---



Audited Consolidated Financial Statements as
  at December 31, 2004

---

Report of Independent Registered Chartered Accountants

To
  the Shareholders of TransGlobe Energy Corporation:

We
  have audited the consolidated balance sheets of TransGlobe Energy Corporation
  as at December 31, 2004 and 2003 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 Canadian generally accepted auditing
  standards. 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, 2004 and 2003 and the results of its operations and its cash
  flows for the years then ended in accordance with Canadian generally accepted
  accounting principles.

The
  Company is not required to have, nor were we engaged to perform, an audit of
  its internal control over financial reporting. Our audit included consideration
  of internal control over financial reporting as a basis for designing audit
  procedures that are appropriate in the circumstances, but not for the purpose
  of expressing an opinion on the effectiveness of the Company’s internal
  control over financial reporting. Accordingly we express no such opinion.




COMMENTS
  BY AUDITORS ON CANADA-UNITED STATES OF AMERICA REPORTING DIFFERENCES

The standards of the Public Company Accounting Oversight Board (United States)
  require the addition of an explanatory paragraph (following the opinion paragraph)
  when there are changes in accounting principles that have a material effect
  on the comparability of the Company’s financial statements, such as the
  changes described in Note 2 to the consolidated financial statements. Our report
  to the board of directors and shareholders on the consolidated financial statements
  of TransGlobe Energy Corporation dated February 18, 2005, is expressed in accordance
  with Canadian reporting standards which do not require a reference to such changes
  in accounting principles in the auditors’ report when the change is properly
  accounted for and adequately disclosed in the financial statements.






---

Consolidated Statements of Income and Deficit

|(Expressed in thousands of U.S. Dollars)                  |   | Year Ended        |   |   | Year Ended        |  
|--------------------------------------------------------- | - | ----------------- | - | - | ----------------- | -
|                                                          |   | December 31, 2004 |   |   | December 31, 2003 |  
|                                                          |   |                   |   |   | (Restated Note 2) |  
|                                                          |   |                   |   |   |                   |  
|REVENUE                                                   |   |                   |   |   |                   |  
|Oil and gas sales, net of
      royalties                 | $ | 31,630            |   | $ | 17,162            |  
|Other income                                              |   | 13                |   |   | 374               |  
|                                                          |   | 31,643            |   |   | 17,536            |  
|                                                          |   |                   |   |   |                   |  
|EXPENSES                                                  |   |                   |   |   |                   |  
|Operating                                                 |   | 7,064             |   |   | 3,706             |  
|General and administrative                                |   | 1,664             |   |   | 1,207             |  
|Stock-based compensation
      (Note 8g)                  |   | 1,310             |   |   | -                 |  
|Foreign exchange loss                                     |   | 289               |   |   | 157               |  
|Interest                                                  |   | 56                |   |   | 1                 |  
|Depletion, depreciation and accretion                     |   | 10,346            |   |   | 6,253             |  
|                                                          |   | 20,729            |   |   | 11,324            |  
|                                                          |   |                   |   |   |                   |  
|Income before income taxes                                |   | 10,914            |   |   | 6,212             |  
|                                                          |   |                   |   |   |                   |  
|Income taxes (Note 9)                                     |   |                   |   |   |                   |  
|- future                                                  |   | (285              | ) |   | (2,448            | )
|- current                                                 |   | 5,280             |   |   | 2,755             |  
|                                                          |   | 4,995             |   |   | 307               |  
|NET INCOME                                                |   | 5,919             |   |   | 5,905             |  
|                                                          |   |                   |   |   |                   |  
|Deficit, beginning of year                                |   | (6,393            | ) |   | (12,298           | )
|Retroactive application of changes in accounting policies |   |                   |   |   |                   |  
|applied with restatement (Note 2a)                        |   | 72                |   |   | 72                |  
|                                                          |   |                   |   |   |                   |  
|Deficit, beginning of year, as restated                   |   | (6,321            | ) |   | (12,226           | )
|Retroactive application of changes in accounting policies |   |                   |   |   |                   |  
|applied without restatement (Note 2d)                     |   | (283              | ) |   | -                 |  
|Deficit, end of year                                      | $ | (685              | ) | $ | (6,321            | )
|                                                          |   |                   |   |   |                   |  
|Net income per share(Note 11)                             |   |                   |   |   |                   |  
|Basic                                                     | $ | 0.11              |   | $ | 0.11              |  
|Diluted                                                   | $ | 0.10              |   | $ | 0.11              |  

---

Consolidated Balance Sheets

|(Expressed in thousands of U.S. Dollars)       |   | December 31, 2004 |   |   | December 31, 2003 |  
|---------------------------------------------- | - | ----------------- | - | - | ----------------- | -
|                                               |   |                   |   |   | (Restated Note 2) |  
|ASSETS                                         |   |                   |   |   |                   |  
|Current                                        |   |                   |   |   |                   |  
|Cash and cash equivalents                      | $ | 4,988             |   | $ | 4,452             |  
|Accounts receivable                            |   | 6,029             |   |   | 2,383             |  
|Oil inventory                                  |   | 389               |   |   | -                 |  
|Prepaid expenses                               |   | 274               |   |   | 161               |  
|                                               |   | 11,680            |   |   | 6,996             |  
|Property and equipment                         |   |                   |   |   |                   |  
|Republic of Yemen (Note 3)                     |   | 26,054            |   |   | 18,563            |  
|Canada (Note 4)                                |   | 19,111            |   |   | 8,470             |  
|Arab
      Republic of Egypt (Note 5)          |   | 992               |   |   | -                 |  
|                                               |   | 46,157            |   |   | 27,033            |  
|Future income tax asset (Note 9)               |   | 2,299             |   |   | 1,572             |  
|Deferred financing costs (Note 6)              |   | 386               |   |   | -                 |  
|                                               | $ | 60,522            |   | $ | 35,601            |  
|                                               |   |                   |   |   |                   |  
|LIABILITIES                                    |   |                   |   |   |                   |  
|Current                                        |   |                   |   |   |                   |  
|Accounts payable and accrued
      liabilities | $ | 8,841             |   | $ | 4,459             |  
|                                               |   |                   |   |   |                   |  
|Asset retirement obligations (Note 7)          |   | 902               |   |   | 467               |  
|                                               |   | 9,743             |   |   | 4,926             |  
|                                               |   |                   |   |   |                   |  
|Commitments and Contingencies (Note 13)        |   |                   |   |   |                   |  
|                                               |   |                   |   |   |                   |  
|SHAREHOLDERS’ EQUITY                           |   |                   |   |   |                   |  
|Share capital (Note 8)                         |   | 47,296            |   |   | 36,996            |  
|Contributed surplus (Note 2d)                  |   | 1,593             |   |   | -                 |  
|Cumulative translation adjustment (Note 2e)    |   | 2,575             |   |   | -                 |  
|Deficit                                        |   | (685              | ) |   | (6,321            | )
|                                               |   | 50,779            |   |   | 30,675            |  
|                                               |   |                   |   |   |                   |  
|                                               | $ | 60,522            |   | $ | 35,601            |  

APPROVED BY THE BOARD




---

Consolidated Statements of Cash Flows

|(Expressed in thousands of U.S. Dollars)             |   | Year Ended        |   |   | Year Ended         |  
|---------------------------------------------------- | - | ----------------- | - | - | ------------------ | -
|                                                     |   | December 31, 2004 |   |   | Decem ber 31, 2003 |  
|                                                     |   |                   |   |   | (Restated Note 2)  |  
|CASH FLOWS RELATED TO THE                            |   |                   |   |   |                    |  
|FOLLOWING ACTIVITIES:                                |   |                   |   |   |                    |  
|                                                     |   |                   |   |   |                    |  
|OPERATING                                            |   |                   |   |   |                    |  
|Net income                                           | $ | 5,919             |   | $ | 5,905              |  
|Adjustments for:                                     |   |                   |   |   |                    |  
|Depletion, depreciation and accretion                |   | 10,346            |   |   | 6,253              |  
|Gain on sale of property and equipment               |   | -                 |   |   | (363               | )
|Amortization of deferred financing costs (Note 6)    |   | 35                |   |   | -                  |  
|Future income taxes                                  |   | (285              | ) |   | (2,448             | )
|Stock-based
      compensation                       |   | 1,310             |   |   | -                  |  
|Cash flow from operations                            |   | 17,325            |   |   | 9,347              |  
|Changes in non-cash working capital (Note
      10)  |   | (4,259            | ) |   | 3,117              |  
|                                                     |   | 13,066            |   |   | 12,464             |  
|                                                     |   |                   |   |   |                    |  
|FINANCING                                            |   |                   |   |   |                    |  
|Issue of share capital (Note
      8)                |   | 10,006            |   |   | 2,270              |  
|Repurchase of share capital                          |   | -                 |   |   | (41                | )
|Deferred financing costs
      (Note 6)              |   | (421              | ) |   | -                  |  
|Changes in non-cash working capital (Note
      10)  |   | 24                |   |   | -                  |  
|                                                     |   | 9,609             |   |   | 2,229              |  
|                                                     |   |                   |   |   |                    |  
|INVESTING                                            |   |                   |   |   |                    |  
|Exploration and development
      expenditures       |   |                   |   |   |                    |  
|Republic of Yemen                                    |   | (15,275           | ) |   | (9,012             | )
|Canada                                               |   | (10,100           | ) |   | (5,217             | )
|Arab Republic of Egypt                               |   | (992              | ) |   | -00                |  
|Proceeds on disposal of
      property and equipment |   | -                 |   |   | 442                |  
|Changes in non-cash working capital (Note
      10)  |   | 4,678             |   |   | 951                |  
|                                                     |   | (21,689           | ) |   | (12,836            | )
|                                                     |   |                   |   |   |                    |  
|Effect of exchange rate changes on cash and          |   |                   |   |   |                    |  
|cash equivalents                                     |   | (450              | ) |   | -                  |  
|                                                     |   |                   |   |   |                    |  
|NET INCREASE IN CASH AND CASH EQUIVALENTS            |   | 536               |   |   | 1,857              |  
|                                                     |   |                   |   |   |                    |  
|CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR         |   | 4,452             |   |   | 2,595              |  
|                                                     |   |                   |   |   |                    |  
|CASH AND CASH EQUIVALENTS, END OF YEAR               | $ | 4,988             |   | $ | 4,452              |  

---

Notes to the Consolidated Financial Statements

Years Ended December 31, 2004 and December 31, 2003
  (Expressed in U.S. Dollars, unless otherwise stated)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The
  Consolidated Financial Statements include the accounts of TransGlobe Energy
  Corporation and subsidiaries (“TransGlobe” or the “Company”),
  and are presented in accordance with Canadian generally accepted accounting
  principles (information prepared in accordance with generally accepted accounting
  principles in the United States is included in Note 15). In these Consolidated
  Financial Statements, unless otherwise indicated, all dollar amounts are expressed
  in United States (U.S.) dollars. All references to US$ or to $ are to
  United States dollars and references to C$ are to Canadian dollars.

Nature
  of Business and Principles of Consolidation                The
  Company is engaged primarily in oil and gas exploration, development and production
  and the acquisition of properties. Such activities are concentrated in three
  geographic areas:

| | • | Block 32 and Block S-1 within the Republic of Yemen; 
| | - | -----------------------------------------------------
| | • | Nuqra Block 1 within the Arab Republic of Egypt; and 
| | • | the Western Canadian Sedimentary Basin within Canada.

Joint
  Ventures
                  Investments
  in unincorporated joint ventures are accounted for using the proportionate consolidation
  method, whereby the Company’s proportionate share of revenues, expenses,
  assets and liabilities are included in the accounts.

Currency
  Translation
                  The
  accounts of the self-sustaining Canadian operations are translated using the
  current rate method, whereby assets and liabilities are translated at year end
  exchange rates, while revenues and expenses are translated using average annual
  rates. Translation gains and losses relating to the self-sustaining Canadian
  operations are included as a separate component of shareholders’ equity.

Monetary
  assets and liabilities of the Company that are denominated in foreign currencies
  are translated into its functional currency at the rates of exchange in effect
  at the period end date. Any gains or losses are recorded in the Consolidated
  Statements of Income and Deficit.

Measurement
  Uncertainty
                  Timely
  preparation of the financial statements in conformity with Canadian generally
  accepted accounting principles requires that Management make estimates and assumptions
  and use judgment regarding assets, liabilities, revenues and expenses. Such
  estimates primarily relate to unsettled transactions and events as of the date
  of the financial statements. Accordingly, actual results may differ from estimated
  amounts as future confirming events occur.

Amounts
  recorded for depreciation, depletion and amortization, asset retirement costs
  and obligations, future income taxes, and amounts used for ceiling test and
  impairment calculations are based on estimates of oil and natural gas reserves
  and future costs required to develop those reserves. By their nature, these
  estimates of reserves and the related future cash flows are subject to measurement
  uncertainty, and the impact on the financial statements of future periods could
  be material.

---

Revenue
  Recognition
                  Revenues
  associated with the sales of the Company’s crude oil, natural gas and
  natural gas liquids owned by the Company are recognized when title passes from
  the Company to its customer. Crude oil and natural gas produced and sold by
  the Company below or above its working interest share in the related resource
  properties results in production underliftings or overliftings. Underliftings
  are recorded as inventory and overliftings are recorded as deferred revenue.

Income
  Taxes
                  The
  Company records income taxes using the liability method. Under this method,
  future income tax assets and liabilities are measured using the substantively
  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 for the income tax amount related
  to the renounced deductions.

Per
  Share Amounts
                  Basic
  net income per share is calculated using the weighted average number of shares
  outstanding during the year. Diluted net income per share is calculated by giving
  effect to the potential dilution that would occur if stock options were exercised.
  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.

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.

Inventories
                  Product
  inventories are valued at the lower of average cost and net realizable value
  on a first-in, first-out basis.

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, production equipment and overhead charges directly related to acquisition,
  exploration and development activities.

Capitalized
  costs within each country are depleted and depreciated on the unit-of-production
  method based on the estimated gross proved reserves and determined by independent
  petroleum engineers. Oil and gas reserves and production are converted into
  equivalent units of 6,000 cubic feet of natural gas to one barrel of oil. Depletion
  and depreciation is calculated using the capitalized costs, including estimated
  asset retirement costs, plus the estimated future costs to be incurred in developing
  proved reserves, net of estimated salvage value.

Costs
  of acquiring and evaluating unproved properties and major development projects
  are initially excluded from the depletion and depreciation calculation until
  it is determined whether or not proved reserves can be assigned to such properties.
  Costs of unproved properties and major development projects are transferred
  to depletable costs based on the percentage of reserves assigned to each project
  over the expected total reserves when the project was initiated. These costs
  are assessed periodically to ascertain whether impairment has occurred.

---

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 a particular country,
  in which case a gain or loss on disposal is recorded.

An
  impairment loss is recognized in net income if the carrying amount of a country
  (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
  is the amount by which the carrying amount exceeds the sum of:

| | i.  | the fair value of proved plus probable reserves; and                                                                         
| | --- | -----------------------------------------------------------------------------------------------------------------------------
| | ii. | the costs of unproved properties that have been subject to a separate
      impairment test and contain no probable reserves.

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

Capitalization
  of Costs
                  Expenditures
  related to renewals or betterments that improve the productive capacity or extend
  the life of an asset are capitalized. Maintenance and repairs are expensed as
  incurred.

Amortization
  of Deferred Financing Costs
                  Deferred
  financing costs are charged to expense over the term of the related loan facility.

Asset
  Retirement Obligations
                  The
  fair value of estimated asset retirement obligations is recognized in the Consolidated
  Balance Sheet when the liability is incurred. Asset retirement obligations include
  those legal obligations where the Company will be required to retire tangible
  long-lived assets such as producing well sites. The asset retirement cost, equal
  to the estimated fair value of the asset retirement obligation, is capitalized
  as part of the cost of the related long-lived asset. Asset retirement costs
  for natural gas and crude oil assets are amortized using the unit-of-production
  method.

Amortization
  of asset retirement costs are included in depreciation, depletion and accretion
  on the Consolidated Statements of Income and Deficit. Increases in the asset
  retirement obligation resulting from the passage of time are recorded as depletion,
  depreciation and accretion in the Consolidated Statements of Income and Deficit.
  Actual expenditures incurred are charged against the accumulated obligation.

Stock-based
  Compensation
                  The
  Company records compensation expense in the Consolidated Financial Statements
  for stock options granted to employees and directors using the fair value method.
  Fair values are determined using the Black-Scholes option pricing model. Compensation
  costs are recognized over the vesting period.

2. CHANGES IN ACCOUNTING POLICIES AND PRACTICES

a)
  Asset Retirement Obligations
                  Effective
  January 1, 2004 the Company retroactively adopted the Canadian Institute of
  Chartered Accountants (“CICA”) section 3110, “Asset Retirement
  Obligations”. The new recommendations require the recognition of the fair
  value of obligations associated with the retirement of tangible long-lived assets
  be recorded in the period the asset is put into use, with a corresponding increase
  to the carrying amount of the related asset. The obligations recognized are
  statutory, contractual or legal obligations. The liability is accreted over
  time for changes in the fair value of the liability through charges to accretion
  expense which is included in depletion, depreciation and accretion expense.
  The costs capitalized to the related assets are amortized to earnings in a manner
  consistent with the depletion and depreciation of the underlying asset.

---

The
  Company previously estimated future site restoration costs based on current
  regulations, costs, technology and industry standards. The costs were recorded
  into income using the unit-of-production method and accumulated a liability
  on the Consolidated Balance Sheet. Upon adoption, all prior periods have been
  restated for the change in accounting policy. The impact was as follows:

Consolidated
  Balance Sheet - as at December 31, 2003

|(000’s)                                  | As Reported |   | Change |   | As Restated |  
|---------------------------------------- | ----------- | - | ------ | - | ----------- | -
|Assets                                   |             |   |        |   |             |  
|Net property and equipment               | $  26,646   |   | $  387 |   | $  27,033   |  
|Liabilities and shareholders’ equity     |             |   |        |   |             |  
|Asset retirement obligations             | -           |   | 467    |   | 467         |  
|Provision for site restoration
      and |             |   |        |   |             |  
|abandonment                              | 153         |   | (153   | ) | -           |  
|Deficit                                  | (6,393      | ) | 72     |   | (6,321      | )

Consolidated
  Statements of Income and Deficit

|                                      | Year ended December 31, 2003
|------------------------------------- | ----------------------------
|(000’s)                               | As Reported                 
|Depletion, depreciation and accretion | $  6,253                    
|Net income                            | 5,905                       

b)
  Property and Equipment
                  
  Effective January 1, 2004 the Company adopted Accounting Guideline 16, “Oil
  and Gas Accounting - Full Cost” (“AcG-16”), which replaces
  Accounting Guideline 5, “Full Cost Accounting in the Oil and Gas Industry”.
  AcG-16 modifies how the ceiling test is performed and is consistent with CICA
  section 3063, “Impairment of Long-lived Assets”. The recoverability
  of a cost centre is tested by comparing the carrying value of the cost centre
  to the sum of the undiscounted cash flows expected from the cost centre’s
  use and eventual disposition. If the carrying value is unrecoverable the cost
  centre is written down to its fair value. This approach incorporates risks and
  uncertainties in the expected future cash flows which are discounted using a
  risk free rate. The adoption of AcG-16 had no effect on the Company’s
  financial results.

c)
  Impairment of Long-lived Assets
                  
  Effective January 1, 2004 the Company adopted CICA section 3063, “Impairment
  of Long-lived Assets”, which had no effect on the consolidated financial
  statements.

d)
  Stock-based CompensationEffective January 1, 2004 the Company adopted the new accounting standard
  of CICA section 3870, “Stock-based Compensation and Other Stock-based
  Payments”, retroactively without restatement of prior periods. This Canadian
  accounting standard requires the Company to record a compensation expense over
  the vesting period based on the fair value of options granted to employees and
  directors since January 1, 2002.

This
  change resulted in an increase to opening deficit of $283,000, an increase
  to contributed surplus of $283,000 and a non-cash expense of $1,310,000
  in 2004.

---

e)
  Currency Translation
                  
  As a result of the increase in cash flow from Canadian operations, the Company
  reviewed its accounting practices for operations in Canada and determined that
  such operations are self-sustaining. The accounts of the self-sustaining Canadian
  operations are translated using the current rate method, whereby assets and
  liabilities are translated at period-end exchange rates, while revenues and
  expenses are translated using average rates for the period. Translation gains
  and losses relating to the operations are deferred and included as a separate
  component of shareholders’ equity.

Previously,
  Canadian operations were considered to be integrated and were translated using
  the temporal method. Under the temporal method, monetary assets and liabilities
  were translated at the period end exchange rate, other assets and liabilities
  at the historical rates and revenues and expenses at the average monthly rates
  except depreciation, depletion and amortization, which were translated on the
  same basis as the related assets.

This
  change in accounting practice was adopted prospectively beginning October 1,
  2004 and resulted in an increase in property and equipment of $1,885,000,
  future income tax asset of $43,000 and an increase in the asset retirement
  obligation of $87,000, all of which resulted in a net operating foreign
  currency translation adjustment of $1,841,000. For the period from October
  1, 2004 to December 31, 2004, the translation gain was $734,000 which was
  recorded to the foreign currency translation adjustment account.

f)
  Accounting for Derivate Instruments and Hedging Activities
                  
  The Canadian Institute of Chartered Accountants (“CICA”) modified
  Accounting Guideline 13 (“AcG 13”) “Hedging Relationships”,
  effective January 1, 2004, to clarify circumstances in which hedge accounting
  is appropriate. In addition, the CICA simultaneously amended EIC 128, “Accounting
  for Trading, Speculative or Non Trading Derivative Financial Instruments”
  to require that all derivative instruments that do not qualify as a hedge under
  AcG 13, or are not designated as a hedge, be recorded in the balance sheet as
  either an asset or liability with changes in fair value recognized in earnings.
  If a derivative financial instrument qualifies as a hedge under AcG 13 then
  the change in fair value of the financial instrument is recognized in earnings
  in the same period as the hedged item. AcG-13 has essentially the same criteria
  to be satisfied before the application of hedge accounting is permitted as the
  corresponding requirements of the Financial Accounting Standards Board (“FASB”)
  Statement No. 133. “Accounting for Derivative Instruments and Hedging
  Activities”(“FAS 133”).

The
  adoption of AcG-13 had no effect on the Company’s financial results.

3. PROPERTY AND EQUIPMENT - REPUBLIC OF YEMEN

|(000’s)                                |   | 2004    |   |   | 2003    |  
|-------------------------------------- | - | ------- | - | - | ------- | -
|Oil and gas properties                 |   |         |   |   |         |  
|- Block
      32                       | $ | 21,651  |   | $ | 17,954  |  
|- Block S-1                            |   | 24,782  |   |   | 12,650  |  
|- Other                                |   | 115     |   |   | 82      |  
|Accumulated depletion and depreciation |   | (20,494 | ) |   | (12,123 | )
|                                       | $ | 26,054  |   | $ | 18,563  |  

The
  Company commenced production on Block 32 in November 2000. The Production Sharing
  Agreement (“PSA”) continues to 2020, with provision for a five year
  extension. The Yemen Ministry of Oil and Minerals approved the Development Plan
  and Development Area for the Block S-1 PSA in October 2003 which will have a
  20 year term with provision for a five year extension. Major development project
  costs in the amount of $Nil in 2004 ($11,684,000 - 2003) 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 $301,000 (2003
  - $240,000).

---

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 production split between cost recovery oil and production sharing oil.
  Cost recovery oil is up to a maximum of 60% of 97% of the production 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 proved 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 production split between
  cost recovery oil and production sharing oil. Cost recovery oil is up to a maximum
  of 50% of after royalty production 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.

4. PROPERTY AND EQUIPMENT - CANADA

|(000’s)                                |   | 2004   |   |   | 2003   |  
|-------------------------------------- | - | ------ | - | - | ------ | -
|Oil and gas properties                 | $ | 23,444 |   | $ | 10,127 |  
|Furniture and fixtures                 |   | 366    |   |   | 250    |  
|Accumulated depletion and depreciation |   | (4,699 | ) |   | (1,907 | )
|                                       | $ | 19,111 |   | $ | 8,470  |  

During
  the year the Company capitalized overhead costs relating to exploration and
  development activities of $278,000 (2003 - $206,000).

5. PROPERTY AND EQUIPMENT - ARAB REPUBLIC OF EGYPT

|(000’s)                |   | 2004 |  |   | 2003 | 
|---------------------- | - | ---- |  | - | ---- | 
|Oil and gas properties | $ | 989  |  | $ | -    | 
|Furniture and fixtures |   | 3    |  |   | -    | 
|                       | $ | 992  |  | $ | -    | 

The
  Company capitalized general and administrative costs relating to the start-up
  of TransGlobe Petroleum Egypt Inc. of $448,000 (2003 - $Nil). The remaining
  costs related to geological and geophysical activity.

6. LONG-TERM DEBT

The
  Company has a $7,000,000 loan facility which expires May 2006. The loan
  facility bears interest at the Eurodollar Rate plus four percent and is secured
  by a first fl oating charge debenture over all assets of the Company, a general
  assignment of book debts and certain covenants, among other things. At December
  31, 2004 $Nil (2003 - $Nil) was drawn on these loan facilities.

---

During
  the year the Company spent $421,000 to secure the new loan facility, of
  which $35,000 has been amortized to the income statement and $386,000
  has been deferred and will be amortized to income over the initial term of the
  loan facility.

7. ASSET RETIREMENT OBLIGATIONS

The
  following table presents the reconciliation of the beginning and ending aggregate
  carrying amount of the obligation associated with the retirement of oil and
  gas properties:

|(000’s)                                         |   | 2004 |  |   | 2003 | 
|----------------------------------------------- | - | ---- |  | - | ---- | 
|Asset retirement obligations, beginning of year | $ | 467  |  | $ | 250  | 
|Liabilities incurred during period              |   | 274  |  |   | 200  | 
|Liabilities settled during period               |   | -    |  |   | -    | 
|Accretion                                       |   | 34   |  |   | 17   | 
|Foreign exchange loss                           |   | 127  |  |   | -    | 
|Asset retirement obligations, end of year       | $ | 902  |  | $ | 467  | 

At
  December 31, 2004, the estimated total undiscounted amount required to settle
  the asset retirement obligations was $1,331,000 (2003 - $792,000). These
  obligations will be settled at the end of the useful lives of the underlying
  assets, which currently extend up to 10 years into the future. This amount has
  been discounted using a credit-adjusted risk-free interest rate of 6.5% .

8. SHARE CAPITAL

a) 
  Authorized

The
  Company is authorized to issue an unlimited number of common shares with no
  par value.

b) 
  Issued

|                                                            | Number    |   |   |        |  
|----------------------------------------------------------- | --------- | - | - | ------ | -
|(000’s)                                                     | of shares |   |   | Amount |  
|Balance, December 31, 2002                                  | 51,495    |   | $ | 35,643 |  
|Exercise of stock options (f)                               | 985       |   |   | 217    |  
|Repurchase of share capital (c)                             | (100      | ) |   | (41    | )
|Private placement net of issue costs (d)                    | 1,363     |   |   | 2,053  |  
|Future tax effect of flow through shares (d)                | -         |   |   | (876   | )
|Balance, December 31, 2003                                  | 53,743    |   |   | 36,996 |  
|Exercise of stock options (f)                               | 523       |   |   | 164    |  
|Bought deal financing net of issue costs (e)                | 2,530     |   |   | 8,557  |  
|Bought deal financing over-allotment net of issue costs (e) | 380       |   |   | 1,285  |  
|Future tax effect of bought deal financing costs (e)        | -         |   |   | 294    |  
|Balance, December 31, 2004                                  | 57,176    |   | $ | 47,296 |  

c)
  In March 2003, the Company repurchased 100,000 shares at C$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.

---

d)
  In December 2003, the Company issued 1,363,637 flow through common shares in
  a private placement at C$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 C$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.

e)
  In November 2004, the Company issued 2,530,000 common shares in a bought deal
  financing at C$4.35 per share for net proceeds of US$8,557,000. In December
  2004, the Company issued an additional 379,500 shares as part of the over-allotment
  of the bought deal financing in November 2004 at C$4.35 per share for net
  proceeds of US$1,285,000. The issue costs were $848,686 for the bought
  deal financing and over-allotment. Share capital is increased and future income
  tax asset increased by the estimated future income taxes recoverable by the
  Company for the share issue expenses.

f)
  Stock Options
                  
  The Company adopted a new stock option plan in May 2004 (the “Plan”).
  The maximum number of common shares to be issued upon the exercise of options
  granted under the Plan is 5,718,000 common shares. All incentive stock options
  granted under the Plan have a per-share exercise price not less than the trading
  market value of the common shares at the date of grant and 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. Effective February 1, 2005, all new grants of stock
  options will vest one-third on each of the first, second and third anniversaries
  of the grant date.

|                                         | 2004    |   | 2003           | 
|---------------------------------------- | ------- | - | -------------- | 
|                                         | Number  |   | Weighted-      | 
|                                         | of      |   | Average        | 
|(000’s except per share amounts)         | Options |   | Exercise Price | 
|Options outstanding at beginning of year | 2,760   |   | $ 0.36         | 
|Granted                                  | 1,225   |   | $ 2.57         | 
|Exercised                                | (523    | ) | $ 0.28         | 
|Expired                                  | -       |   | -              | 
|                                         |         |   |                | 
|Options outstanding at end of year       | 3,462   |   | $ 1.15         | 
|                                         |         |   |                | 
|Options exercisable at end of year       | 2,787   |   | $ 0.79         | 

---

The
  following table summarizes information about the stock options outstanding at
  December 31, 2004:

|         | Options Outstanding |  | Options Exercisable | 
|-------- | ------------------- |  | ------------------- | 
|         | Number              |  | Weighted-           | 
|         | Out-                |  | Average             | 
|Range of | standing            |  | Remaining           | 
|Exercise | at Dec.31,          |  | Contractual         | 
|Prices   | 2004                |  | Life                | 
|         | (000’s)             |  |                     | 
|C$0.73   | 667                 |  | 0.6                 | 
|C$0.55   | 200                 |  | 1.4                 | 
|C$0.39   | 40                  |  | 1.8                 | 
|C$0.50   | 1,260               |  | 2.3                 | 
|C$0.63   | 70                  |  | 3.5                 | 
|C$3.40   | 150                 |  | 4.0                 | 
|C$3.26   | 870                 |  | 4.2                 | 
|C$3.43   | 80                  |  | 4.3                 | 
|US$3.25  | 100                 |  | 4.7                 | 
|C$4.50   | 25                  |  | 4.9                 | 
|         | 3,462               |  | 2.6                 | 

g)
  Stock-based Compensation
                  Effective
  January 1, 2004 and as described in Note 2, the Company adopted CICA section
  3870 retroactively without restatement whereby the fair value of all stock options
  granted after January 1, 2002 are estimated on the date of grant using the Black-Scholes
  option-pricing model. Compensation expense of $1,310,000 has been recorded
  in the Consolidated Statements of Income and Deficit in 2004 (2003 - $Nil).
  If the Company would have adopted CICA section 3870 retroactively with restatement,
  net income would have decreased $143,000 in 2003 to $5,762,000 and net
  income per share basic and diluted would be unchanged. The weighted average
  fair market value of stock options granted during the year and assumptions used
  in their determination are as noted below:

|                                                     | 2004  | 2003 
|---------------------------------------------------- | ----- | -----
|Weighted average fair market value per option (Cdn$) | 1.84  | 0.19 
|Risk free interest rate (%)                          | 5.17  | 5.40 
|Expected lives (years)                               | 4.00  | 2.50 
|Expected volatility (%)                              | 66.37 | 97.01
|Dividend per share                                   | 0.00  | 0.00 

Prior
  to January 1, 2004 the Company accounted 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 the date of grant.

---

9. INCOME TAXES

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

|(000’s)                                  |   | 2004  |   |   | 2003   |  
|---------------------------------------- | - | ----- | - | - | ------ | -
|Temporary differences related to:        |   |       |   |   |        |  
|Oil and gas properties                   | $ | 2,154 |   | $ | 2,142  |  
|Non-capital losses carried
      forward |   | 457   |   |   | 965    |  
|Share issue expenses                     |   | 287   |   |   | 107    |  
|Valuation allowance                      |   | (599  | ) |   | (1,642 | )
|                                         | $ | 2,299 |   | $ | 1,572  |  

The
  Company has deductible temporary differences of C$1,520,000 related to non-capital
  losses carried forward and C$7,344,000 related to 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 2007 and 2009
  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 C$3,483,000 on Canadian operations. A valuation allowance of
  C$720,000 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 $5,280,000 (2003 - $2,755,000) represents
  income taxes of $5,269,000 incurred and paid under the laws of the Republic
  of Yemen pursuant to the PSA on Block 32 and Block S-1 and $11,000 paid
  in Canada.

The
  provision for income taxes has been computed as follows:

|(000’s)                                            |   | 2004   |   |   | 2003   |  
|-------------------------------------------------- | - | ------ | - | - | ------ | -
|Computed Canadian expected income tax              |   |        |   |   |        |  
|expense
      at 38.87% (2003 - 40.62%)            | $ | 4,301  |   | $ | 2,523  |  
|Non-deductible Crown charges (net of ARTC)         |   | 261    |   |   | 96     |  
|Resource allowance                                 |   | (180   | ) |   | (62    | )
|Non-deductible stock-based compensation expense    |   | 509    |   |   | -      |  
|Different tax rates in the Republic of Yemen       |   | 945    |   |   | 328    |  
|Future income tax assets not previously recognized |   | (1,083 | ) |   | (2,448 | )
|Other differences                                  |   | 242    |   |   | (130   | )
|                                                   | $ | 4,995  |   | $ | 307    |  

---

10. SUPPLEMENTAL CASH FLOW INFORMATION

|(000’s)                                          |   | 2004   |   |   | 2003  |  
|------------------------------------------------ | - | ------ | - | - | ----- | -
|                                                 |   |        |   |   |       |  
|Operating activities                             |   |        |   |   |       |  
|Decrease (increase) in current
      assets      |   |        |   |   |       |  
|Accounts receivable                              | $ | (3,896 | ) | $ | 1,335 |  
|Prepaid expenses                                 |   | (113   | ) |   | (72   | )
|Oil inventory                                    |   | (180   | ) |   | -     |  
|Increase (decrease) in current
      liabilities |   |        |   |   |       |  
|Accounts
      payable                           |   | (70    | ) |   | 1,854 |  
|                                                 | $ | (4,259 | ) | $ | 3,117 |  
|                                                 |   |        |   |   |       |  
|Investing activities                             |   |        |   |   |       |  
|Decrease (increase) in current
      assets      |   |        |   |   |       |  
|Accounts receivable                              | $ | 250    |   | $ | (735  | )
|                                                 |   |        |   |   |       |  
|Increase (decrease) in current
      liabilities |   |        |   |   |       |  
|Accounts
      payable                           |   | 4,428  |   |   | 1,686 |  
|                                                 | $ | 4,678  |   | $ | 951   |  
|                                                 |   |        |   |   |       |  
|Financing activities                             |   |        |   |   |       |  
|Increase (decrease) in current
      liabilities |   |        |   |   |       |  
|Accounts
      payable                           | $ | 24     |   | $ | -     |  
|                                                 | $ | 24     |   | $ | -     |  
|                                                 |   |        |   |   |       |  
|Interest paid                                    | $ | 56     |   | $ | 1     |  
|                                                 |   |        |   |   |       |  
|Taxes paid                                       | $ | 5,280  |   | $ | 2,755 |  

11. NET INCOME PER SHARE

In
  calculating the net income per share basic and diluted, the following weighted
  average shares were used:

|(000’s)                                                     | 2004   |   | 2003   |  
|----------------------------------------------------------- | ------ | - | ------ | -
|Weighted average number of shares outstanding               | 54,388 |   | 52,071 |  
|Shares issuable pursuant to stock options                   | 3,445  |   | 3,066  |  
|Shares to be purchased from proceeds of stock options under |        |   |        |  
|treasury stock method                                       | (1,114 | ) | (1,358 | )
|Weighted average number of diluted shares outstanding       | 56,719 |   | 53,779 |  

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. In calculating the weighted average number of diluted
  common shares outstanding for the year ended December 31, 2004, we excluded
  125,000 options (2003 - nil) because their exercise price was greater than the
  annual average common share market price in this period.

---

12. SEGMENTED INFORMATION

In
  2004 the Company had oil and natural gas production in two geographic segments,
  the Republic of Yemen and Canada, and start-up operations in a third geographic
  segment, the Arab Republic of Egypt. The property and equipment in each geographic
  segment are disclosed in Notes 3, 4 and 5.

The
  results of operations for the year ended December 31, 2004 are comprised of
  the following:

|                                      | Republic of |  |         |  |         
|------------------------------------- | ----------- |  | ------- |  | --------
|(000’s)                               | Yemen       |  | Canada  |  | Total   
|REVENUE                               |             |  |         |  |         
|Oil and gas sales, net of royalties   | $ 24,966    |  | $ 6,664 |  | $ 31,630
|                                      |             |  |         |  |         
|EXPENSES                              |             |  |         |  |         
|Operating                             | 5,449       |  | 1,615   |  | 7,064   
|Depletion, depreciation and accretion | 8,162       |  | 2,184   |  | 10,346  
|Segmented operations                  | $ 11,355    |  | $ 2,865 |  | 14,220  
|Other income                          |             |  |         |  | 13      
|                                      |             |  |         |  | 14,233  
|General and administrative            |             |  |         |  | 1,664   
|Stock-based compensation              |             |  |         |  | 1,310   
|Foreign exchange loss                 |             |  |         |  | 289     
|Interest                              |             |  |         |  | 56      
|Income taxes (Note 9)                 |             |  |         |  | 4,995   
|NET INCOME                            |             |  |         |  | $  5,919

In
  the Republic of Yemen, the Company sold all of its 2004 Block 32 production
  to one purchaser and all of its 2004 Block S-1 production to another single
  purchaser. In Canada, the Company sold primarily all of its 2004 gas production
  to one purchaser and primarily all of its 2004 oil production to another single
  purchaser.

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

|                                                    | Republic of |  |         |  |          
|--------------------------------------------------- | ----------- |  | ------- |  | ---------
|(000’s)                                             | Yemen       |  | Canada  |  | Total    
|REVENUE                                             |             |  |         |  |          
|Oil and gas sales, net of royalties                 | $ 14,625    |  | $ 2,537 |  | $ 17,162 
|                                                    |             |  |         |  |          
|EXPENSES                                            |             |  |         |  |          
|Operating                                           | 3,012       |  | 694     |  | 3,706    
|Depletion, depreciation and accretion               | 5,516       |  | 737     |  | 6,253    
|Segmented operations                                | $ 6,097     |  | $ 1,106 |  | 7,203    
|Other income (includes a gain on sale of property   |             |  |         |  |          
|and
      equipment in the United States of America |             |  |         |  |          
|of
      $363,000)                                  |             |  |         |  | 374      
|                                                    |             |  |         |  | 7,577    
|General and administrative                          |             |  |         |  | 1,207    
|Foreign exchange loss                               |             |  |         |  | 157      
|Interest                                            |             |  |         |  | 1        
|Income taxes (Note 9)                               |             |  |         |  | 307      
|NET INCOME                                          |             |  |         |  | $   5,905

---

In
  the Republic of Yemen, the Company sold all of its 2003 production to one purchaser.
  In Canada, the Company sold primarily all of its 2003 gas production to one
  purchaser and primarily all of its 2003 oil production to another single purchaser.

13. COMMITMENTS AND CONTINGENCIES

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

|2005 | $    191,000
|---- | ------------
|2006 | 243,000     
|2007 | 235,000     
|2008 | 328,000     
|2009 | 348,000     

In
  2004, the Company entered into a one year fixed price contract to sell 10,000
  barrels of oil per month in Block 32, Yemen commencing July 1, 2004 at $33.90
  per barrel for Dated Brent plus or minus the Yemen Government’s official
  selling price differential.

Upon
  the determination that proved recoverable reserves are 40 million barrels or
  greater for Block S-1, Yemen, the Company will be required to pay a finders’
  fee to third parties in the amount of $281,000.

Pursuant
  to the Company’s farm-in agreement on the Nuqra Concession in Egypt, the
  Company is committed to spend $6 million over the next 5 years to earn its
  50% working interest. As part of this commitment the Company issued a $2
  million letter of credit on July 8, 2004 to Ganoub El Wadi Holding Petroleum
  Company which expires on February 14, 2007. This letter of credit is secured
  by a guarantee granted by Export Development Canada.

14. FINANCIAL INSTRUMENTS

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

The
  Company has foreign exchange risk due to the fact that it operates using other
  than United States currency. 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.

15. 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).

---

a)
  Full Cost AccountingThe full cost method accounting for crude oil and natural gas operations
  under Canadian and U.S. GAAP differ in the following respect. Under U.S. GAAP,
  a ceiling test is applied to ensure the unamortized capitalized costs in each
  cost centre do not exceed the sum of the present value, discounted at 10%, of
  the estimated unescalated future net operating revenue from proved reserves
  plus unimpaired unproved property costs less future development costs, related
  production costs and applicable taxes. Under Canadian GAAP, a similar ceiling
  test calculation is performed with the exception that cash flows from proved
  reserves are undiscounted and utilize forecasted pricing to determine whether
  impairment exists. However, in Canada, the impaired amount is measured using
  the fair value of reserves.

There
  are no impairment charges under Canadian GAAP or U.S. GAAP.

b)
  Stock-based Compensation
                  
  The Company has a stock-based compensation plan as more fully described in Note
  8. Under Canadian GAAP, compensation costs have been recognized in the financial
  statements for stock options granted to employees and directors since January
  1, 2002. For U.S. GAAP, the Company uses the intrinsic value method of accounting
  for stock options granted to employees and directors whereby no costs are recognised
  in the financial statements, per APB opinion No. 25 as interpreted by FASB Interpretation
  No. 44.

The
  effect of applying this provision to the Company’s U.S. GAAP financial
  statements results in a decrease to stock-based compensation in 2004 by $1,310,000
  and a corresponding decrease to the contributed surplus account. Also, the deficit
  would decrease by $283,000 in 2004 with a corresponding decrease to the
  contributed surplus account relating to the 2004 adoption entry for Canadian
  GAAP that is not required for U.S. GAAP.

Had
  compensation expense been determined based on fair value at the grant dates
  for the stock options grants consistent with the method under SFAS No. 123,
  the pro forma effect on the Company’s net income under U.S. GAAP would
  be as follows:

|(000’s except per share amounts) |   | 2004  |  |   | 2003  | 
|-------------------------------- | - | ----- |  | - | ----- | 
|Compensation costs               | $ | 1,310 |  | $ | 143   | 
|Net Income (U.S. GAAP)           |   |       |  |   |       | 
|As reported                      | $ | 7,229 |  | $ | 5,101 | 
|Pro forma                        | $ | 5,919 |  | $ | 4,958 | 
|                                 |   |       |  |   |       | 
|Net Income per share (U.S. GAAP) |   |       |  |   |       | 
|As reported                      |   |       |  |   |       | 
|- basic                          | $ | 0.13  |  | $ | 0.10  | 
|- diluted                        | $ | 0.13  |  | $ | 0.09  | 
|Pro forma                        |   |       |  |   |       | 
|- basic                          | $ | 0.11  |  | $ | 0.09  | 
|- diluted                        | $ | 0.10  |  | $ | 0.09  | 

c)
  Future Income TaxesThe Company records the renouncement of tax deductions related to flow
  through shares by reducing share capital and recording a future tax liability
  in the amount of the estimated cost of the tax deductions flowed to the shareholders.
  U.S. GAAP requires 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 $Nil in 2004, $876,000 in 2003, $67,000 in 2002 and
  $335,000 in 2000 representing the tax effect of the flow through shares
  and a corresponding increase to share capital and decrease to future tax liability
  by $Nil in 2004, $876,000 in 2003, $67,000 in 2002 and $335,000
  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.

---

Under
  U.S. GAPP, enacted tax rates are used to calculate future taxes, whereas Canadian
  GAAP uses substantively enacted tax rates. The effect of this change between
  Canadian and U.S. GAAP would result in an increase in future income tax expense
  and future tax liability of $231,000 in 2004, $592,000 in 2003 and $Nil
  in 2002 representing the higher enacted tax rates over the substantively enacted
  tax rates and a corresponding reduction in future income tax expense and future
  tax liability of $231,000 in 2004, $592,000 in 2003 and $Nil in
  2002 to record an additional valuation allowance against the increased tax asset.

d)
  Foreign Currency Translation Adjustments and Other Comprehensive Income
                  
  U.S. GAAP requires gains or losses arising from the translation of self-sustaining
  operations to be included in other comprehensive income. Canadian GAAP requires
  these amounts to be recorded in a separate component of Shareholders’
  Equity. Other comprehensive income arose from the translation adjustment resulting
  from the translation of Canadian currency financial statements into U.S. dollars
  under FAS 52. At December 31, 2004, accumulated other comprehensive income related
  to these items was a gain of $2,575,000 of which $1,841,000 represents
  the translation adjustment resulting from the Canadian operations becoming a
  self-sustaining operation effective October 1, 2004.

e)
  Asset Retirement ObligationThe Company adopted the Canadian accounting standard for asset retirement
  obligations, as outlined in the CICA section 3110. This standard is equivalent
  to U.S. FAS 143, Accounting for Asset Retirement Obligations, which was effective
  for fiscal periods beginning on or after January 1, 2003. The Company adopted
  the Canadian standard effective January 1, 2004 which eliminated the U.S. GAAP
  reconciling item in respect to accounting for the obligation, however a difference
  is created on how the transition amounts are disclosed.

For
  US GAAP, FAS 143 was adopted January 1, 2003 and required the cumulative impact
  of the change in accounting policy to be presented in the 2003 Income Statement
  and that prior periods not be restated prior to 2003. For Canadian GAAP, all
  prior periods were restated. The effect of applying the different transition
  provision to the Company’s consolidated financial statements would result
  in net income under U.S. GAAP in 2003 being reduced by $72,000 for the cumulative
  effect of the change in accounting policy and no opening deficit adjustment
  in 2003.

f)
  Escrowed SharesFor 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 188,000
  escrow shares were released resulting in an increase in share capital of $833,000
  with the offset to deficit.

g)
  Cash FlowsUnder 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.

h)
  Consolidated Balance SheetsHad the Company followed US GAAP, asset and liability sections of the
  balance sheet would not have changed from Canadian GAAP to U.S. GAAP.

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

|                                           | 2004      |   | 2003      |  
|------------------------------------------ | --------- | - | --------- | -
|(000’s)                                    | Cdn. GAAP |   | U.S. GAAP |  
|Share capital (c, f)                       | $ 47,296  |   | $ 49,407  |  
|Contributed surplus (b)                    | 1,593     |   | -         |  
|Cumulative translation adjustment (d)      | 2,575     |   | -         |  
|Accumulated other comprehensive income (d) | -         |   | 2,575     |  
|Deficit (b, c, f)                          | (685      | ) | (1,203    | )
|                                           | $ 50,779  |   | $ 50,779  |  

The
  reconciling items between share capital and deficit for Canadian and United
  States of America GAAP are $833,000 related to escrowed shares and $1,278,000
  related to flow through shares. The reconciling items between contributed surplus
  and deficit for Canadian and U.S. GAAP are $283,000 for the adoption of
  stock-based compensation under Canadian GAAP and $1,310,000 for the 2004
  stock-based compensation expense under Canadian GAAP, which is not expensed
  under U.S. GAAP APB Opinion No. 25 as interpreted by FASB Interpretation No.
  44.

i)
  Consolidated Statements of Income and DeficitHad the Company followed U.S. GAAP, the statement of income would have
  been reported as follows:

|(000’s, except per share amounts)                                |   | 2004   |   |   | 2003    |  
|---------------------------------------------------------------- | - | ------ | - | - | ------- | -
|Net income for the year under Canadian GAAP                      | $ | 5,919  |   | $ | 5,905   |  
|Adjustments, before income taxes:                                |   |        |   |   |         |  
|Stock-based
      compensation (b)                               |   | 1,310  |   |   | -       |  
|Future
      income tax expense (c)                              |   | -      |   |   | (876    | )
|Net income before change in accounting policy - U.S. GAAP        |   | 7,229  |   |   | 5,029   |  
|Cumulative effect of change in accounting policy - U.S. GAAP (e) |   | -      |   |   | 72      |  
|Net income U.S. GAAP                                             |   | 7,229  |   |   | 5,101   |  
|Deficit, beginning of year - U.S. GAAP                           |   | (8,432 | ) |   | (13,533 | )
|Deficit, end of year - U.S. GAAP                                 | $ | (1,203 | ) | $ | (8,432  | )
|                                                                 |   |        |   |   |         |  
|Net income per share under U.S. GAAP                             |   |        |   |   |         |  
|-
      Basic                                                    | $ | 0.13   |   | $ | 0.10    |  
|- Diluted                                                        | $ | 0.13   |   | $ | 0.09    |  
|                                                                 |   |        |   |   |         |  
|j) Statement of Other Comprehensive Income                       |   |        |   |   |         |  
|                                                                 |   |        |   |   |         |  
|(000’s)                                                          |   | 2004   |   |   | 2003    |  
|Net income - U.S. GAAP                                           | $ | 7,229  |   | $ | 5,101   |  
|Currency translation adjustment (d)                              |   | 734    |   |   | -       |  
|Other comprehensive income                                       | $ | 7,963  |   | $ | 5,101   |  

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k)
  Recent Accounting PronouncementsIn November 2004, the Financial Accounting Standards Board (FASB) issued
  Statement 151, Inventory Costs. This statement amends ARB 43 to clarify that:

| | • | abnormal amounts of idle facility expense, freight,
      handling costs and wasted material (spoilage) should be recognized as current-period
      charges; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                  
| | • | requires the allocation of fixed production overhead
      to inventory based on the normal capacity of the production facilities.                               

The
  provisions of this statement are effective for inventory costs incurred during
  fiscal years beginning after June 15, 2005. We do not expect the adoption of
  this statement will have any material impact on our results of operations or
  financial position.

In
  December 2004, the FASB issued Statement 123(R), Share-Based Payments. This
  statement revises Statement 123, Accounting for Stock-Based Compensation, and
  supersedes APB Opinion 25, Accounting for Stock Issued to Employees.

Statement
  123(R) requires all stock-based awards issued to employees to be measured at
  fair value and to be expensed in the income statement. This statement is effective
  for reporting periods beginning after June 15, 2005.

We
  are currently expensing stock options issued to employees and directors using
  the intrinsic value method for U.S. GAAP. Adoption of the fair value method
  under FASB Statement 123(R) will have an undertermined effect on our results
  of operations and financial position.

In
  December 2004, the FASB issued Statement 153, Exchanges of Nonmonetary Assets,
  an amendment of APB Opinion 29, Accounting for Nonmonetary Transactions. This
  amendment eliminates the exception for nonmonetary exchanges of similar productive
  assets and replaces it with a general exception for exchanges of nonmonetary
  assets that do not have commercial substance. Under Statement 153, if a nonmonetary
  exchange of similar productive assets meets a commercial-substance criterion
  and fair value is determinable, the transaction must be accounted for at fair
  value resulting in recognition of any gain or loss. This statement is effective
  for nonmonetary transactions in fiscal periods that begin after June 15, 2005.
  The adoption of this statement will not have any material impact on our results
  of operation or financial position.

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