,801 |   |   | 35,643,173 |  
|Exercise of stock options (g)                | 985,000    |   |   | 216,700    |  
|Repurchase of share capital (e)              | (100,000   | ) |   | (41,267    | )
|Private placement net of issue costs (f)     | 1,363,637  |   |   | 2,053,005  |  
|Future tax effect of flow through shares (f) | -          |   |   | (875,775   | )
|                                             |            |   |   |            |  
|Balance, December 31, 2003                   | 53,743,438 |   | $ | 36,995,836 |  

c) In December 2001, the Company issued 519,000 flow through
  common shares in a private placement at Cdn$0.49 per share for net proceeds
  of US$155,797, subscribed by insiders of the Company. The terms of the flow
  through shares provide that the Company renounce Canadian tax deductions in
  the amount of Cdn$254,310 to the subscribers with the entire amount to be expended
  by the Company by December 31, 2002. As at December 31, 2002, the entire amount
  was spent. As described in Note 1, share capital is reduced and future income
  taxes are increased by the estimated amount of the future income taxes payable
  by the Company ($67,168) as a result of renouncing the expenditures to subscribers.

d) Pursuant to an employment contract and the Company meeting
  certain performance criteria, the Company issued 250,000 common shares to the
  President of the Company in 2002 recorded at market price at date of issue.

e) In March 2003, the Company repurchased 100,000 shares at
  Cdn$0.60 and cancelled the shares pursuant to a normal course issuer bid approved
  in December 2002. The normal course issuer bid terminated December 8, 2003.

f) In December 2003, the Company issued 1,363,637 flow through
  common shares in a private placement at Cdn$2.20 per share for net proceeds
  of US$2,053,005. Insiders of the Company subscribed for 65,000 shares. The terms
  of the flow through shares provide that the Company renounce Canadian tax deductions
  in the amount of Cdn$3,000,001 to the subscribers with the entire amount to
  be expended by the Company by December 31, 2004. As described in Note 1, share
  capital is reduced and future income taxes are increased by the estimated amount
  of the future income taxes payable by the Company ($875,775) as a result of
  renouncing the expenditures to subscribers.

F-8

---

g) Share purchase options

The Company adopted a new stock option plan in May 2003 (the
  Plan). The maximum number of common shares to be issued upon the
  exercise of options granted under the Plan is 7,103,580 common shares. All incentive
  stock options granted under the Plan will have a per-share exercise price not
  less than the trading market value of the common shares at the date of grant
  and will vest as to 50% of the options, six months after the grant date, and
  as to the remaining 50%, one year from the grant date.

|                                         | 2003      |  | 2002           |     
|---------------------------------------- | --------- |  | -------------- | ----
|                                         |           |  |                |     
|                                         | Number    |  | Weighted-      |     
|                                         | of        |  | Average        |     
|                                         | Options   |  | Exercise Price |     
|                                         |           |  |                |     
|Options outstanding at beginning of year | 3,624,500 |  | $              | 0.32
|Granted                                  | 120,000   |  |                | 0.47
|Exercised                                | 985,000   |  |                | 0.22
|Expired                                  | -         |  |                | -   
|                                         |           |  |                |     
|Options outstanding at end of year       | 2,759,500 |  | $              | 0.36
|                                         |           |  |                |     
|                                         |           |  |                |     
|Options exercisable at end of year       | 2,639,500 |  | $              | 0.36

The following table summarizes information about the stock options outstanding
  at December 31, 2003:

|         |  | Options Outstanding |  | Options Exercisable | 
|-------- |  | ------------------- |  | ------------------- | 
|         |  |                     |  |                     | 
|         |  |                     |  | Weighted-           | 
|         |  | Number              |  | Average             | 
|Range of |  | Outstanding         |  | Remaining           | 
|Exercise |  | at Dec. 31,         |  | Contractual         | 
|Prices   |  | 2003                |  | Life                | 
|         |  |                     |  |                     | 
|$0.22    |  | 300,000             |  | 0.3                 | 
|Cdn0.45  |  | 20,000              |  | 0.8                 | 
|Cdn0.55  |  | 200,000             |  | 2.4                 | 
|Cdn0.39  |  | 40,000              |  | 2.8                 | 
|Cdn0.73  |  | 679,500             |  | 1.6                 | 
|Cdn0.50  |  | 1,400,000           |  | 3.3                 | 
|Cdn0.63  |  | 120,000             |  | 4.5                 | 
|         |  |                     |  |                     | 
|         |  | 2,759,500           |  | 2.5                 | 

h) Stock-based compensation

The Company accounts for its stock-based compensation plan
  using the intrinsic-value of the options granted whereby no costs have been
  recognized in the financial statements for stock options granted to employees
  and directors at market values. Effective January 1, 2002 under Canadian generally
  accepted accounting principles, the impact of using the fair value method on
  compensation costs and recorded net earnings must be disclosed. If the fair
  value method had been used, the Companys net earnings per share would
  approximate the following pro forma amounts (the pro forma amounts shown do
  not include the compensation costs associated with stock options granted prior
  to January 1, 2002):

F-9

---

|                      |                     | 2003      |           | 2002 |          
|--------------------- | ------------------- | --------- | --------- | ---- | ---------
|                      |                     |           |           |      |          
|Compensation costs    | $                   | 143,000   |           | $    | 140,000  
|Net income:           |                     |           |           |      |          
|As reported           |                     | 5,905,228 |           |      | 5,426,389
|Pro forma             |                     |           | 5,762,228 |      |          
|Net income per share: |                     |           |           |      |          
|As reported           | - Basic             | $         | 0.11      |      | $        
|                      | - Diluted           | $         | 0.11      |      | $        
|Pro forma             | - Basic and diluted | $         | 0.11      |      | $        

The fair value of each option granted on the date of grant
  using the Black-Scholes option-pricing model with weighted average assumptions
  for grants is as follows:

|                            | 2003  |  | 2002  | 
|--------------------------- | ----- |  | ----- | 
|                            |       |  |       | 
|Risk free interest rate (%) | 5.40  |  | 5.05  | 
|Expected lives (years)      | 2.50  |  | 5.00  | 
|Expected volatility (%)     | 97.01 |  | 66.35 | 
|Dividend per share          | 0.00  |  | 0.00  | 

The weighted average fair market value of stock options granted in 2003 was
  $0.19 per option (2002 - $0.18 per option).

6. INCOME TAXES

The Companys future Canadian income tax assets are as follows:

|                                   | 2003 |            | 2002 |  
|---------------------------------- | ---- | ---------- | ---- | -
|                                   |      |            |      |  
|Temporary differences related to:  |      |            |      |  
|Oil and gas properties             | $    | 2,142,233  |      | $
|Non-capital losses carried forward |      | 964,781    |      |  
|Share issue expenses               |      | 106,939    |      |  
|Valuation allowance                |      | (1,641,643 | )    |  
|                                   |      |            |      |  
|                                   | $    | 1,572,310  |      | $

The Company has deductible temporary differences of approximately
  Cdn$3,240,000 of non-capital losses carried forward and Cdn$7,552,000 of income
  tax pools in excess of the carrying value of the Companys Canadian property
  and equipment. The Company also has $12,700,000 of income tax losses in the
  United States of America. The Canadian losses carried forward expire between
  2006 and 2011 and the United States of America losses carried forward expire
  between 2006 and 2020. In total, these temporary differences would generate
  a future income tax asset of Cdn$4,166,891 on Canadian operations. A valuation
  allowance of Cdn$2,128,391 has been recorded to reduce this amount to the amount
  which is considered to be more likely than not to be recovered.

Current income taxes in the amount of $2,755,067 (2002 - $986,862)
  represents income taxes incurred and paid under the laws of the Republic of
  Yemen.

F-10

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The provision for income taxes has been computed as follows:

|                                                                        | 2003 |            | 2002 |  
|----------------------------------------------------------------------- | ---- | ---------- | ---- | -
|                                                                        |      |            |      |  
|Computed Canadian expected income tax expense at 40.62% (2002 - 42.15%) | $    | 2,523,400  |      | $
|Non-deductible Crown charges (net of ARTC)                              |      | 95,773     |      |  
|Resource allowance                                                      |      | (61,471    | )    |  
|Different tax rates in the Republic of Yemen                            |      | 327,559    |      |  
|Future income tax assets and recovery                                   |      | (2,448,085 | )    |  
|Other differences                                                       |      | (130,194   | )    |  
|                                                                        |      |            |      |  
|                                                                        | $    | 306,982    |      | $

7. SUPPLEMENTAL CASH FLOW INFORMATION

|                                           | 2003 |           | 2002 |  
|------------------------------------------ | ---- | --------- | ---- | -
|                                           |      |           |      |  
|Operating activities                       |      |           |      |  
|Decrease (increase) in current assets      |      |           |      |  
|Accounts receivable                        | $    | 1,335,741 |      | $
|Prepaid expenses                           |      | (72,174   | )    |  
|Increase (decrease) in current liabilities |      |           |      |  
|Accounts payable                           |      | 1,853,831 |      |  
|                                           |      |           |      |  
|                                           | $    | 3,117,398 |      | $
|                                           |      |           |      |  
|Investing activities                       |      |           |      |  
|Decrease (increase) in current assets      |      |           |      |  
|Accounts receivable                        | $    | (735,200  | )    | $
|                                           |      |           |      |  
|Increase (decrease) in current liabilities |      |           |      |  
|Accounts payable                           |      | 1,685,947 |      |  
|                                           |      |           |      |  
|                                           | $    | 950,747   |      | $
|                                           |      |           |      |  
|Interest paid                              | $    | 1,173     |      | $
|                                           |      |           |      |  
|Taxes paid                                 | $    | 2,755,067 |      | $

8. NET INCOME PER SHARE

|                                                    | 2003 |            | 2002 |  
|--------------------------------------------------- | ---- | ---------- | ---- | -
|                                                    |      |            |      |  
|Basic                                               |      |            |      |  
|Net income per share                                | $    | 0.11       |      | $
|Weighted average number of shares outstanding       |      | 52,070,638 |      |  
|                                                    |      |            |      |  
|Diluted                                             |      |            |      |  
|Net income per share                                | $    | 0.11       |      | $
|Weighted average number of shares
      outstanding |      | 53,779,217 |      |  

F-11

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9. SEGMENTED INFORMATION

In 2003 the Company operated in two geographic segments, the
  Republic of Yemen and Canada. The property and equipment in each geographic
  segment are disclosed in Notes 2 and 3.

The results of operations for the year ended December 31,
  2003 are comprised of the following:

|                                                                | Republic of Yemen |            | Canada |   | Total     | 
|--------------------------------------------------------------- | ----------------- | ---------- | ------ | - | --------- | 
|                                                                |                   |            |        |   |           | 
|REVENUE                                                         |                   |            |        |   |           | 
|Oil and gas sales, net of royalties                             | $                 | 14,624,888 |        | $ | 2,536,822 | 
|                                                                |                   |            |        |   |           | 
|EXPENSES                                                        |                   |            |        |   |           | 
|Operating                                                       |                   | 3,011,620  |        |   | 694,476   | 
|Depletion and depreciation                                      |                   | 5,516,000  |        |   | 737,000   | 
|                                                                |                   |            |        |   |           | 
|Segmented operations                                            | $                 | 6,097,268  |        | $ | 1,105,346 | 
|Other income, includes a gain on sale of property               |                   |            |        |   |           | 
|and equipment in the United States
      of America of $363,142 |                   |            |        |   |           | 
|                                                                |                   |            |        |   |           | 
|                                                                |                   |            |        |   |           | 
|General and administrative                                      |                   |            |        |   |           | 
|Foreign exchange (gain) loss                                    |                   |            |        |   |           | 
|Interest                                                        |                   |            |        |   |           | 
|Income taxes (Note 6)                                           |                   |            |        |   |           | 
|                                                                |                   |            |        |   |           | 
|                                                                |                   |            |        |   |           | 
|NET INCOME                                                      |                   |            |        |   |           | 

In the Republic of Yemen, the Company sells all of its production
  to one purchaser.

The results of operations for the year ended December 31,
  2002 are comprised of the following:

|                                    |   | Republic of Yemen |  |   | Canada    |  |   | Total      |  
|----------------------------------- | - | ----------------- |  | - | --------- |  | - | ---------- | -
|                                    |   |                   |  |   |           |  |   |            |  
|REVENUE                             |   |                   |  |   |           |  |   |            |  
|Oil and gas sales, net of royalties | $ | 12,238,711        |  | $ | 1,015,394 |  | $ | 13,254,105 |  
|                                    |   |                   |  |   |           |  |   |            |  
|EXPENSES                            |   |                   |  |   |           |  |   |            |  
|Operating                           |   | 1,394,379         |  |   | 448,894   |  |   | 1,843,273  |  
|Depletion and depreciation          |   | 3,960,000         |  |   | 317,000   |  |   | 4,277,000  |  
|                                    |   |                   |  |   |           |  |   |            |  
|Segmented operations                | $ | 6,884,332         |  | $ | 249,500   |  |   | 7,133,832  |  
|Other income                        |   |                   |  |   |           |  |   | 42,108     |  
|                                    |   |                   |  |   |           |  |   |            |  
|                                    |   |                   |  |   |           |  |   | 7,175,940  |  
|General and administrative          |   |                   |  |   |           |  |   | 820,691    |  
|Foreign exchange (gain) loss        |   |                   |  |   |           |  |   | (6,988     | )
|Interest                            |   |                   |  |   |           |  |   | 16,154     |  
|Income taxes (Note 6)               |   |                   |  |   |           |  |   | 919,694    |  
|                                    |   |                   |  |   |           |  |   |            |  
|NET INCOME                          |   |                   |  |   |           |  | $ | 5,426,389  |  

In the Republic of Yemen, the Company sells all of its production to one purchaser.

F-12

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10. COMMITMENTS AND CONTINGENCIES

The Company is committed to office and equipment leases over the next five
  years as follows:

|2004 | 142,000 |  | 
|---- | ------- |  | 
|2005 | 142,000 |  | 
|2006 | 143,000 |  | 
|2007 | 48,000  |  | 

11. FINANCIAL INSTRUMENTS

Carrying values of financial instruments, which include accounts
  receivable, accounts payable and accrued liabilities approximate their fair
  value due to the short-term or the floating interest rate nature of these amounts.

The Company has foreign exchange risk due to the fact that
  it operates internationally using foreign currencies. The Company has commodity
  price risk associated with its sale of crude oil and natural gas.

The majority of the accounts receivable are in respect of
  oil and gas operations. The Company generally extends unsecured credit to these
  customers and therefore the collection of accounts receivable may be affected
  by changes in economic or other conditions. Management believes the risk is
  mitigated by the size and reputation of the companies to which they extend credit.
  The Company has not experienced any material credit loss in the collection of
  accounts receivable to date.

12. COMPARATIVE FIGURES

Certain of the prior periods comparative figures have
  been reclassified to conform with the current periods presentation.

13. SUBSEQUENT EVENT

Subsequent to December 31, 2003, the Company entered into
  a contract to sell 1,500 gigajoules (GJ) per day of natural gas in Canada from
  April 1 to October 31, 2004 for Cdn$5.795/GJ.

14. DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING
  PRINCIPLES IN CANADA AND THE UNITED STATES OF AMERICA

The consolidated financial statements have been prepared in
  accordance with Canadian generally accepted accounting principles (Canadian
  GAAP or Cdn. GAAP) which differ in certain material respects from those principles
  that the Company would have followed had its consolidated financial statements
  been prepared in accordance with United States of America generally accepted
  accounting principles (U.S. GAAP).

Escrowed shares 
  For U.S. GAAP purposes, escrowed shares would be considered a separate compensatory
  arrangement between the Company and the holder of the shares. Accordingly, the
  fair market value of shares at the time the shares are released from escrow
  will be recognized as a charge to income in that year with a corresponding increase
  in share capital. The difference in share capital between Canadian GAAP and
  U.S. GAAP represents the effect of applying this provision in 1995 when 187,500
  escrow shares were released resulting in an increase in share capital of $833,333
  with the offset to deficit.

F-13

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Stock-based compensation 
  The Company has a stock-based compensation plan as more fully described in Note
  5. With regard to its stock option plan, the Company applies APB Opinion No.
  25 as interpreted by FASB Interpretation No. 44 in accounting for this plan
  and accordingly no compensation cost has been recognized. Had compensation expense
  been determined based on fair value at the grant dates for the stock option
  grants consistent with the method under SFAS No. 123, the proforma effect on
  the Companys net income would be as follows:

|                      |                     | 2003    |           | 2002 |        
|--------------------- | ------------------- | ------- | --------- | ---- | -------
|                      |                     |         |           |      |        
|Compensation costs    | $                   | 143,000 |           | $    | 140,000
|Net income:           |                     |         |           |      |        
|As reported           |                     |         | 5,905,228 |      |        
|Pro forma             |                     |         | 5,762,228 |      |        
|Net income per share: |                     |         |           |      |        
|As reported           | - Basic             | $       | 0.11      |      | $      
|                      | - Diluted           | $       | 0.11      |      | $      
|Pro forma             | - Basic and diluted | $       | 0.11      |      | $      

The foregoing information is calculated in accordance with the Black-Scholes
  option-pricing model, using the following data and assumptions:

|                            | 2003  |  | 2002  | 
|--------------------------- | ----- |  | ----- | 
|                            |       |  |       | 
|Risk free interest rate (%) | 5.40  |  | 5.05  | 
|Expected lives (years)      | 2.50  |  | 5.00  | 
|Expected volatility (%)     | 97.01 |  | 66.35 | 
|Dividend per share          | 0.00  |  | 0.00  | 

Flow through shares 
  The Company records the renouncement of tax deductions related to flow through
  shares by reducing the share capital and recording a future tax liability in
  the amount of the estimated cost of the tax deductions flowed to the shareholders.
  United States of America accounting principles require that the share capital
  on flow through shares be stated at the quoted market value of the shares at
  the date of issuance. In addition, the temporary difference that arises as a
  result of the renouncement of the deductions, less any proceeds received in
  excess of the quoted market value of the shares is recognized in the determination
  of income tax expense for the period. The effect of applying this provision
  to the Companys financial statements would result in an increase in income
  tax expense and future tax liability by $875,775 in 2003, $67,168 in 2002 and
  $335,020 in 2000 representing the tax effect of the flow through shares and
  a corresponding decrease to income tax expense and future tax liability by $875,775
  in 2003, $67,168 in 2002 and $335,020 in 2000 to record the recognition of the
  benefit of tax losses available to the Company equal to the liability arising
  from renouncing tax pools to the subscribers.

Asset retirement obligations 
  In 2001, the FASB approved Statements of Financial Accounting Standards No.
  143, Accounting for Asset Retirement Obligations (SFAS 143) for US GAAP reporting
  purposes effective for fiscal years beginning after June 15, 2002. SFAS 143
  requires recognition of a liability for the future retirement obligations associated
  with our property, plant and equipment, which includes oil and gas wells and
  facilities. These obligations, which generally relate to dismantlement and site
  restoration, are initially measured at fair value, which is the discounted future
  value of the liability. This fair value is capitalized as part of the cost of
  the related asset and amortized to expense over its useful life. The liability
  accretes until we expect to settle the retirement obligation.

F-14

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Had this change in accounting policy been adopted the effect
  would be to recognize an asset retirement liability of $467,399, eliminate the
  provision for site restoration and abandonment liability of $153,209, increase
  property and equipment net of accumulated depletion and depreciation by $386,353,
  increase deficit by $72,163 and reduce net income by $81,046 (increase in depletion
  and depreciation expense of $32,384 and accretion expense of $48,662).

Consolidated balance sheets 
  Had the Company followed US GAAP, asset and liability sections of the balance
  sheet would have been reported as follows:

|                                               | 2003      |           | 2002      |  
|---------------------------------------------- | --------- | --------- | --------- | -
|                                               |           |           |           |  
|                                               | Cdn. GAAP |           | U.S. GAAP |  
|                                               |           |           |           |  
|Property and equipment - Canada                | $         | 8,083,428 |           | $
|Asset retirement obligation                    |           | -         |           |  
|Provision for site restoration and abandonment |           | 153,209   |           |  

Had the Company followed U.S. GAAP, the shareholders equity would have
  been reported as follows:

|              | 2003      |            | 2002      |  
|------------- | --------- | ---------- | --------- | -
|              |           |            |           |  
|              | Cdn. GAAP |            | U.S. GAAP |  
|              |           |            |           |  
|Share capital | $         | 36,995,836 |           | $
|deficit       |           | (6,393,081 | )         |  
|              |           |            |           |  
|              | $         | 30,602,755 |           | $

The reconciling items between share capital and deficit for
  Canadian and United States of America GAAP are $833,333 related to escrowed
  shares, $1,277,963 related to flow through shares and $81,046 related to depletion
  and depreciation expense and accretion expense affecting deficit only, as described
  above. There are no other balance sheet differences.

Consolidated statements of income 
  Had the Company followed U.S. GAAP, the statement of income would have been
  reported as follows:

|                                            |           | 2003 |           | 2002 |  
|------------------------------------------- | --------- | ---- | --------- | ---- | -
|                                            |           |      |           |      |  
|Net income for the year under Canadian GAAP |           | $    | 5,905,228 |      | $
|Adjustments, before income taxes:           |           |      |           |      |  
|Depletion and depreciation expense          |           |      | 32,384    |      |  
|Accretion expense                           |           |      | 48,662    |      |  
|Future income tax expense                   |           |      | 875,775   |      |  
|Income taxes on the above items             |           |      | -         |      |  
|                                            |           |      |           |      |  
|Net income for the year under U.S. GAAP     |           | $    | 4,948,407 |      | $
|                                            |           |      |           |      |  
|Net income per share under U.S. GAAP        | - Basic   | $    | 0.10      |      | $
|                                            | - Diluted | $    | 0.09      |      | $

F-15

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Cash flows 
  Under Canadian GAAP, reporting entities are permitted to present a sub-total
  prior to changes in non-cash working capital within operating activities. This
  information is perceived to be useful information for various users of the financial
  statements and is commonly presented by Canadian public companies. Under U.S.
  GAAP, this sub-total is not permitted to be shown and would be removed in the
  statements of cash flows for all periods presented.

Recent accounting pronouncements

The following standards issued by the FASB do not impact us:

- Interpretation No. 46, Consolidation of Variable
      Interest Entities, effective for financial statements issued after
      January 31, 2003.
- SFAS No. 150, Accounting for Certain Financial
      Instruments with Characteristics of both Liabilities and Equity, effective
      for financial statements issued after June 15, 2003.
- SFAS No. 132 (revised 2003), Employers Disclosures
      about Pensions and Other Post Retirements Benefits - an amendment of SFAS
      No. 87, 88 and 106, effective for financial statements issued after
      December 15, 2003.
- SFAS No. 149, Amendment of Statement 133 on Derivative
      Instruments and Hedging Activities, effective for contracts entered
      into or modified after June 30, 2003.

F-16

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