---

|TRANSGLOBE ENERGY CORPORATION    
|---------------------------------
|CONSOLIDATED FINANCIAL STATEMENTS

Managements Report

Managements Responsibility On Financial Statements

The consolidated financial statements of TransGlobe Energy
Corporation were prepared by management within acceptable limits of materiality
and are in accordance with Canadian generally accepted accounting principles.
Management is responsible for ensuring that the financial and operating
information presented in this annual report is consistent with that shown in the
consolidated financial statements.

The consolidated financial statements have been prepared by
management in accordance with the accounting policies as described in the notes
to the consolidated financial statements. Timely release of financial
information sometimes necessitates the use of estimates when transactions
affecting the current accounting period cannot be finalized until future
periods. When necessary, such estimates are based on informed judgments made by
management.

Deloitte & Touche LLP, an independent firm of Chartered
Accountants appointed by the shareholders, have conducted an examination of the
corporate and accounting records in order to express their opinion on the
consolidated financial statements. The Audit Committee, consisting of three
independent directors, has met with representatives of Deloitte & Touche LLP
and management in order to determine if management has fulfilled its
responsibilities in the preparation of the consolidated financial statements.
The Board of Directors has approved the consolidated financial statements.

Managements Report On Internal Control Over Financial
Reporting

Management has designed and maintains an appropriate system of
internal controls to provide reasonable assurance that all assets are
safeguarded and financial records are properly maintained to facilitate the
preparation of consolidated financial statements for reporting purposes.

|/s/ Ross G. Clarkson                | /s/ David C. Ferguson                                  
|----------------------------------- | -------------------------------------------------------
|Ross G. Clarkson                    | David C. Ferguson                                      
|President & Chief Executive Officer | Vice President, Finance & Chief Financial
      Officer
|                                    |                                                        
|March 9, 2009                       |                                                        

|1
|-

---

|TRANSGLOBE ENERGY CORPORATION    
|---------------------------------
|CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Chartered
Accountants

To the Board of Directors and Shareholders of TransGlobe
Energy Corporation:

We have audited the accompanying consolidated balance sheets of
TransGlobe Energy Corporation and subsidiaries (the Company) as at December
31, 2008 and 2007, and the related consolidated statements of income and
retained earnings, comprehensive income 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 and the standards of the Public Company Accounting
Oversight Board (United States). These standards require that we plan and
perform the audit to obtain reasonable assurance about 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 and subsidiaries as at December 31, 2008 and 2007, and the results
of their operations and their cash flows for the years then ended in accordance
with Canadian generally accepted accounting principles.

We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the Company's
internal control over financial reporting as of December 31, 2008, based on the
criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated March 9, 2009 expressed an unqualified opinion on the Companys internal
control over financial reporting.

/s/ Deloitte & Touche LLPIndependent Registered
Chartered Accountants Calgary, Canada March 9, 2009

Comments by Independent Registered Chartered Accountants 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 Notes 2 and 21 to the consolidated financial
statements. Although we conducted our audits in accordance with both Canadian
generally accepted auditing standards and the standards of the Public Company
Accounting Oversight Board (United States), our report to the Board of Directors
and Shareholders of TransGlobe Energy Corporation, dated March 9, 2009, 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 changes are properly accounted for and adequately disclosed in the financial
statements.

/s/ Deloitte & Touche LLPIndependent Registered
Chartered Accountants Calgary, Canada March 9, 2009

|2
|-

---

|TRANSGLOBE ENERGY CORPORATION    
|---------------------------------
|CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Chartered
Accountants

To the Board of Directors and Shareholders of TransGlobe
Energy Corporation:

We have audited the internal control over financial reporting
of TransGlobe Energy Corporation and subsidiaries (the Company) as of December
31, 2008, based on the criteria established in Internal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The Company's management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the
accompanying Managements Report on Internal Control Over Financial Reporting.
Our responsibility is to express an opinion on the Company's internal control
over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in
all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a
process designed by, or under the supervision of, the company's principal
executive and principal financial officers, or persons performing similar
functions, and effected by the company's board of directors, management, and
other personnel to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A
company's internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a
material effect on the financial statements.

Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to error or fraud
may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2008, based on the criteria established in Internal Control  Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.

We have also audited, in accordance with Canadian generally
accepted auditing standards and the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements as at and
for the year ended December 31, 2008 of the Company and our report dated March
9, 2009 expressed an unqualified opinion on those financial statements and
included a separate report titled Comments by Independent Registered Chartered
Accountants on Canada-United States of America Reporting Difference referring to
changes in accounting principles.

/s/ Deloitte & Touche LLPIndependent Registered
Chartered Accountants Calgary, Canada March 9, 2009

|3
|-

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|TRANSGLOBE ENERGY CORPORATION    
|---------------------------------
|CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Statements of Income and Retained
Earnings

(Expressed in thousands of U.S. Dollars, except per share
amounts)

|                                                               |   | Year Ended        |   |   | Year Ended        |  
|-------------------------------------------------------------- | - | ----------------- | - | - | ----------------- | -
|                                                               |   | December 31, 2008 |   |   | December 31, 2007 |  
|                                                               |   |                   |   |   |                   |  
|                                                               |   |                   |   |   |                   |  
|                                                               |   |                   |   |   |                   |  
|REVENUE                                                        |   |                   |   |   |                   |  
|Oil sales, net of royalties
      and other                    | $ | 123,231           |   | $ | 67,628            |  
|Derivative gain (loss) on commodity contracts
      (Note 16)  |   | 3,005             |   |   | (7,979            | )
|Other income                                                   |   | 170               |   |   | 183               |  
|                                                               |   | 126,406           |   |   | 59,832            |  
|                                                               |   |                   |   |   |                   |  
|EXPENSES                                                       |   |                   |   |   |                   |  
|Operating                                                      |   | 19,333            |   |   | 11,056            |  
|General and administrative                                     |   | 10,213            |   |   | 6,743             |  
|Foreign exchange (gain) loss                                   |   | (84               | ) |   | 5                 |  
|Interest on long-term debt                                     |   | 6,163             |   |   | 1,450             |  
|Depletion and depreciation (Note 4)                            |   | 35,378            |   |   | 19,568            |  
|                                                               |   | 71,003            |   |   | 38,822            |  
|                                                               |   |                   |   |   |                   |  
|Income before income taxes                                     |   | 55,403            |   |   | 21,010            |  
|                                                               |   |                   |   |   |                   |  
|Income taxes 
      current (Note 11)                         |   | 32,230            |   |   | 12,630            |  
|                                                               |   |                   |   |   |                   |  
|NET INCOME FROM CONTINUING OPERATIONS                          |   | 23,173            |   |   | 8,380             |  
|NET INCOME FROM DISCONTINUED OPERATIONS(Note 5)                |   | 8,350             |   |   | 4,422             |  
|NET INCOME                                                     |   | 31,523            |   |   | 12,802            |  
|                                                               |   |                   |   |   |                   |  
|Retained earnings, beginning of year                           |   | 57,787            |   |   | 45,360            |  
|Repurchase of common shares (Note 8)                           |   | (880              | ) |   | (375              | )
|                                                               |   |                   |   |   |                   |  
|RETAINED EARNINGS, END OF YEAR                                 | $ | 88,430            |   | $ | 57,787            |  
|                                                               |   |                   |   |   |                   |  
|Net income from continuing operations
      per share(Note 14) |   |                   |   |   |                   |  
|Basic                                                          | $ | 0.39              |   | $ | 0.14              |  
|Diluted                                                        | $ | 0.38              |   | $ | 0.14              |  
|Net income from discontinued operations per share(Note 14)     |   |                   |   |   |                   |  
|Basic                                                          | $ | 0.14              |   | $ | 0.07              |  
|Diluted                                                        | $ | 0.14              |   | $ | 0.07              |  
|Net income per share(Note 14)                                  |   |                   |   |   |                   |  
|Basic                                                          | $ | 0.53              |   | $ | 0.21              |  
|Diluted                                                        | $ | 0.52              |   | $ | 0.21              |  

See accompanying notes to the consolidated financial
statements.

Consolidated Statements of Comprehensive Income

(Expressed in thousands of U.S. Dollars)

|                                        |   | Year Ended        |   |   | Year Ended        | 
|--------------------------------------- | - | ----------------- | - | - | ----------------- | 
|                                        |   | December 31, 2008 |   |   | December 31, 2007 | 
|Net income                              | $ | 31,523            |   | $ | 12,802            | 
|Other comprehensive (loss) income:      |   |                   |   |   |                   | 
|Foreign currency translation adjustment |   | (886              | ) |   | 8,554             | 
|                                        |   |                   |   |   |                   | 
|COMPREHENSIVE INCOME                    | $ | 30,637            |   | $ | 21,356            | 

See accompanying notes to the consolidated financial
statements.

|4
|-

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|TRANSGLOBE ENERGY CORPORATION    
|---------------------------------
|CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Balance Sheets

(Expressed in thousands of U.S. Dollars)

|                                                      |   | As at             |  |   | As at             | 
|----------------------------------------------------- | - | ----------------- |  | - | ----------------- | 
|                                                      |   | December 31, 2008 |  |   | December 31, 2007 | 
|                                                      |   |                   |  |   |                   | 
|ASSETS                                                |   |                   |  |   |                   | 
|Current                                               |   |                   |  |   |                   | 
|Cash and cash equivalents                             | $ | 7,634             |  | $ | 12,729            | 
|Accounts receivable                                   |   | 28,701            |  |   | 14,408            | 
|Derivative commodity contracts
      (Note 16)        |   | 2,336             |  |   | -                 | 
|Prepaid expenses                                      |   | 822               |  |   | 557               | 
|Assets of discontinued operations (Note 5)            |   | 764               |  |   | 4,063             | 
|                                                      |   |                   |  |   |                   | 
|                                                      |   | 40,257            |  |   | 31,757            | 
|                                                      |   |                   |  |   |                   | 
|Derivative commodity contracts (Note 16)              |   | 472               |  |   | -                 | 
|Goodwill (Note 6)                                     |   | 8,180             |  |   | 4,313             | 
|Property and equipment (Note 4)                       |   | 179,329           |  |   | 116,288           | 
|Discontinued
      operations (Note 5)                |   | -                 |  |   | 51,861            | 
|                                                      |   |                   |  |   |                   | 
|                                                      | $ | 228,238           |  | $ | 204,219           | 
|                                                      |   |                   |  |   |                   | 
|                                                      |   |                   |  |   |                   | 
|LIABILITIES                                           |   |                   |  |   |                   | 
|Current                                               |   |                   |  |   |                   | 
|Accounts payable and accrued
      liabilities        | $ | 15,852            |  | $ | 7,790             | 
|Income taxes payable                                  |   | 79                |  |   |                   | 
|Derivative commodity contracts
      (Note 16)        |   | -                 |  |   | 7,098             | 
|Current portion of long-term debt (Note 7)            |   | -                 |  |   | 4,727             | 
|Liabilities of discontinued operations (Note
      5) |   | 342               |  |   | 6,648             | 
|                                                      |   |                   |  |   |                   | 
|                                                      |   | 16,273            |  |   | 26,263            | 
|                                                      |   |                   |  |   |                   | 
|Long-term debt (Note 7)                               |   | 57,230            |  |   | 51,958            | 
|Discontinued
      operations (Note 5)                |   | -                 |  |   | 2,755             | 
|                                                      |   |                   |  |   |                   | 
|                                                      |   | 73,503            |  |   | 80,976            | 
|                                                      |   |                   |  |   |                   | 
|                                                      |   |                   |  |   |                   | 
|Commitments and contingencies (Note 18)               |   |                   |  |   |                   | 
|                                                      |   |                   |  |   |                   | 
|SHAREHOLDERS EQUITY                                  |   |                   |  |   |                   | 
|Share capital (Note 8)                                |   | 50,532            |  |   | 50,128            | 
|Contributed surplus (Note 10)                         |   | 4,893             |  |   | 3,562             | 
|Accumulated other comprehensive income (Note 13)      |   | 10,880            |  |   | 11,766            | 
|Retained earnings                                     |   | 88,430            |  |   | 57,787            | 
|                                                      |   |                   |  |   |                   | 
|                                                      |   | 154,735           |  |   | 123,243           | 
|                                                      |   |                   |  |   |                   | 
|                                                      | $ | 228,238           |  | $ | 204,219           | 

See accompanying notes to the consolidated financial
statements.

Approved on behalf of the Board:

|/s/ Ross G. Clarkson       | /s/ Fred J. Dyment      
|-------------------------- | ------------------------
|Ross G. Clarkson, Director | Fred J. Dyment, Director

|5
|-

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|TRANSGLOBE ENERGY CORPORATION    
|---------------------------------
|CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Statements of Cash Flows

(Expressed in thousands of U.S. Dollars)

|                                                                   |   | Year Ended        |   |   | Year Ended        |  
|------------------------------------------------------------------ | - | ----------------- | - | - | ----------------- | -
|                                                                   |   | December 31, 2008 |   |   | December 31, 2007 |  
|                                                                   |   |                   |   |   |                   |  
|CASH FLOWS RELATED TO THE FOLLOWING ACTIVITIES:                    |   |                   |   |   |                   |  
|                                                                   |   |                   |   |   |                   |  
|OPERATING                                                          |   |                   |   |   |                   |  
|Net income                                                         | $ | 31,523            |   | $ | 12,802            |  
|Net
      income from discontinued operations                      |   | 8,350             |   |   | 4,422             |  
|Net income from continuing
      operations                        |   | 23,173            |   |   | 8,380             |  
|Adjustments for:                                                   |   |                   |   |   |                   |  
|Depletion
      and depreciation                                   |   | 35,378            |   |   | 19,568            |  
|Amortization of deferred
      financing costs                     |   | 1,884             |   |   | 153               |  
|Stock-based compensation (Note 9)                                  |   | 1,830             |   |   | 1,086             |  
|Unrealized (gain) loss on
      commodity contracts                |   | (9,906            | ) |   | 7,098             |  
|Changes in non-cash working capital (Note 12)                      |   | (1,269            | ) |   | 1,133             |  
|Cash provided by continuing operations                             |   | 51,090            |   |   | 37,418            |  
|Cash provided by discontinued operations                           |   | 6,703             |   |   | 16,200            |  
|                                                                   |   |                   |   |   |                   |  
|                                                                   |   | 57,793            |   |   | 53,618            |  
|                                                                   |   |                   |   |   |                   |  
|                                                                   |   |                   |   |   |                   |  
|FINANCING                                                          |   |                   |   |   |                   |  
|Increase in long-term debt
      (Note 7)                          |   | 55,000            |   |   | 63,000            |  
|Repayments of long-term debt (Note 7)                              |   | (55,000           | ) |   | (5,000            | )
|Deferred financing costs                                           |   | (1,339            | ) |   | (1,097            | )
|Repurchase of common shares (Note 8)                               |   | (1,135            | ) |   | (472              | )
|Options surrendered for cash
      payments (Note 8)               |   | (256              | ) |   | -                 |  
|Issue of common shares for cash (Note 8)                           |   | 512               |   |   | 605               |  
|Changes in non-cash working capital (Note 12)                      |   | 1,515             |   |   | -                 |  
|                                                                   |   |                   |   |   |                   |  
|                                                                   |   | (703              | ) |   | 57,036            |  
|                                                                   |   |                   |   |   |                   |  
|                                                                   |   |                   |   |   |                   |  
|INVESTING                                                          |   |                   |   |   |                   |  
|Exploration and development
      expenditures                     |   | (43,857           | ) |   | (25,362           | )
|Acquisitions (Note 3)                                              |   | (62,392           | ) |   | (68,001           | )
|Changes in non-cash working capital (Note 12)                      |   | (2,737            | ) |   | (3,081            | )
|Cash used by continuing operations                                 |   | (108,986          | ) |   | (96,444           | )
|Cash provided (used) by discontinued
      operations              |   | 46,600            |   |   | (10,535           | )
|                                                                   |   |                   |   |   |                   |  
|                                                                   |   | (62,386           | ) |   | (106,979          | )
|                                                                   |   |                   |   |   |                   |  
|                                                                   |   |                   |   |   |                   |  
|Effect of exchange
      rate changes on cash and cash equivalents |   | 201               |   |   | 218               |  
|                                                                   |   |                   |   |   |                   |  
|NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS               |   | (5,095            | ) |   | 3,893             |  
|                                                                   |   |                   |   |   |                   |  
|CASH AND CASH
      EQUIVALENTS, BEGINNING OF YEAR                 |   | 12,729            |   |   | 8,836             |  
|                                                                   |   |                   |   |   |                   |  
|                                                                   |   |                   |   |   |                   |  
|CASH AND CASH EQUIVALENTS, END OF YEAR                             | $ | 7,634             |   | $ | 12,729            |  
|                                                                   |   |                   |   |   |                   |  
|                                                                   |   |                   |   |   |                   |  
|Supplemental Disclosure of Cash Flow Information                   |   |                   |   |   |                   |  
|Cash interest paid                                                 | $ | 4,279             |   | $ | 1,297             |  
|Cash taxes paid                                                    |   | 32,230            |   |   | 12,630            |  
|Cash is comprised of cash on
      hand and balances with banks    |   | 6,634             |   |   | 12,729            |  
|Cash
      equivalents                                             |   | 1,000             |   |   | -                 |  

See accompanying notes to the consolidated financial
statements.

|6
|-

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|TRANSGLOBE ENERGY
      CORPORATION             
|------------------------------------------------
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS

December 31, 2008 and 2007 and for the years then ended(Expressed in U.S. Dollars)

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 (Canadian GAAP or Cdn. GAAP). Information prepared in accordance
with generally accepted accounting principles in the United States (U.S. GAAP)
is included in Note 21. 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:

- Nuqra Block 1 and West Gharib area within the Arab Republic of Egypt
  (Egypt).
- Block 32, Block S-1, Block 72, Block 75 and Block 84 within the Republic
  of Yemen (Yemen).
- The Western Canadian Sedimentary Basin within Canada, until this area was
  sold in April 2008 (Note 5).

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.

Foreign Currency Translation

The accounts of the integrated Canadian operations are
translated using the temporal method, whereby monetary assets and liabilities
are translated at year end exchange rates, non-monetary assets and liabilities
at the historical rates and revenues and expenses at the rates for the period,
except depreciation, depletion and accretion expense, which is translated on the
same basis as the related assets. Translation gains and losses relating to the
integrated Canadian operations are included in net income.

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.

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

Income Taxes

The Company uses the liability method to account for income
taxes. Under this method, future income taxes are based on the difference
between assets and liabilities reported for financial accounting purposes from
those reported for income tax. 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. The Companys contractual arrangements in foreign
jurisdictions stipulate that income taxes are paid by the respective government
out of its entitlement share of production sharing oil. Such amounts are
included in income tax expense at the statutory rate in effect at the time of
production.

Flow Through Shares

The Company has financed a portion of its prior years
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.

Net Income Per Share

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.

|7
|-

---

|TRANSGLOBE ENERGY
      CORPORATION             
|------------------------------------------------
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS

Cash and Cash Equivalents

Cash and cash equivalents include cash on deposit with banks
and short-term investments such as treasury bills with original maturity of less
than 90 days.

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.

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.

Depreciation, Depletion, Amortization and Impairment

Capitalized costs within each country are depleted and
depreciated on the unit-of-production method based on the estimated gross proved
reserves as determined by independent reserve evaluators. Gas reserves and
production are converted into equivalent units using the energy equivalency
conversion method 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 value is assessed to be
recoverable when the sum of the undiscounted cash flows expected from the
production of proved reserves and the cost, less impairment, of unproved
properties exceeds the carrying value. If the carrying value is assessed to not
be recoverable, the calculation compares the carrying value to the sum of the
discounted cash flows expected from the production of proved and probable
reserves and the cost, less impairment, of unproved properties. Should the
carrying value exceed this sum, an impairment loss is recognized.

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

Asset Retirement Obligations

The fair value of the statutory, contractual or legal liability
associated with the retirement and reclamation of tangible long-lived assets is
recognized when incurred. 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
depletion, depreciation and accretion on the Consolidated Statements of Income
and Retained Earnings. Increases in the asset retirement obligation resulting
from the passage of time are recorded in depletion, depreciation and accretion
in the Consolidated Statements of Income and Retained Earnings. 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 lattice-based
binomial option pricing model in 2008, 2007 and 2006 and the Black-Scholes
option pricing model in 2005 and prior years. Compensation costs are recognized
over the vesting period.The Company estimates forfeitures at the grant
date and revises the estimate as necessary if subsequent information indicates
that actual forfeitures differ significantly from the original estimate.

Derivative Financial Instruments and Hedging
Activities

a) Financial InstrumentsAll financial instruments are
initially measured in the balance sheet at fair value. Subsequent measurement of
the financial instruments is based on their classification. The Company has
classified each financial instrument into one of these five categories:
held-for-trading, held-to-maturity investments, loans and receivables,
available-for-sale financial assets or other financial liabilities. Loans and
receivables, held-to-maturity investments and other financial liabilities are
measured at amortized cost using the effective interest rate method. For all
financial assets and financial liabilities that are not classified as
held-for-trading, the transaction costs that are directly attributable to the
acquisition or issue of a financial asset or financial liability are adjusted to
the fair value initially recognized for that financial instrument. These costs
are expensed using the effective interest rate method and are recorded within
interest expense. Held-for-trading financial assets are measured at fair value
and changes in fair value are recognized in net income.

|8
|-

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|TRANSGLOBE ENERGY
      CORPORATION             
|------------------------------------------------
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS

Available-for-sale financial instruments are measured at fair
value with changes in fair value recorded in other comprehensive income until
the instrument is derecognized or impaired. All derivative instruments are
recorded in the balance sheet at fair value unless they qualify for the expected
purchase, sale and usage exemption. All changes in their fair value are recorded
in income unless cash flow hedge accounting is used, in which case changes in
fair value are recorded in other comprehensive income.

The Company has classified its derivative commodity contracts
and cash and cash equivalents as held-for-trading, which are measured at fair
value with changes being recognized in net income. Accounts receivable are
classified as loans and receivables; operating bank loans, accounts payable and
accrued liabilities, and long-term debt, including interest payable, are
classified as other liabilities, all of which are measured at amortized cost the
classification of all financial instruments is the same at inception and at
December 31, 2008. The Company has elected to classify all derivatives and
embedded derivatives as held-for trading, which are measured at fair value with
changes being recognized in net income.

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

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

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

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

Goodwill

Goodwill, which represents the excess of cost of an acquired
enterprise over the net of the amounts assigned to assets acquired and
liabilities assumed, is assessed at least annually for impairment. To assess
impairment, the fair value of the reporting unit is determined and compared to
the book value of the reporting unit. If the fair value is less than the book
value, then a second test is performed to determine the amount of the
impairment. The amount of the impairment is determined by deducting the fair
value of the reporting units assets and liabilities from the fair value of the
reporting unit to determine the implied fair value of goodwill and comparing
that amount to the book value of the reporting units goodwill. Any excess of
the book value of goodwill over the implied fair value of goodwill is the
impaired amount. Goodwill is not amortized.

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 depletion, depreciation and amortization,
asset retirement costs and obligations, goodwill, stock-based compensation,
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.

2. CHANGES IN ACCOUNTING POLICIES

Effective January 1, 2008, the Company adopted the Canadian
Institute of Chartered Accountants (CICA) Section 1535, Capital Disclosuresas issued by the Accounting Standards Board (AcSB). The main features of
this section are to establish requirements for an entity to disclose qualitative
information about its objectives, policies and processes for managing capital,
quantitative data about what it regards as capital, and whether it has complied
with any externally imposed capital requirements and, if not, the consequences
of such non-compliance.

Effective January 1, 2008, the Company adopted CICA Section
3862, Financial Instruments Disclosures, and CICA Section 3863,
Financial Instruments Presentation,which require incremental disclosures
regarding the significance of financial instruments for the entitys financial
position and performance; and the nature, extent and management of risks arising
from financial instruments to which the entity is exposed.

The Company has applied these new standards prospectively in
Note 15 - Capital disclosures for Section 1535 Capital Disclosuresand in
Note 16 - Financial instruments and risk management for Sections 3862
Financial Instruments Disclosures and 3863 Financial Instruments
Presentation.

|9
|-

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|TRANSGLOBE ENERGY
      CORPORATION             
|------------------------------------------------
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS

Foreign Currency Translation

In the second quarter of 2008, as a result of the sale of the
Canadian oil and natural gas interests, the Company reviewed its foreign
currency translation policy for its Canadian operations and determined that such
operations are now integrated. The accounts of integrated operations are
translated using the temporal method, whereby monetary assets and liabilities
are translated at the period-end exchange rates, non-monetary assets and
liabilities at the historical rates and revenues and expenses at the rates for
the period, except for the depreciation, depletion and accretion expense, which
is translated on the same basis as the related assets. Translation gains and
losses related to the operations are included in net income. Previously,
operations in Canada were considered to be self-sustaining and translated using
the current rate method. Under the current rate method, assets and liabilities
are translated at the period-end exchange rates, while revenues and expense are
translated using rates for the period and gains and losses are included as a
separate component of shareholders equity. This change in practice was adopted
prospectively beginning May 1, 2008.

New Accounting Standards

a) Goodwill and Intangible Assets

In February 2008, the Canadian Institute of Chartered
Accountants (CICA) issued Section 3064, Goodwill and intangible assets,
replacing Section 3062, Goodwill and other intangible assetsand Section
3450, Research and development costs. Various changes have been made to
other sections of the CICA Handbook for consistency purposes. The new Section
will be applicable to financial statements relating to fiscal years beginning on
or after October 1, 2008. Accordingly, the Company will adopt the new standards
for its fiscal year beginning January 1, 2009. It establishes standards for the
recognition, measurement, presentation and disclosure of goodwill subsequent to
its initial recognition and of intangible assets by profit-oriented enterprises.
Standards concerning goodwill are unchanged from the standards included in the
previous Section 3062. The adoption of this Standard should not have a material
impact on the Consolidated Financial Statements.

b) Business Combinations

In December 2008, the CICA issued Section 1582, Business
Combinations, which will replace CICA Section 1581 of the same name. Section
1582 establishes principles and requirements of the acquisition method for
business combinations and related disclosures. This statement applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
January 2011 with earlier application permitted. The Company is currently
evaluating the impact of this changeover on its Consolidated Financial
Statements.

c) Non-Controlling Interests

In December 2008, the CICA issued Sections 1601,
Consolidated Financial Statements, and 1602, Non-Controlling
Interests, which replaces existing Section 1600. Section 1601 establishes
standards for the preparation of consolidated financial statements. Section 1602
provides guidance on accounting for a non-controlling interest in a subsidiary
in consolidated financial statements subsequent to a business combination. These
standards are effective on or after the beginning of the first annual reporting
period beginning on or after January 2011 with earlier application permitted.
These standards currently do not impact the Company as it has full controlling
interest of all of its subsidiaries.

d) International Financial Reporting Standards

In January 2006, the Canadian Accounting Standards Board
(AcSB) adopted a strategic plan for the direction of accounting standards in
Canada. On February 13, 2008 the AcSB has confirmed that effective for interim
and annual financial statements related to fiscal years beginning on or after
January 1, 2011, International Financial Reporting Standards (IFRS) will
replace Canadas current GAAP for all publically accountable profit-oriented
enterprises.

The Company has determined that the most significant impact of
IFRS conversion is to property and equipment. IFRS does not prescribe specific
oil and gas accounting guidance other than for costs associated with the
exploration and evaluation phase. The Company currently follows full cost
accounting as prescribed in Accounting Guideline 16, Oil and Gas Accounting 
Full Cost. Conversion to IFRS may have a significant impact on how the
Company accounts for costs pertaining to oil and gas activities, in particular
those related to the pre-exploration and development phases. In addition, the
level at which impairment tests are performed and the impairment testing
methodology will differ under IFRS. IFRS conversion will also result in other
impacts, some of which may be significant in nature. The impact on the Companys
Consolidated Financial Statements is not reasonably determinable at this
time.

3. ACQUISITIONS

Corporate Acquisitions

a) GHP Exploration (West Gharib) Ltd.

On February 5, 2008, TransGlobe acquired all of the common
shares of GHP Exploration (West Gharib) Ltd. (GHP) for cash consideration of
$44.1 million, net of cash acquired. The results of GHPs operations have been
included in the consolidated financial statements since that date. GHP holds a
30% interest in the West Gharib Concession area in Egypt. TransGlobe funded the
acquisition from bank debt of $40.0 million and cash on hand.

|10
|--

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|TRANSGLOBE ENERGY
      CORPORATION             
|------------------------------------------------
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS

The acquisition has been accounted for using the purchase
method with TransGlobe as the acquirer, and the purchase price was allocated to
the fair value of the assets acquired and the liabilities assumed as
follows:

|Cost of
      acquisition (000s)            |   |        | 
|------------------------------------------- | - | ------ | 
|Cash paid, net of cash acquired             | $ | 44,095 | 
|Transaction costs                           |   | 99     | 
|                                            | $ | 44,194 | 
|                                            |   |        | 
|Allocation of purchase price (000s)         |   |        | 
|Property and equipment                      | $ | 36,602 | 
|Goodwill                                    |   | 3,602  | 
|Working capital,
      net of cash acquired |   | 3,990  | 
|                                            | $ | 44,194 | 

b) Dublin International Petroleum (Egypt) Limited and
Drucker Petroleum Inc.

On September 25, 2007, TransGlobe acquired all of the common
shares of two private companies, Dublin International Petroleum (Egypt) Limited
(Dublin) and Drucker Petroleum Inc. (Drucker), for cash consideration of
$67.7 million. The results of Dublins and Druckers operations have been
included in the consolidated financial statements since that date. Dublin and
Drucker hold interests in eight development leases and associated infrastructure
in the West Gharib Concession area in Egypt (Dublin is the operator of this
Concession). TransGlobe funded the acquisition from cash on hand and bank debt
of $63.0 million.

The acquisition has been accounted for using the purchase
method and the purchase price was allocated to the fair value of the assets
acquired and the liabilities assumed as follows:

|Cost of
      acquisition (000s)            |   |        | 
|------------------------------------------- | - | ------ | 
|Cash paid, net of cash acquired             | $ | 67,949 | 
|Transaction costs                           |   | 317    | 
|                                            | $ | 68,266 | 
|                                            |   |        | 
|Allocation of purchase price (000s)         |   |        | 
|Property and equipment                      | $ | 54,823 | 
|Goodwill                                    |   | 4,578  | 
|Working capital,
      net of cash acquired |   | 8,865  | 
|                                            | $ | 68,266 | 

Property Acquisition

On August 18, 2008, TransGlobe completed an oil and gas
property acquisition in Egypt for the 25% financial interest in the eight
non-Hana development leases on the West Gharib Concession. The total cost of the
acquisition was $18.0 million, subject to closing adjustments to the effective
date of June 1, 2008. In addition, the Company could pay up to an additional
$7.0 million if incremental reserve thresholds are reached in the East Hoshia
(up to $5.0 million) and in South Rahmi (up to $2.0 million) development leases,
to be determined annually. As at December 31, 2008, no additional fees are due
in the year 2009. The value of the net assets acquired has been assigned to
property and equipment. Following this property acquisition, TransGlobe now
holds a 100% working interest in the West Gharib Concession in Egypt.

4. PROPERTY AND EQUIPMENT

|Egypt                                  |   |         |   |   |        |  
|-------------------------------------- | - | ------- | - | - | ------ | -
|(000s)                                 |   | 2008    |   |   | 2007   |  
|Oil and gas properties                 | $ | 157,635 |   | $ | 68,460 |  
|Furniture and fixtures                 |   | 1,373   |   |   | 1,144  |  
|Accumulated depletion and depreciation |   | (30,336 | ) |   | (3,177 | )
|Write-off of dry
      hole costs      |   | -       |   |   | (4,111 | )
|                                       | $ | 128,672 |   | $ | 62,316 |  

On February 5, 2008 the Company acquired all common shares of
GHP who held a 30% working interest in the West Gharib Concession area in Egypt.
On August 18, 2008 the Company acquired an additional 25% financial interest in
the eight non-Hana development leases. As a result of these two acquisitions
TransGlobe now holds a 100% working interest in the West Gharib Concession in
Egypt. The nine approved West Gharib development leases are valid for 20 years,
expiring between 2019 and 2026.

The Contractor (joint venture partners) is in the first three
year extension period of the Nuqra Concession Agreement which expires in July
2009. One additional extension period of three years is available to the
Contractor at its option.

During the year, the Company capitalized general and
administrative costs relating to exploration and development activities of $1.9
million (2007 - $0.8 million). Unproven property costs in the amount of $10.0
million (2007 - $9.2 million) were excluded from costs subject to depletion and
depreciation representing costs incurred in Nuqra and undeveloped land in West
Gharib. Future development costs for proved reserves included in the depletion
calculation for the year ended December 31, 2008 totaled $3.3 million (2007 -
$3.7 million).

|11
|--

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|TRANSGLOBE ENERGY
      CORPORATION             
|------------------------------------------------
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS

|Yemen                                        |   |         |   |   |         |  
|-------------------------------------------- | - | ------- | - | - | ------- | -
|(000s)                                       |   | 2008    |   |   | 2007    |  
|                                             |   |         |   |   |         |  
|Oil and gas properties                       | $ | 119,139 |   | $ | 110,400 |  
|Accumulated
      depletion and depreciation |   | (69,230 | ) |   | (57,237 | )
|                                             | $ | 49,909  |   | $ | 53,163  |  

The Company has working interests in five blocks in Yemen:
Block 32, Block S-1, Block 72, Block 75 and Block 84. The Block 32 (13.81087%)
Production Sharing Agreement (PSA) continues to 2020, with provision for a
five year extension. The Block S-1 (25%) PSA continues to 2023, with provision
for a five year extension. At December 31, 2008, the Contractor (joint venture
partners) was in the first exploration period of the Block 72 (33%) PSA which
ended January 2009, at which time the Contractor elected to proceed to the
second 36-month exploration period. The Contractor (joint venture partners) is
in the first 36-month exploration period commencing March 8, 2008 of the Block
75 (25%) PSA. The Block 84 (33%) PSA is in the ratification process with the
Republic of Yemen.

During the year the Company capitalized overhead costs relating
to exploration and development activities of $0.3 million (2007 -$0.7 million).
Unproven property costs in the amount of $7.2 million in 2008 ($5.0 million in
2007) were excluded in the costs subject to depletion and depreciation
representing some of the costs incurred at Block 72, Block 75 and Block 84.
Future development costs for proved reserves included in the depletion
calculation for the year ended December 31, 2008 totaled $12.1 million (2007 -
$7.1 million).

|Corporate                      |   |        |   |   |        |  
|------------------------------ | - | ------ | - | - | ------ | -
|(000s)                         |   | 2008   |   |   | 2007   |  
|Furniture, fixtures and other  | $ | 2,148  |   | $ | 1,908  |  
|Accumulated
      depreciation |   | (1,400 | ) |   | (1,099 | )
|                               | $ | 748    |   | $ | 809    |  

Ceiling Test

An impairment test calculation was performed on property and
equipment at December 31, 2008 in which the estimated undiscounted future net
cash flows based on estimated future prices associated with the proved reserves
exceed the carrying amount of oil and gas property and equipment for each cost
centre.

The following table outlines prices used in the impairment test
at December 31, 2008:

|              |   | Oil   | 
|------------- | - | ----- | 
|Year          |   | Egypt | 
|2009          | $ | 45.23 | 
|2010          |   | 55.44 | 
|2011          |   | 61.02 | 
|2012          |   | 69.67 | 
|2013          |   | 75.98 | 
|Thereafter(1) |   | 2.5%  | 

(1) Percentage change represents the increase in
each year after 2013 to the end of the reserve life.

5. DISCONTINUED OPERATIONS

On April 30, 2008, the Company sold Canadian oil and natural
gas interests for C$56.7 million, subject to normal closing adjustments. The
Canadian operations have been accounted for as discontinued operations in
accordance with Canadian GAAP. Results of the Canadian operations have been
included in the financial statements up to the closing date of the sale (the
date control was transferred to the purchaser). The Company used the cash
proceeds from the sale and cash on hand to repay $55.0 million of debt.

Discontinued operations as at December 31, 2007 included
current assets of $4.1 million, property and equipment of $50.0 million, and a
future income tax asset of $1.9 million, current liabilities of $6.6 million and
asset retirement obligations of $2.8 million. Discontinued operations at
December 31, 2008 included current assets of $0.5 million, property and
equipment of $0.3 million, and current liabilities of $0.3 million. The Company
recorded a gain on disposition of $4.0 million, net of tax, in the year ended
December 31, 2008.

|(000s)                                           |   | 2008  |  |   | 2007   |  
|------------------------------------------------ | - | ----- |  | - | ------ | -
|Revenue                                          |   |       |  |   |        |  
|Oil and gas sales, net
      of royalties        | $ | 9,162 |  | $ | 20,283 |  
|                                                 |   |       |  |   |        |  
|Expenses                                         |   |       |  |   |        |  
|Operating                                        |   | 2,228 |  |   | 4,212  |  
|Depletion, depreciation and accretion            |   | 2,678 |  |   | 11,604 |  
|                                                 |   | 4,906 |  |   | 15,816 |  
|Gain on disposition, net of tax                  |   | 4,012 |  |   | -      |  
|Income from discontinued operations before taxes |   | 8,268 |  |   | 4,467  |  
|Future income tax recovery (expense)             |   | 82    |  |   | (45    | )
|                                                 |   |       |  |   |        |  
|Net income from discontinued operations          | $ | 8,350 |  | $ | 4,422  |  

|12
|--

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|TRANSGLOBE ENERGY
      CORPORATION             
|------------------------------------------------
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS

In Canada, the Company capitalized overhead costs relating to
exploration and development activities during the year ended December 31, 2008
of $0.4 million (2007 - $0.5 million). Unproven property costs of $1.8 million
were excluded from the costs subject to depletion and depreciation for 2008
(2007 - $3.9 million). Future development costs for proved reserves of $0.3
million (2007 - $11.0 million) were included in the depletion and depreciation
calculations. Depletion, depreciation and accretion was not recorded while the
assets were classified as held for sale.

6. GOODWILL

Changes in the carrying amount of the Companys goodwill,
arising from acquisitions (Note 3), are as follows:

|(000s)                        |   | 2008  |  |   | 2007  | 
|----------------------------- | - | ----- |  | - | ----- | 
|Balance, beginning of year    | $ | 4,313 |  | $ | -     | 
|Changes during the
      year |   | 3,867 |  |   | 4,313 | 
|Balance, end of year          | $ | 8,180 |  | $ | 4,313 | 

7. LONG-TERM DEBT

|(000s)                              |   | 2008   |   |   | 2007   |  
|----------------------------------- | - | ------ | - | - | ------ | -
|Revolving Credit Agreement          | $ | 58,000 |   | $ | 50,000 |  
|Term Loan
      Agreement           |   | -      |   |   | 8,000  |  
|                                    |   | 58,000 |   |   | 58,000 |  
|Unamortized
      transaction costs |   | (770   | ) |   | (1,315 | )
|                                    |   | 57,230 |   |   | 56,685 |  
|                                    |   |        |   |   |        |  
|Current portion of long-term debt   |   | -      |   |   | 4,727  |  
|                                    | $ | 57,230 |   | $ | 51,958 |  

As at December 31, 2008, the Company has a $60.0 million
Revolving Credit Agreement of which $58.0 million is drawn. The Revolving Credit
Agreement expires on September 19, 2010 and is secured by a first floating
charge debenture over all assets of the Company, a general assignment of book
debts, security pledge of the Companys subsidiaries and certain covenants. The
Revolving Credit Agreement bears interest at the Eurodollar Rate plus three
percent. During the year ended December 31, 2008, the average effective interest
rate was 7.3% (2007  9.8%) . In the year ended December 31, 2008, the Company
incurred $1.3 million (2007 -$1.1 million) in fees to draw on its Revolving
Credit Agreement and Term Loan Agreement. In February 2008, the Company
increased its Term Loan Agreement from $8.0 million to $48.0 million. The entire
amount of the Term Loan was repaid in April 2008.

The future debt payments on long-term debt, as of December 31,
2008, are as follows:

|(000s) |   |        | 
|------ | - | ------ | 
|2009   | $ | -      | 
|2010   |   | 58,000 | 

8. SHARE CAPITAL

Authorized

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

Issued

|                                            |  | 2008   |   |   | 2007   |  
|------------------------------------------- |  | ------ | - | - | ------ | -
|                                            |  | No. of |   |   |        |  
|(000s)                                      |  | Shares |   |   | Amount |  
|Balance, beginning of year                  |  | 59,627 |   | $ | 50,128 |  
|Stock options exercised                     |  | 173    |   |   | 512    |  
|Stock options surrendered for cash payments |  | -      |   |   | (256   | )
|Stock-based compensation on exercise        |  | -      |   |   | 403    |  
|Repurchase of common shares                 |  | (300   | ) |   | (255   | )
|Balance, end of
      year                  |  | 59,500 |   | $ | 50,532 |  

The Company has received regulatory approval to purchase, from
time to time, as it considers advisable, up to 5,558,322 common shares under a
Normal Course Issuer Bid which commenced August 1, 2008 and will terminate July
31, 2009. During the year ended December 31, 2008, the Company purchased and
cancelled 300,000 common shares at an average price of C$3.87 per share. The
excess of the purchase price over the book value in the amount of $0.9 million
was charged to retained earnings during the year. During the year ended December
31, 2007, the Company purchased 115,990 common shares at an average price of
C$4.07 per share, with $0.4 million charged to retained earnings.

9. STOCK OPTION PLAN

The Company adopted a stock option plan in May 2007 (the
Plan). The maximum number of common shares to be issued upon the exercise of
options granted under the Plan is 5,888,300 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. Stock options
granted prior to February 1, 2005 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 vest one-third on
each of the first, second and third anniversaries of the grant date.

|13
|--

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|TRANSGLOBE ENERGY
      CORPORATION             
|------------------------------------------------
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS

The following tables summarize information about the stock
options outstanding and exercisable at December 31, 2008:

|                                       |  | 2008    |   |   | 2007      | 
|-------------------------------------- |  | ------- | - | - | --------- | 
|                                       |  |         |   |   | Weighted- | 
|                                       |  | Number  |   |   | Average   | 
|(000s, except per share amounts)       |  | of      |   |   | Exercise  | 
|                                       |  | Options |   |   | Price     | 
|Options outstanding, beginning of year |  | 2,936   |   | $ | 4.11      | 
|Granted                                |  | 3,457   |   | $ | 3.45      | 
|Exercised                              |  | (173    | ) | $ | 2.25      | 
|Exercised for cash                     |  | (150    | ) | $ | 2.66      | 
|Forfeited                              |  | (470    | ) | $ | 4.93      | 
|                                       |  |         |   |   |           | 
|Options outstanding, end of year       |  | 5,600   |   | $ | 3.73      | 
|                                       |  |         |   |   |           | 
|Options exercisable, end of year       |  | 1,758   |   | $ | 4.17      | 

|                |  | Options Outstanding |  |  | Options Exercisable | 
|--------------- |  | ------------------- |  |  | ------------------- | 
|                |  |                     |  |  | Weighted-           | 
|                |  |                     |  |  | Average             | 
|                |  | Number              |  |  | Remaining           | 
|                |  | Outstanding at      |  |  | Contractual         | 
|                |  | Dec. 31, 2008       |  |  | Life                | 
|Exercise Prices |  | (000s)              |  |  | (Years)             | 
|C$2.78-C$3.25   |  | 1,906               |  |  | 4.9                 | 
|C$3.26-C$4.08   |  | 550                 |  |  | 0.2                 | 
|C$4.09-C$5.18   |  | 1,785               |  |  | 4.0                 | 
|C$5.19-C$5.31   |  | 348                 |  |  | 3.6                 | 
|C$5.32-C$6.56   |  | 1,011               |  |  | 2.1                 | 
|                |  | 5,600               |  |  | 3.5                 | 

Stockbased Compensation

Compensation expense of $1.8 million has been recorded in
general and administrative expenses in the Consolidated Statements of Income and
Retained Earnings in 2008 (2007- $1.1 million). The fair value of all common
stock options granted is estimated on the date of grant using the lattice-based
binomial option pricing model. The weighted average fair value of options
granted during the year and the assumptions used in their determination are as
noted below:

|                                                          |   | 2008               |  |   | 2007               | 
|--------------------------------------------------------- | - | ------------------ |  | - | ------------------ | 
|Weighted average fair market value per
      option (C$)  | $ | 1.62               |  | $ | 1.94               | 
|Risk free interest rate (%)                               |   | 3.10               |  |   | 4.60               | 
|Expected lives (years)                                    |   | 5.00               |  |   | 5.00               | 
|Expected volatility (%)                                   |   | 44.76              |  |   | 45.92              | 
|Dividend per share                                        |   | 0.00               |  |   | 0.00               | 
|Early exercise
      (Year 1/Year 2/Year 3/Year 4/Year 5) |   | 0%/10%/20%/30%/40% |  |   | 0%/10%/20%/30%/40% | 

During the year, employees exercised 173,300 (2007  860,000)
stock options. In accordance with Canadian generally accepted accounting
principles, the fair value related to these options was $0.4 million (2007 -
$0.3 million) at time of grant and has been transferred from contributed surplus
to common shares.

10. CONTRIBUTED SURPLUS

|(000s)                                           |   | 2008  |   |   | 2007  |  
|------------------------------------------------ | - | ----- | - | - | ----- | -
|Contributed surplus, beginning of year           | $ | 3,562 |   | $ | 2,863 |  
|Stock-based compensation expense                 |   | 1,734 |   |   | 959   |  
|Transfer to common shares on exercise of options |   | (403  | ) |   | (260  | )
|Contributed
      surplus, end of year           | $ | 4,893 |   | $ | 3,562 |  

11. INCOME TAXES

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

|(000s)                                           |   | 2008   |   |   | 2007* | 
|------------------------------------------------ | - | ------ | - | - | ----- | 
|Temporary differences related to:                |   |        |   |   |       | 
|Fixed assets and oil
      and gas properties    | $ | 1,479  |   | $ | 1,727 | 
|Non-capital losses carried forward               |   | 210    |   |   | -     | 
|Share issue expenses                             |   | 111    |   |   | 136   | 
|                                                 |   | 1,800  |   |   | 1,863 | 
|Valuation allowance for future income tax assets |   | (1,800 | ) |   | -     | 
|Future income tax
      asset                    | $ | -      |   | $ | 1,863 | 

* 2007 comparative figures relate to discontinued operations.
See Note 5.

Current income taxes in the amount of $32.2 million (2007 -
$12.6 million) represents income taxes incurred and paid under the laws of Yemen
pursuant to the PSA on Block 32 and Block S-1 and Egypt pursuant to the PSC on
the West Gharib Concession.

|14
|--

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|TRANSGLOBE ENERGY
      CORPORATION             
|------------------------------------------------
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS

Income taxes vary from the amount that would be computed by
applying the Canadian statutory income tax rate of 29.5% (2007 32.12%) to
income before taxes as follows:

|(000s)                                                       |   | 2008   |   |   | 2007   | 
|------------------------------------------------------------ | - | ------ | - | - | ------ | 
|Income taxes calculated at the Canadian
      statutory rate | $ | 15,017 |   | $ | 8,184  | 
|Increases (decreases) in income taxes resulting from:        |   |        |   |   |        | 
|Permanent differences                                        |   | 2,639  |   |   | -      | 
|Changes in valuation allowance                               |   | (1,731 | ) |   | -      | 
|Non-deductible
      stock-based compensation expense        |   | 527    |   |   | 349    | 
|Different tax rates in Yemen and Egypt                       |   | 13,423 |   |   | 4,014  | 
|Other differences                                            |   | 2,355  |   |   | 83     | 
|Current income
      taxes                                   | $ | 32,230 |   | $ | 12,630 | 

12. SUPPLEMENTAL CASH FLOW INFORMATION

Changes in operating non-cash working capital consisted of the
following:

|(000s)                                         |   | 2008    |   |   | 2007    |  
|---------------------------------------------- | - | ------- | - | - | ------- | -
|Operating activities                           |   |         |   |   |         |  
|Increase in current assets                     |   |         |   |   |         |  
|Accounts
      receivable                      | $ | (14,292 | ) | $ | (10,384 | )
|Prepaid expenses                               |   | (265    | ) |   | (300    | )
|Working capital acquired                       |   | 3,925   |   |   | 9,108   |  
|Increase in current liabilities                |   |         |   |   |         |  
|Accounts
      payable and accrued liabilities |   | 9,284   |   |   | 2,709   |  
|Income taxes payable                           |   | 79      |   |   | -       |  
|                                               | $ | (1,269  | ) | $ | 1,133   |  
|Financing                                      |   |         |   |   |         |  
|Increase in current
      liabilities          |   |         |   |   |         |  
|Accounts payable and accrued liabilities       | $ | 1,515   |   | $ | -       |  
|                                               | $ | 1,515   |   | $ | -       |  
|Investing activities                           |   |         |   |   |         |  
|Decrease in current assets                     |   |         |   |   |         |  
|Prepaid expenses                               | $ | -       |   | $ | 180     |  
|                                               |   |         |   |   |         |  
|Decrease in current liabilities                |   |         |   |   |         |  
|Accounts payable and accrued
      liabilities |   | (2,737  | ) |   | (3,261  | )
|                                               | $ | (2,737  | ) | $ | (3,081  | )

13. ACCUMULATED OTHER COMPREHENSIVE INCOME

The balance of accumulated other comprehensive income consists
of the following:

|(000s)                                                          |   | 2008   |   |   | 2007   | 
|--------------------------------------------------------------- | - | ------ | - | - | ------ | 
|Accumulated other comprehensive income,
      beginning of year | $ | 11,766 |   | $ | 3,212  | 
|Other comprehensive (loss) income:                              |   |        |   |   |        | 
|Foreign currency translation
      adjustment                   |   | (886   | ) |   | 8,554  | 
|Accumulated other
      comprehensive income, end of year       | $ | 10,880 |   | $ | 11,766 | 

14. PER SHARE AMOUNTS

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

|(000s)                                                |  | 2008   |  |  | 2007   | 
|----------------------------------------------------- |  | ------ |  |  | ------ | 
|Weighted average number of shares
      outstanding   |  | 59,692 |  |  | 59,595 | 
|Dilution effect
      stock options                   |  | 1,012  |  |  | 930    | 
|Weighted average number of diluted shares outstanding |  | 60,704 |  |  | 60,525 | 

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, 2008, the
Company excluded 3,014,700 options (2007  2,187,000) because their exercise
price was greater than the annual average common share market price in this
period.

15. CAPITAL DISCLOSURES

The Companys objectives when managing capital are to ensure
the Company will have the financial capacity, liquidity and flexibility to fund
the ongoing exploration and development of its oil and gas assets. The Company
relies on cash flow to fund its capital investments. However, due to long lead
cycles of some of its developments and corporate acquisitions, the Companys
capital requirements may exceed its cash flow generated in any one period. This
requires the Company to maintain financial flexibility and liquidity. The
Company sets the amount of capital in proportion to risk and manages to ensure
that the total of the long-term debt is not greater than two times the Companys
funds flow from operations for the trailing twelve months. For the purposes of
measuring the Companys ability to meet the above stated criteria, funds flow
from operations is defined as the net income (including net income from
discontinued operations) before any deduction for depletion, depreciation and
accretion, amortization of deferred financing charges, non-cash stock based
compensation, and non-cash derivative loss on commodity contracts.

|15
|--

---

|TRANSGLOBE ENERGY
      CORPORATION             
|------------------------------------------------
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS

The Company defines and computes its capital as follows:

|(000s)                                        |   | 2008    |   |   | 2007    |  
|--------------------------------------------- | - | ------- | - | - | ------- | -
|                                              |   |         |   |   |         |  
|Shareholders equity                          | $ | 154,735 |   | $ | 123,243 |  
|Long-term debt, including the current portion |   | 57,230  |   |   | 56,685  |  
|Cash and cash equivalents                     |   | (7,634  | ) |   | (12,729 | )
|                                              |   |         |   |   |         |  
|Total capital                                 | $ | 204,331 |   | $ | 167,199 |  

The Companys debt-to-funds flow ratio is computed as
follows:

|                                              |   | 12 Months Trailing | 
|--------------------------------------------- | - | ------------------ | 
|(000s)                                        |   | 2008               | 
|Long-term debt, including the current portion | $ | 57,230             | 
|                                              |   |                    | 
|Cash flow from operating activities           | $ | 57,793             | 
|Changes in
      non-cash working capital     |   | 1,474              | 
|Funds flow from operations                    | $ | 59,267             | 
|                                              |   |                    | 
|Ratio                                         |   | 1.0                | 

The Companys financial objectives and strategy as described
above have remained substantially unchanged over the last two completed fiscal
years. These objectives and strategy are reviewed on an annual basis. The
Company believes that its ratios are within reasonable limits, in light of the
relative size of the Company and its capital management objectives.

The Company is also subject to financial covenants in its
revolving credit agreement. The key financial covenants are as follows:

- Interest coverage ratio of greater than 3.5 to 1.0, calculated as EBITDAX
  to interest expense, for the immediately preceding four consecutive fiscal
  quarters. For the purposes of the financial covenant calculations EBITDAX
  shall mean Consolidated Net Income before interest, income taxes,
  depreciation, depletion, amortization, and accretion, unrealized hedging
  losses and stock-based compensation expense.
- Indebtedness to EBITDAX of less than 2.0 to 1.0. For the purposes of the
  financial covenant calculation, indebtedness shall mean the balance of the
  Revolving Credit Facility, letters of credit, and any amounts payable in
  connection with a realized derivative loss.
- Current ratio (current assets to current liabilities, excluding the
  current portion of long-term debt) of greater than 1.0 to 1.0.

The Company is in compliance with all financial covenants at
December 31, 2008.

16. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

Carrying Values and Estimated Fair Values of Financial
Assets and Liabilities

The Company has classified its cash and cash equivalents as
financial assets held-for-trading and its derivative commodity contracts as
financial assets or liabilities held-for-trading, which are both measured at
fair value with changes being recognized in net income. Accounts receivable are
classified as loans and receivables; accounts payable and accrued liabilities,
income taxes payable, liabilities of discontinued operations, and long-term debt
are classified as other liabilities, all of which are measured at amortized
cost.

Carrying value and fair value of financial assets and
liabilities are summarized as follows:

|                                       |   | December 31, 2008 | 
|-------------------------------------- | - | ----------------- | 
|Classification
      (000s)            |   | Carrying Value    | 
|Financial assets held-for-trading      | $ | 10,442            | 
|Loans and receivables                  |   | 28,701            | 
|Financial liabilities held-for-trading |   | -                 | 
|Other liabilities                      |   | 73,503            | 

Credit Risk

Credit risk is the risk of loss if counterparties do not
fulfill their contractual obligations. 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 the Company extends credit. The Company has not experienced
any material credit loss in the collection of accounts receivable to date.

Trade and other receivables from continuing operations are
analyzed in the table below. With respect to the trade and other receivables
that are not impaired and past due, there are no indications as of the reporting
date that the debtors will not meet their payment obligations.

|(000s)                                                   |   |       | 
|-------------------------------------------------------- | - | ----- | 
|Trade and other
      receivables at December 31, 2008   |   |       | 
|Neither impaired nor past due                            | $ | 7,675 | 
|Impaired (net of valuation allowance)                    |   | -     | 
|Not impaired and past due in the following
      period: |   |       | 
|Within 30 days                                           |   | 2,657 | 
|31-60 days                                               |   | 3,761 | 
|61-90 days                                               |   | 4,688 | 
|Over 90 days                                             |   | 9,920 | 

|16
|--

---

|TRANSGLOBE ENERGY
      CORPORATION             
|------------------------------------------------
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS

In Egypt, the Company sold all of its 2008 production to one
purchaser. In Yemen, the Company sold all of its 2008 Block 32 production to one
purchaser and all of its 2008 Block S-1 production to one purchaser.

Market Risk

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

a) Commodity Price Risk

The Companys operational results and financial condition are
partially dependent on the commodity prices received for its oil and natural gas
production. Commodity prices have fluctuated significantly this year.

Any movement in commodity prices would have an effect on the
Companys financial condition. Therefore, the Company has entered into various
financial derivative contracts to manage fluctuations in commodity prices in the
normal course of operations. The following are the contracts outstanding at
December 31, 2008:

|                                         |                   |                  | Dated Brent  
|---------------------------------------- | ----------------- | ---------------- | -------------
|Period                                   | Volume            | Type             | Pricing      
|                                         |                   |                  | Put-Call     
|Crude Oil                                |                   |                  |              
|January 1,
      2009-December 31, 2009  | 12,000 Bbls/month | Financial Collar | $60.00-$82.10
|September 1, 2008-January 31,
      2009 | 11,000 Bbls/month | Financial Collar | $60.00-$88.80
|February 1,
      2009-December 31, 2009 | 6,000 Bbls/month  | Financial Collar | $60.00-$86.10
|January 1, 2010-August 31, 2010          | 12,000 Bbls/month | Financial Collar | $60.00-$84.25

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

When assessing the potential impact of commodity price changes
on its financial derivative commodity contracts, the Company believes 10%
volatility is a reasonable measure. The effect of a 10% increase in commodity
prices on the derivative commodity contracts would increase net income, for the
year ended December 31, 2008, by $1.2 million. The effect of a 10% decrease in
commodity prices on the derivative commodity contracts would decrease net
income, for the year ended December 31, 2008, by $1.3 million.

b) Foreign Currency Exchange Risk

The Companys Canadian dollar transactions are exposed to
fluctuations in foreign currency exchange rates. The Company manages its foreign
currency exchange risk by maintaining foreign currency bank accounts and
receivable accounts to offset foreign currency payables and planned
expenditures.

As the Companys business is conducted primarily in U.S.
dollars and its financial instruments are primarily denominated in U.S. dollars,
the potential impact of fluctuations in foreign exchange rates on the Companys
financial instruments would have a minimal impact on net income and other
comprehensive income for the year ended December 31, 2008.

c) Interest Rate Risk

Fluctuations in interest rates could result in a change in the
amount the Company pays to service variable-interest, U.S.-dollar-denominated
debt. No derivative contracts were entered into during 2008 to mitigate this
risk. When assessing interest rate risk applicable to the Companys
variable-interest, U.S.-dollar-denominated debt, the Company believes 1%
volatility is a reasonable measure. The effect of interest rates increasing by
1% would decrease the Companys net income, for the year ended December 31,
2008, by $0.6 million. The effect of interest rates decreasing by 1% would
increase the Companys net income, for year ended December 31, 2008, by $0.6
million.

Liquidity Risk

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

The Company actively maintains credit facilities to ensure it
has sufficient available funds to meet current and foreseeable financial
requirements at a reasonable cost. The following are the contractual maturities
of financial liabilities at December 31, 2008:

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

|1. | Payments exclude ongoing operating costs related to
      certain leases, interest on long-term debt and payments made to settle
      derivatives.       
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|2. | Payments denominated in foreign currencies have been
      translated at December 31, 2008 exchange rates.                                                
|3. | Minimum work commitments include contracts awarded for
      capital projects and those commitments related to exploration and drilling
      obligations.

|17
|--

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|TRANSGLOBE ENERGY
      CORPORATION             
|------------------------------------------------
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS

The Company actively monitors its liquidity to ensure that its
cash flows, credit facilities and working capital are adequate to support these
financial liabilities, as well as the Company's capital programs. The existing
banking arrangements at December 31, 2008 consist of a Revolving Credit Facility
of $60.0 million of which $58.0 million is drawn.

The table below shows cash inflows for financial derivative
instruments based on forward curve prices for Dated Brent oil of $36.55/Bbl at
December 31, 2008:

|Less
      than 1 year | $ | 2,336 | 
|---------------------- | - | ----- | 
|1-3 years              |   | 472   | 

As a result of the re-evaluation of managements intent for the
derivative commodity contracts, the derivative commodity contracts were
classified as both current and long-term on the Balance Sheet as at December 31,
2008 as there is no intent to early settle these derivative instruments.

17. SEGMENTED INFORMATION

|(000s)                                  |   | Egypt   |  |   | Yemen   |   |   | Total   | 
|--------------------------------------- | - | ------- |  | - | ------- | - | - | ------- | 
|                                        |   | 2008    |  |   | 2007    |   |   | 2008    | 
|Oil sales, net of royalties and other   | $ | 51,368  |  | $ | 6,529   |   | $ | 71,863  | 
|Other income                            |   | 36      |  |   | 61      |   |   | 1       | 
|                                        |   |         |  |   |         |   |   |         | 
|                                        | $ | 51,404  |  |   | 6,590   |   |   | 71,864  | 
|                                        |   |         |  |   |         |   |   |         | 
|Segmented expenses                      |   |         |  |   |         |   |   |         | 
|Operating expenses                      |   | 6,972   |  |   | 722     |   |   | 12,361  | 
|Depletion and depreciation              |   | 23,052  |  |   | 7,255   |   |   | 11,993  | 
|Income taxes                            |   | 14,627  |  |   | 1,735   |   |   | 17,603  | 
|                                        |   |         |  |   |         |   |   |         | 
|Total segmented expenses                |   | 44,651  |  |   | 9,712   |   |   | 41,957  | 
|                                        |   |         |  |   |         |   |   |         | 
|Segmented income                        | $ | 6,753   |  | $ | (3,122  | ) | $ | 29,907  | 
|                                        |   |         |  |   |         |   |   |         | 
|                                        |   |         |  |   |         |   |   |         | 
|                                        |   |         |  |   |         |   |   |         | 
|Non-segmented expenses                  |   |         |  |   |         |   |   |         | 
|Derivative (gain) loss on commodity     |   |         |  |   |         |   |   |         | 
|contracts (Note 16)                     |   |         |  |   |         |   |   |         | 
|General and administrative              |   |         |  |   |         |   |   |         | 
|Interest on long-term debt              |   |         |  |   |         |   |   |         | 
|Depreciation                            |   |         |  |   |         |   |   |         | 
|Foreign exchange (gain) loss            |   |         |  |   |         |   |   |         | 
|Other income                            |   |         |  |   |         |   |   |         | 
|                                        |   |         |  |   |         |   |   |         | 
|Total
      non-segmented expenses      |   |         |  |   |         |   |   |         | 
|                                        |   |         |  |   |         |   |   |         | 
|                                        |   |         |  |   |         |   |   |         | 
|Net income from continuing operations   |   |         |  |   |         |   |   |         | 
|Net income from discontinued operations |   |         |  |   |         |   |   |         | 
|(Note 5)                                |   |         |  |   |         |   |   |         | 
|                                        |   |         |  |   |         |   |   |         | 
|Net income                              |   |         |  |   |         |   |   |         | 
|                                        |   |         |  |   |         |   |   |         | 
|                                        |   |         |  |   |         |   |   |         | 
|                                        |   |         |  |   |         |   |   |         | 
|Capital expenditures                    |   |         |  |   |         |   |   |         | 
|Exploration and development             | $ | 34,797  |  | $ | 6,904   |   | $ | 8,819   | 
|Property acquisitions                   |   | 18,000  |  |   | -       |   |   | -       | 
|                                        | $ | 52,797  |  | $ | 6,904   |   | $ | 8,819   | 
|Corporate                               |   |         |  |   |         |   |   |         | 
|Corporate acquisitions                  |   |         |  |   |         |   |   |         | 
|                                        |   |         |  |   |         |   |   |         | 
|Net capital
      expenditures          |   |         |  |   |         |   |   |         | 
|                                        |   |         |  |   |         |   |   |         | 
|                                        |   |         |  |   |         |   |   |         | 
|                                        |   | Dec. 31 |  |   | Dec. 31 |   |   | Dec. 31 | 
|                                        |   | 2008    |  |   | 2007    |   |   | 2008    | 
|                                        |   |         |  |   |         |   |   |         | 
|Property and equipment                  | $ | 128,672 |  | $ | 62,316  |   | $ | 49,909  | 
|Goodwill                                |   | 8,180   |  |   | 4,313   |   |   | -       | 
|Other                                   |   | 27,517  |  |   | 13,464  |   |   | 6,430   | 
|Segmented assets                        | $ | 164,369 |  | $ | 80,093  |   | $ | 56,339  | 
|Non-segmented assets                    |   |         |  |   |         |   |   |         | 
|Discontinued operations                 |   |         |  |   |         |   |   |         | 
|                                        |   |         |  |   |         |   |   |         | 
|Total assets                            |   |         |  |   |         |   |   |         | 

|18
|--

---

|TRANSGLOBE ENERGY
      CORPORATION             
|------------------------------------------------
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS

18. COMMITMENTS AND CONTINGENCIES

The Company is subject to certain office and equipment leases
(Note 16).

Pursuant to the East Hoshia Development Lease in Egypt, the
Company has committed to drilling three exploration wells and submitted a letter
of production guarantee for $4.0 million ($1.4 million remaining) as security
(expiring June 1, 2009). One exploration well has been drilled.

Pursuant to the PSA for Block 72, Yemen, the Contractor (Joint
Venture Partners) has a minimum financial commitment of $4.0 million ($1.3
million to TransGlobe) during the first exploration period, all of which had
been spent at December 31, 2008. The Contractor entered the second three-year
exploration period on January 12, 2009. The Contractor has a commitment to drill
one exploration well for $2.0 million ($0.7 million to TransGlobe).

Pursuant to the PSA for Block 75, Yemen, the Contractor (Joint
Venture Partners) has a minimum financial commitment of $7.0 million ($1.8
million to TransGlobe) for the signature bonus and first exploration period work
program consisting of seismic acquisition and one exploration well. The first
36-month exploration period commenced March 8, 2008. The Company issued a $1.5
million letter of credit (expiring November 15, 2011) to guarantee the Companys
performance under the first exploration period. The letter is secured by a
guarantee granted by Export Development Canada.

Pursuant to the bid awarded for Block 84, Yemen, the Contractor
(Joint Venture Partners) has a minimum financial commitment of $20.1 million
($6.6 million to TransGlobe) for the signature bonus and first exploration
period work program consisting of seismic acquisition and four exploration
wells. The first 42 month exploration period will commence when the PSA has been
approved and ratified by the government of Yemen, anticipated to occur in
2009.

Pursuant to the August 18, 2008 asset purchase agreement for a
25% financial interest in eight development leases on the West Gharib concession
in Egypt, the Company has committed to paying the vendor a success fee to a
maximum of $7.0 million if incremental reserve thresholds are reached in the
East Hoshia (up to $5.0 million) and South Rahmi (up to $2.0 million)
development leases, to be evaluated annually. As at December 31, 2008, no
additional fees are due in the year 2009.

19. SUBSEQUENT EVENT

On February 4, 2009, the Company announced it had entered into
an agreement with a syndicate of underwriters, whereby the members of the
syndicate have agreed to purchase for resale, on a bought deal basis, 5,798,000
common shares of the Company at C$3.45 per Common Share to raise gross proceeds
of approximately C$20.0 million. Closing of the Offering occurred on February
25, 2009. TransGlobe has also granted the underwriters an over-allotment option
to purchase, on the same terms, up to an additional 869,700 Common Shares. This
option is exercisable, in whole or in part, by the underwriters, in their sole
discretion, at any time up to 30 days after closing. The maximum gross proceeds
raised under the Offering would be approximately C$23.0 million, should the
over-allotment option be exercised in full.

20. COMPARATIVE FIGURES

Certain comparative figures have been reclassified to conform
to the current period presentation.

21. 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 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 U.S. GAAP as described
below:

Consolidated Statements of Income and Retained Earnings
(Deficit)

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

|(000s, except per
      share amounts)                                              |   | 2008    |   |   | 2007    |  
|----------------------------------------------------------------------------------- | - | ------- | - | - | ------- | -
|Net income from continuing operations for
      the year under Canadian GAAP        | $ | 23,173  |   | $ | 8,380   |  
|Adjustments:                                                                        |   |         |   |   |         |  
|Impairment of property and
      equipment and goodwill (a)                         |   | (98,391 | ) |   | (10,615 | )
|Depletion and depreciation (a)                                                      |   | 611     |   |   | -       |  
|Net (loss) income from continuing
      operations for the year under U.S. GAAP     |   | (74,607 | ) |   | (2,235  | )
|Net income from
      discontinued operations for the year  Canadian and U.S. GAAP |   | 8,350   |   |   | 4,422   |  
|Net (loss) income for the year under U.S.
      GAAP                                |   | (66,257 | ) |   | 2,187   |  
|Purchase of common shares                                                           |   | (880    | ) |   | (375    | )
|Retained earnings, beginning of year - U.S. GAAP                                    |   | 47,377  |   |   | 45,565  |  
|Retained earnings
      (deficit), end of year - U.S. GAAP                          | $ | (19,760 | ) | $ | 47,377  |  
|                                                                                    |   |         |   |   |         |  
|Net (loss) income from continuing operations per share
      under U.S. GAAP        |   |         |   |   |         |  
|- Basic                                                                             | $ | (1.25   | ) | $ | (0.03   | )
|- Diluted                                                                           | $ | (1.25   | ) | $ | (0.03   | )
|Net income from discontinued operations per
      share under U.S. GAAP             |   |         |   |   |         |  
|- Basic                                                                             | $ | 0.14    |   | $ | 0.07    |  
|- Diluted                                                                           | $ | 0.14    |   | $ | 0.07    |  
|Net (loss) income per share under U.S. GAAP                                         |   |         |   |   |         |  
|- Basic                                                                             | $ | (1.11   | ) | $ | 0.04    |  
|-
      Diluted                                                                     | $ | (1.11   | ) | $ | 0.04    |  

|19
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|TRANSGLOBE ENERGY
      CORPORATION             
|------------------------------------------------
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS

Statement of Other Comprehensive Income

|(000s)                                    |   | 2008    |   |   | 2007   | 
|----------------------------------------- | - | ------- | - | - | ------ | 
|Net (loss) income  U.S. GAAP             | $ | (66,257 | ) | $ | 2,187  | 
|Currency
      translation adjustment (d) |   | (886    | ) |   | 8,554  | 
|Other comprehensive (loss) income         | $ | (67,143 | ) | $ | 10,741 | 

Consolidated Balance Sheets

Had the Company followed U.S. GAAP, the balance sheet would
have been reported as follows:

|(000s)                                     |   | 2008      |  |   | 2007      |  
|------------------------------------------ | - | --------- |  | - | --------- | -
|                                           |   | Cdn. GAAP |  |   | U.S. GAAP |  
|Current assets                             | $ | 40,257    |  | $ | 40,257    |  
|Property and equipment (a)                 |   | 179,329   |  |   | 79,114    |  
|Derivative commodity contracts             |   | 472       |  |   | 472       |  
|Deferred financing costs (f)               |   | -         |  |   | 770       |  
|Goodwill (a)                               |   | 8,180     |  |   | -         |  
|Other non-current
      assets             |   | -         |  |   | -         |  
|                                           | $ | 228,238   |  | $ | 120,613   |  
|                                           |   |           |  |   |           |  
|Current liabilities                        | $ | 16,273    |  | $ | 16,273    |  
|Long-term debt (f)                         |   | 57,230    |  |   | 58,000    |  
|Other non-current liabilities              |   | -         |  |   | -         |  
|                                           |   | 73,503    |  |   | 74,273    |  
|                                           |   |           |  |   |           |  
|Share capital (b, c)                       |   | 50,532    |  |   | 52,235    |  
|Contributed surplus (b)                    |   | 4,893     |  |   | 2,985     |  
|Accumulated other comprehensive income (d) |   | 10,880    |  |   | 10,880    |  
|Retained earnings (b, c)                   |   | 88,430    |  |   | (19,760   | )
|                                           |   | 154,735   |  |   | 46,340    |  
|                                           | $ | 228,238   |  | $ | 120,613   |  

The reconciling items between share capital and retained
earnings for Canadian and U.S. GAAP are $0.8 million related to escrowed shares,
and $1.3 million related to flow through shares. The reconciling items between
contributed surplus and deficit for Canadian and U.S. GAAP are $0.3 million for
the adoption of stock-based compensation under Canadian GAAP and $2.0 million
for the 2005 and 2004 stock-based compensation expense under Canadian GAAP,
which was not expensed in 2005 under U.S. GAAP APB Opinion No. 25 as interpreted
by FASB Interpretation No. 44. The reconciling item between share capital and
contributed surplus is $0.4 million for the transfer of compensation expense
related to options exercised in 2005 and prior.

a) Full Cost Accounting

The full cost method of 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 and before tax
to determine whether impairment exists. In Canada, the impaired amount is
measured using the fair value of reserves.

There are no impairment charges under Canadian GAAP as at
December 31, 2008. Under U.S. GAAP, the unamortized capitalized cost of the
Companys Egypt and Yemen oil and gas properties exceeded the full cost ceiling
limitation by $79.9 million and $14.6 million, respectively, net of taxes, which
were written off for U.S. GAAP purposes. Goodwill was tested for impairment by
comparing the fair value of the reporting to the book value of the reporting
unit, which resulted in an impairment charge to goodwill of $3.9 million.
Because of the volatility of oil and natural gas prices, no assurance can be
given that the Company will not experience a writedown in future periods.

b) Stock-based Compensation

The Company has a stock-based compensation plan as more fully
described in Note 9 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 has adopted SFAS No. 123R
effective January 1, 2006. As permitted by SFAS No. 123R, the Company has
applied this change using modified prospective application for new awards
granted after January 1, 2006 and for the compensation cost of awards that were
not vested at December 31, 2005. In 2005 and prior periods, the Company used the
intrinsic value method of accounting for stock options granted to employees and
directors whereby no costs were recognized in the financial statements, per APB
Opinion No. 25 as interpreted by FASB Interpretation No. 44.

The effect of applying APB Opinion No. 25 in 2005 and prior
years to the Companys U.S. GAAP financial statements resulted in a decrease to
stock-based compensation in 2005 by $0.7 million (2004 - $1.3 million) and a
corresponding decrease to the contributed surplus account. Also, the deficit
would decrease by $0.3 million 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. Also, the share capital would decrease
by $0.4 million for options exercised since the compensation expense was
transferred into common shares for Canadian GAAP. This is not required for U.S.
GAAP.

|20
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|TRANSGLOBE ENERGY
      CORPORATION             
|------------------------------------------------
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS

c) Future Income Taxes

The 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 2008, $Nil in 2007, $Nil in 2006, $Nil in
2005, $Nil in 2004, $0.9 million in 2003, $0.1 million in 2002 and $0.3 million
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 2008, $Nil in 2007, $Nil in 2006, $Nil in 2005, $Nil in 2004, $0.9
million in 2003, $0.1 million in 2002 and $0.3 million 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. GAAP, 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 $Nil in 2008, $Nil in 2007, $0.2
million in 2006, $0.2 million in 2005, $0.2 million in 2004 and $0.4 million in
2003 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 $Nil in 2008, $Nil in 2007, $0.2 million in 2006, $0.2 million
in 2005, $0.2 million in 2004 and $0.4 million in 2003 to record an additional
valuation allowance against the increased tax asset.

d) 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 188,000 escrow shares were released resulting in an
increase in share capital of $0.8 million with the offset to deficit.

e) Accounting for Uncertainty in Income Taxes

Effective January 1, 2007, the Company adopted FASB
Interpretation 48, Accounting For Uncertainty in Income Taxes(the
Interpretation or FIN 48), which clarifies the accounting for uncertainty in
income taxes recognized in an enterprises financial statements in accordance
with SFAS 109, Accounting for Income Taxes. The interpretation prescribes
a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return.

Under FIN 48, a company recognizes a tax benefit in the
financial statements for an uncertain tax position only if managements
assessment is that the position is more likely than not (i.e., a likelihood
greater than 50 percent) to be allowed by the tax jurisdiction based solely on
the technical merits of the position. The term tax position in FIN 48 refers
to a position in a previously filed tax return or a position expected to be
taken in a future tax return that is reflected in measuring current or deferred
income tax assets and liabilities for interim or annual periods. The
Interpretation also provides guidance on measurement methodology, derecognition
thresholds, financial statement classification and disclosures, recognition of
interest and penalties, and accounting for the cumulative-effect adjustment at
the date of adoption. Upon adoption, it was determined that there was no effect
to TransGlobe.

Tax positions for TransGlobe and its subsidiaries are subject
to income tax audits by tax jurisdictions throughout the world. For the
Companys major tax jurisdictions, examinations of tax returns for certain prior
tax periods had not been completed as of December 31, 2008. In this regard,
examinations had not been finalized for years beginning after 2007 for the
Companys Canadian federal income taxes. For other tax jurisdictions, the
earliest years for which income tax examinations had not been finalized were as
follows: Egypt  2008 and Yemen  2008.

f) Deferred Financing Costs

The Company has accounted for transaction costs differently for
Canadian and U.S. GAAP. Under Canadian GAAP transaction costs are included with
the associated financial instrument whereas under U.S. GAAP transaction costs
are presented separately as an asset.

g) Changes in Accounting Policies

Fair Value MeasurementOn January 1, 2008, the
Company adopted the Financial Accounting Standards Board (FASB) statement FAS
157, Fair Value Measurements,which defines fair value, establishes a
framework for measuring fair value in U.S. GAAP, and expands disclosures about
fair value measurements. This Statement applies under other accounting
pronouncements that require or permit fair value measurements, the Board having
previously concluded in those accounting pronouncements that fair value is the
relevant measurement attribute. The adoption of this standard did not have an
impact on the Consolidated Financial Statements.

The Fair Value Option for Financial Assets and Financial
LiabilitiesOn January 1, 2008 the Company adopted FASB statement 159,
The Fair Value Options for Financial Assets and Financial Liabilities,
which permits entities to choose to measure many financial instruments and
certain other items at fair value. The objective is to improve financial
reporting by providing entities with the opportunity to mitigate volatility in
reported earnings caused by measuring related assets and liabilities differently
without having to apply complex hedge accounting provisions.

|21
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|TRANSGLOBE ENERGY
      CORPORATION             
|------------------------------------------------
|NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS

h) Recent Accounting Pronouncements

Business CombinationsIn December 2007, the FASB
released FASB 141-R, Business Combinations. This Statement applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008, which are business combinations in the year ending December
31, 2009 for the Company. The objective of this Statement is to improve the
relevance, representational faithfulness, and comparability of the information
that a reporting entity provides in its financial reports about a business
combination and its effects. The Company will assess the impact of this standard
for Business Combinations occurring after January 1, 2009.

Noncontrolling Interests in Consolidated Financial
StatementsIn December 2007, the FASB released FASB 160,
Noncontrolling Interests in Consolidated Financial Statements  an amendment
of ARB No. 51. This Statement is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008,
which for the Company is the year ending December 31, 2009 and the interim
periods within that fiscal year. The objective of this Statement is to improve
the relevance, comparability, and transparency of the financial information that
a reporting entity provides in its consolidated financial statements. This
standard currently does not impact the Company as it has full controlling
interest of all of its subsidiaries.

Derivative Instruments and Hedging ActivitiesIn
March 2008, the FASB issued FASB Statement 161, Disclosures about Derivative
Instruments and Hedging Activities  an amendment of FASB Statement 133which requires enhanced disclosures about (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and related hedged items
are accounted for under Statement 133 and its related interpretations, and (c)
how derivative instruments and related hedged items affect an entitys financial
position, financial performance, and cash flows. FASB Statement 161 is effective
for financial statements issued for fiscal years and interim periods beginning
after November 15, 2008. The Company is currently assessing the impact of this
requirement on the Consolidated Financial Statements.

Hierarchy of Generally Accepted Accounting PrinciplesIn May 2008, the FASB issued FAS 162, The Hierarchy of Generally
Accepted Accounting Principles. This standard identifies the sources of
accounting principle and the framework for selecting the principles to be used
in the preparation of financial statements. This standard is effective for the
Company 60 days following the SECs approval of the PCAOBs amendments to AU
Section 411, The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles. The Company does not expect the application
of FAS 162 to have an impact on the financial statements.

Postretirement Benefit Plan Asset DisclosuresIn
December 2008, the FASB issued FSP FAS 132(R)-1, which amends Statement 132(R)
to require more detailed disclosure about employers benefit plan assets,
including employers investment strategies, major categories of benefit plan
assets, concentration of risk within benefit plan assets, and valuation
techniques used to measure the fair value of benefit plan assets. This standard
currently does not impact the Company as it does not have a postretirement
benefit plan.

Oil and Gas ReportingAs of December 31, 2009,
TransGlobe will be required to prospectively adopt the new reserves requirements
that arise from the completion of the SECs project, Modernization of Oil and
Gas Reporting. The new rules include provisions that permit the use of new
technologies to establish proved reserves if those technologies have been
demonstrated empirically to lead to reliable conclusions about reserves volumes.
Additionally, oil and gas reserves will be reported using an average price based
upon the prior 12-month period rather than year-end prices. The new rules will
affect the reserve estimate used in the calculation of DD&A and the ceiling
test for U.S. GAAP purposes. The Company is assessing the impact these new rules
will have on its Consolidated Financial Statements.

|22
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