---

Management's Report

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 judgements made by management.

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

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.

|                        |                          
|----------------------- | -------------------------
|                        |                          
|Ross G. Clarkson        | David C. Ferguson        
|President &             | Vice President, Finance &
|Chief Executive Officer | Chief Financial Officer  
|                        |                          
|                        |                          
|                        |                          
|March 20, 2007          |                          

42

2006 Annual Report

---

Report of Independent Registered Chartered
  Accountants

To the Shareholders of TransGlobe Energy Corporation:

We have audited the consolidated balance sheets of TransGlobe
  Energy Corporation as at December 31, 2006 and 2005 and the consolidated statements
  of income and retained earnings (deficit) and cash flows for the years then
  ended. These financial statements are the responsibility of the Companys
  management. Our responsibility is to express an opinion on these financial statements
  based on our audits.

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

In our opinion, these consolidated financial statements present
  fairly, in all material respects, the financial position of the Company as at
  December 31, 2006 and 2005 and the results of its operations and its cash flows
  for the years then ended in accordance with Canadian generally accepted accounting
  principles.

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

Independent Registered Chartered Accountants
  Calgary, Alberta, Canada
  February 23, 2007

COMMENTS BY INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS
  ON CANADA-UNITED STATES OF AMERICA REPORTING DIFFERENCE

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 material effect on the comparability of the Companys financial statements,
  such as the changes described in Note 2 of the consolidated financial statements.
  Our report to the Shareholders, dated February 23, 2007, is expressed in accordance
  with Canadian reporting standards which do not require a reference to such changes
  in accounting principles in the auditors report when the change is properly
  accounted for and adequately disclosed in the financial statements.

Independent Registered Chartered Accountants
  Calgary, Alberta, Canada
  February 23, 2007

43

TransGlobe Energy Corporation

---

Consolidated Statements of Income and Retained
  Earnings (Deficit)

(Expressed in thousands of U.S. Dollars)

|                                                              |   | Year Ended              |   |   | Year Ended              |  
|------------------------------------------------------------- | - | ----------------------- | - | - | ----------------------- | -
|                                                              |   | December
      31, 2006 |   |   | December
      31, 2005 |  
|                                                              |   |                         |   |   |                         |  
|REVENUE                                                       |   |                         |   |   |                         |  
|Oil and gas
      sales, net of royalties and other           | $ | 70,097                  |   | $ | 58,911                  |  
|Unrealized gain (loss) on
      commodity contracts (Note 14) |   | (83                     | ) |   | 83                      |  
|Other income                                                  |   | 283                     |   |   | 46                      |  
|                                                              |   | 70,297                  |   |   | 59,040                  |  
|                                                              |   |                         |   |   |                         |  
|EXPENSES                                                      |   |                         |   |   |                         |  
|Operating                                                     |   | 11,107                  |   |   | 10,253                  |  
|General and administrative                                    |   | 4,674                   |   |   | 3,544                   |  
|Foreign exchange
      (gain) loss                            |   | (12                     | ) |   | 42                      |  
|Interest                                                      |   | -                       |   |   | 8                       |  
|Depletion, depreciation
      and accretion                   |   | 18,941                  |   |   | 16,990                  |  
|                                                              |   | 34,710                  |   |   | 30,837                  |  
|                                                              |   |                         |   |   |                         |  
|Income before income taxes                                    |   | 35,587                  |   |   | 28,203                  |  
|                                                              |   |                         |   |   |                         |  
|                                                              |   |                         |   |   |                         |  
|INCOME TAXES(Note 9)                                          |   |                         |   |   |                         |  
|Current                                                       |   | 9,129                   |   |   | 7,882                   |  
|Future                                                        |   | 263                     |   |   | 471                     |  
|                                                              |   | 9,392                   |   |   | 8,353                   |  
|                                                              |   |                         |   |   |                         |  
|NET INCOME                                                    |   | 26,195                  |   |   | 19,850                  |  
|                                                              |   |                         |   |   |                         |  
|Retained earnings
      (deficit), beginning of year          |   | 19,165                  |   |   | (685                    | )
|                                                              |   |                         |   |   |                         |  
|RETAINED EARNINGS,
      END OF YEAR                          | $ | 45,360                  |   | $ | 19,165                  |  
|                                                              |   |                         |   |   |                         |  
|Net income per share(Note 11)                                 |   |                         |   |   |                         |  
|Basic                                                         | $ | 0.45                    |   | $ | 0.34                    |  
|Diluted                                                       | $ | 0.43                    |   | $ | 0.33                    |  

44

2006 Annual Report

---

Consolidated Balance Sheets

(Expressed in thousands of U.S. Dollars)

|                                               |   | December
      31, 2006 |  |   | December
      31, 2005 | 
|---------------------------------------------- | - | ----------------------- |  | - | ----------------------- | 
|                                               |   |                         |  |   |                         | 
|ASSETS                                         |   |                         |  |   |                         | 
|Current                                        |   |                         |  |   |                         | 
|Cash and
      cash equivalents                | $ | 8,836                   |  | $ | 12,221                  | 
|Accounts receivable                            |   | 7,742                   |  |   | 7,414                   | 
|Product inventory                              |   | 508                     |  |   | 436                     | 
|Prepaid expenses                               |   | 782                     |  |   | 463                     | 
|Unrealized commodity contracts
      (Note 14) |   | -                       |  |   | 83                      | 
|                                               |   | 17,868                  |  |   | 20,617                  | 
|                                               |   |                         |  |   |                         | 
|Property and equipment                         |   |                         |  |   |                         | 
|Republic
      of Yemen (Note 3)               |   | 46,124                  |  |   | 30,898                  | 
|Canada (Note 4)                                |   | 42,645                  |  |   | 30,261                  | 
|Arab Republic of Egypt
      (Note 5)          |   | 7,839                   |  |   | 2,512                   | 
|                                               |   | 96,608                  |  |   | 63,671                  | 
|                                               |   |                         |  |   |                         | 
|Future income tax asset (Note 9)               |   | 1,626                   |  |   | 1,886                   | 
|Deferred financing costs (Note 6)              |   | 371                     |  |   | 112                     | 
|                                               |   |                         |  |   |                         | 
|                                               | $ | 116,473                 |  | $ | 86,286                  | 
|                                               |   |                         |  |   |                         | 
|LIABILITIES                                    |   |                         |  |   |                         | 
|Current                                        |   |                         |  |   |                         | 
|Accounts
      payable and accrued liabilities | $ | 13,507                  |  | $ | 11,146                  | 
|                                               |   |                         |  |   |                         | 
|Asset retirement obligations (Note 7)          |   | 2,171                   |  |   | 1,503                   | 
|                                               |   | 15,678                  |  |   | 12,649                  | 
|                                               |   |                         |  |   |                         | 
|Commitments and contingencies (Note 13)        |   |                         |  |   |                         | 
|                                               |   |                         |  |   |                         | 
|SHAREHOLDERS EQUITY                           |   |                         |  |   |                         | 
|Share capital (Note 8)                         |   | 49,360                  |  |   | 48,922                  | 
|Contributed surplus (Note 8d)                  |   | 2,863                   |  |   | 1,908                   | 
|Cumulative translation adjustment              |   | 3,212                   |  |   | 3,642                   | 
|Retained earnings                              |   | 45,360                  |  |   | 19,165                  | 
|                                               |   | 100,795                 |  |   | 73,637                  | 
|                                               |   |                         |  |   |                         | 
|                                               | $ | 116,473                 |  | $ | 86,286                  | 

APPROVED ON BEHALF OF THE BOARD

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

45

TransGlobe Energy Corporation

---

Consolidated Statements of Cash Flows

|(Expressed in thousands of U.S. Dollars)               |   |                         |   |   |                         |  
|------------------------------------------------------ | - | ----------------------- | - | - | ----------------------- | -
|                                                       |   | Year Ended              |   |   | Year Ended              |  
|                                                       |   | December
      31, 2006 |   |   | December
      31, 2005 |  
|                                                       |   |                         |   |   |                         |  
|CASH FLOWS
      RELATED TO THE                        |   |                         |   |   |                         |  
|FOLLOWING ACTIVITIES:                                  |   |                         |   |   |                         |  
|                                                       |   |                         |   |   |                         |  
|OPERATING                                              |   |                         |   |   |                         |  
|Net income                                             | $ | 26,195                  |   | $ | 19,850                  |  
|Adjustments for:                                       |   |                         |   |   |                         |  
|Depletion, depreciation
      and accretion            |   | 18,941                  |   |   | 16,990                  |  
|Amortization of deferred financing
      costs         |   | 179                     |   |   | 291                     |  
|Future income taxes                                    |   | 263                     |   |   | 471                     |  
|Stock-based compensation (Note
      8d)               |   | 1,168                   |   |   | 723                     |  
|Unrealized (gain)
      loss on commodity contracts    |   | 83                      |   |   | (83                     | )
|Settlement of asset retirement
      obligations       |   | (66                     | ) |   | (165                    | )
|Changes in non-cash working capital (Note 10)          |   | 620                     |   |   | 1,280                   |  
|                                                       |   | 47,383                  |   |   | 39,357                  |  
|                                                       |   |                         |   |   |                         |  
|FINANCING                                              |   |                         |   |   |                         |  
|Issue of common shares for cash                        |   | 297                     |   |   | 1,218                   |  
|Deferred financing costs                               |   | (438                    | ) |   | (17                     | )
|Changes in non-cash working capital (Note 10)          |   | -                       |   |   | (24                     | )
|                                                       |   | (141                    | ) |   | 1,177                   |  
|                                                       |   |                         |   |   |                         |  
|INVESTING                                              |   |                         |   |   |                         |  
|Exploration and development expenditures               |   |                         |   |   |                         |  
|Republic of Yemen                                      |   | (26,585                 | ) |   | (17,939                 | )
|Canada                                                 |   | (19,605                 | ) |   | (13,189                 | )
|Arab Republic of Egypt                                 |   | (5,365                  | ) |   | (1,526                  | )
|Changes in non-cash working capital (Note 10)          |   | 1,035                   |   |   | (509                    | )
|                                                       |   | (50,520                 | ) |   | (33,163                 | )
|                                                       |   |                         |   |   |                         |  
|Effect of exchange rate changes
      on cash and      |   |                         |   |   |                         |  
|cash equivalents                                       |   | (107                    | ) |   | (138                    | )
|                                                       |   |                         |   |   |                         |  
|NET INCREASE
      IN CASH AND CASH EQUIVALENTS        |   | (3,385                  | ) |   | 7,233                   |  
|                                                       |   |                         |   |   |                         |  
|CASH AND CASH EQUIVALENTS,
      BEGINNING OF YEAR     |   | 12,221                  |   |   | 4,988                   |  
|                                                       |   |                         |   |   |                         |  
|CASH AND CASH EQUIVALENTS,
      END OF YEAR (Note 10) | $ | 8,836                   |   | $ | 12,221                  |  

46

2006 Annual Report

---

Notes to the Consolidated Financial Statements

Years Ended December 31, 2006 and December 31, 2005(Expressed in U.S. Dollars, unless otherwise stated)

1. SUMMARY OF SIGNIFICANT ACCOUNTING
  POLICIES

The Consolidated Financial Statements
  include the accounts of TransGlobe Energy Corporation and subsidiaries (TransGlobe
  or the Company), and are presented in accordance with Canadian generally
  accepted accounting principles (information prepared in accordance with generally
  accepted accounting principles in the United States is included in Note 16).
  In these Consolidated Financial Statements, unless otherwise indicated, all
  dollar amounts are expressed in United States (U.S.) dollars. All references
  to US$ or to $ are to United States dollars and references to C$ are to Canadian
  dollars.

Nature of Business and Principles of Consolidation

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

| | * | Block 32, Block S-1, Block 72, Block 75 and Block 84
        within the Republic of Yemen.
| | - | ------------------------------------------------------------------------------------------
| | * | the Western Canadian Sedimentary Basin within Canada.                                     
| | * | Nuqra Block 1 within the Arab Republic of Egypt.                                          

Joint Ventures

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

Currency Translation

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

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

Measurement Uncertainty

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

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

47

TransGlobe Energy Corporation

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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 non-governmental partners pay all
  operating and capital costs for exploring and developing the concessions. Each
  PSA establishes specific terms for the Company to recover these costs (Cost
  Recovery Oil) and to share in the production profits (Profit 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. Profit 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. Profit 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 records income taxes using
  the liability method. Under this method, future income tax assets and liabilities
  are measured using the substantively enacted tax rates expected to apply to
  taxable income in the years in which the temporary differences are expected
  to be recovered or settled.

Flow Through Shares

The Company has financed a portion of
  its 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.

Per Share Amounts

Basic net income per share is calculated
  using the weighted average number of shares outstanding during the year. Diluted
  net income per share is calculated by giving effect to the potential dilution
  that would occur if stock options were exercised. Diluted net income per share
  is calculated using the treasury stock method. The treasury stock method assumes
  that the proceeds received from the exercise of in-the-money stock
  options are used to repurchase common shares at the average market price.

Cash and Cash Equivalents

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

48

2006 Annual Report

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Depletion, Depreciation, Amortization and Impairment (DD&A)

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

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

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

An impairment loss is recognized in net
  income if the carrying amount of a country (cost centre) is not recoverable
  and the carrying amount of the cost centre exceeds its fair value. The carrying
  amount of the cost centre is not recoverable if the carrying amount exceeds
  the sum of the undiscounted cash flows from proved reserves. If the sum of the
  cash flows is less than carrying amount, the impairment is the amount by which
  the carrying amount exceeds the sum of:

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

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

Amortization of Deferred Financing Costs

Deferred financing costs are charged
  to expense on a straight-line basis over the term of the related loan facility.

Asset Retirement Obligations

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

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

Stock-based Compensation

The Company records compensation expense
  in the Consolidated Financial Statements for stock options granted to employees
  and directors using the fair value method. Fair values are determined using
  the lattice-based binomial option pricing model in 2006, and the Black-Scholes
  option pricing model in 2005 and prior years. Compensation costs are recognized
  over the vesting period.

49

TransGlobe Energy Corporation

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Derivative Financial Instruments

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.

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 natural gas and crude oil 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.

2. CHANGES IN ACCOUNTING POLICIES

Non-monetary transactions

Effective January 1, 2006, the Canadian
  Institute of Chartered Accountants (CICA) Section 3831 Non-Monetary Transactions
  was adopted by the Company which replaced Section 3830 of the same name. The
  Standard, which harmonizes Canadian generally accepted accounting principles
  with the United States Financial Accounting Standards Board (FASB) Statement
  153 Exchanges of Non-Monetary Assets, requires that all non-monetary transactions
  are measured based on fair value unless the transaction lacks commercial substance
  or is an exchange of product or property held for sale in the ordinary course
  of business. A transaction is determined to have commercial substance if it
  causes an identifiable and measurable change in the economic circumstances,
  or expected cash flows, of the entity. The guidance was effective for all non-monetary
  transactions initiated in periods beginning on or after January 1, 2006. The
  adoption of Section 3831 had no effect on the Companys Consolidated Financial
  Statements.

Implicit variable interests

Effective January 1, 2006, Emerging Issues
  Committee (EIC) Abstract 157 Implicit Variable Interests was adopted
  by the Company. The Abstract harmonizes Canadian generally accepted accounting
  principles with the United States FASB Staff Position (FSP) FIN 46(R)-5 Implicit
  Variable Interests. Implicit variable interests are implied financial interests
  in an entity and act the same as an explicit variable interest except they involve
  the absorbing and or receiving of variability indirectly from the entity rather
  than directly. The adoption of EIC Abstract 157 had no effect on the Companys
  Consolidated Financial Statements.

Conditional asset retirement obligations

Effective April 1, 2006, EIC Abstract
  159 Accounting for Conditional Asset Retirement Obligations was
  adopted by the Company. The Abstract, which is harmonized with the equivalent
  United States FASB Interpretation 47 (Accounting for Conditional Asset Retirement
  Obligations), clarifies the accounting for conditional asset retirement obligations
  where the timing or method of settlement are conditional on a future event that
  may or may not be within the control of the entity. Although these uncertainties
  affect the fair value of the liability, they do not relieve an entity from the
  requirement to record a liability, if it can be reasonably determined. The adoption
  of EIC Abstract 159 had no effect on the Companys Consolidated Financial
  Statements.

Stock-based compensation for employees
  eligible to retire before the vesting date

In the fourth quarter of 2006, the Company
  retroactively adopted EIC Abstract 162, Stock-Based Compensation for Employees
  Eligible to Retire Before the Vesting Date. The Abstract provides that
  if an employee is eligible to retire on the grant date of a stock-based award,
  related compensation expense is recognized in full at that date as there is
  no ongoing service requirement to earn the award. In addition, if an employee
  becomes eligible to retire during the vesting period, related compensation expense
  is recognized over the period from the grant date to the retirement eligibility
  date on a graded vesting basis. The Abstract is effective for interim and annual
  periods ending on or after December 31, 2006 and is to be adopted on a retroactive
  basis. This EIC had no effect on the Companys Consolidated Financial Statements
  for the twelve months ended December 31, 2006 and 2005.

50

2006 Annual Report

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3. PROPERTY AND EQUIPMENT - REPUBLIC
  OF YEMEN

| | (000s)                                |   | 2006    |   |   | 2005    |  
| | -------------------------------------- | - | ------- | - | - | ------- | -
| |                                        |   |         |   |   |         |  
| | Oil and gas properties                 |   |         |   |   |         |  
| | - Block S-1                            | $ | 54,410  |   | $ | 37,269  |  
| | - Block 32                             |   | 34,060  |   |   | 25,790  |  
| | - Block 72                             |   | 2,373   |   |   | 1,479   |  
| | - Block 75                             |   | 250     |   |   | -       |  
| | - Block 84                             |   | 15      |   |   | -       |  
| | - Other                                |   | 96      |   |   | 90      |  
| | Accumulated depletion and depreciation |   | (45,080 | ) |   | (33,730 | )
| |                                        | $ | 46,124  |   | $ | 30,898  |  

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. The Contractor (Joint Venture
  Partners) is in the first exploration period of the Block 72 (33%) PSA which
  ends in January 2008, at which time the Contractor can elect to proceed to the
  second exploration period. The Block 84 (33%) and Block 75 (25%) PSAs
  are in the ratification process with the Republic of Yemen.

During the year the Company capitalized
  overhead costs relating to exploration and development activities of $419,000
  (2005 - $351,000). Unproven property costs in the amount of $2,638,000 in 2006
  ($1,479,000 in 2005) were excluded in the costs subject to depletion and depreciation
  representing the costs incurred at Block 72, Block 75 and Block 84.

4. PROPERTY AND EQUIPMENT - CANADA

| | (000s)                                |   | 2006    |   |   | 2005   |  
| | -------------------------------------- | - | ------- | - | - | ------ | -
| | Oil and gas properties                 | $ | 57,624  |   | $ | 38,144 |  
| | Furniture and fixtures                 |   | 1,004   |   |   | 867    |  
| | Accumulated depletion and depreciation |   | (15,983 | ) |   | (8,750 | )
| |                                        | $ | 42,645  |   | $ | 30,261 |  

During the year the Company capitalized
  overhead costs relating to exploration and development activities of $524,000
  (2005 - $317,000).

5. PROPERTY AND EQUIPMENT - ARAB REPUBLIC
  OF EGYPT

| | (000s)                  |   | 2006  |   |   | 2005  |  
| | ------------------------ | - | ----- | - | - | ----- | -
| | Oil and gas properties   | $ | 7,683 |   | $ | 2,457 |  
| | Furniture and fixtures   |   | 199   |   |   | 61    |  
| | Accumulated depreciation |   | (43   | ) |   | (6    | )
| |                          | $ | 7,839 |   | $ | 2,512 |  

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

The Company capitalized general and administrative
  costs relating to TransGlobe Petroleum Egypt Inc. of $1,056,000 (2005 - $1,007,000).
  The remaining costs related to drilling preparation and geological and geophysical
  activity. Unproven property costs associated with Nuqra Block 1 in the amount
  of $7,683,000 in 2006 (2005 - $2,457,000) were excluded from costs subject to
  depletion and depreciation.

51

TransGlobe Energy Corporation

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6. LONG-TERM DEBT

The Company has a $55 million credit
  agreement, with the initial borrowing base established at $25 million, which
  expires July 18, 2009. The credit agreement bears interest at the Eurodollar
  Rate plus three percent and is secured by a first floating charge debenture
  over all assets of the Company, a general assignment of book debts and certain
  covenants, among other things. At December 31, 2006 $Nil (2005 - $Nil) was drawn
  on these loan facilities.

During the year the Company spent $438,000
  to secure the credit agreement, of which $67,000 was amortized to the income
  statement and the remaining $371,000 was deferred and will be amortized to income
  over the term of the loan facility.

7. ASSET RETIREMENT OBLIGATIONS

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

| | (000s)                                               | 2006          |   | 2005    |  
| | ----------------------------------------------------- | ------------- | - | ------- | -
| | Asset retirement obligations, beginning of
      year | $ 1,503       |   | $ 902   |  
| | Liabilities incurred                                  | 632           |   | 638     |  
| | Liabilities settled                                   | (66           | ) | (165    | )
| | Accretion                                             | 124           |   | 75      |  
| | Foreign exchange (gain) loss                          | (22           | ) | 53      |  
| | Asset retirement obligations,
      end of year       | $
      2,171 |   | $ 1,503 |  

At December 31, 2006, the estimated total
  undiscounted amount required to settle the asset retirement obligations was
  $2,957,000 (2005 - $2,171,000). These obligations will be settled at the end
  of the useful lives of the underlying assets, which currently extend up to 9
  years into the future. This amount has been discounted using a credit-adjusted
  risk-free interest rate of 6.5% .

8. SHARE CAPITAL

|a) | Authorized                                                                                        
|-- | --------------------------------------------------------------------------------------------------
|   |                                                                                                   
|   | The Company is authorized to issue an unlimited number
        of common shares with no par value.
|   |                                                                                                   
|b) | Issued                                                                                            

| |                                                                  | Number          |  |          | 
| | ---------------------------------------------------------------- | --------------- |  | -------- | 
| | (000s)                                                          | of
      shares |  | Amount   | 
| | Balance, December 31, 2004                                       | 57,176          |  | $ 47,296 | 
| | Stock options exercised (c)                                      | 1,297           |  | 1,218    | 
| | Transfer from contributed surplus related to
      stock options |                 |  |          | 
| | exercised (d)                                                    | -               |  | 408      | 
| | Balance, December 31, 2005                                       | 58,473          |  | 48,922   | 
| | Stock options exercised (c)                                      | 410             |  | 297      | 
| | Transfer from contributed surplus related to
      stock options |                 |  |          | 
| | exercised (d)                                                    | -               |  | 141      | 
| | Balance, December 31, 2006                                       | 58,883          |  | $ 49,360 | 

52

2006 Annual Report

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|c) | Stock Options                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | The Company adopted a stock option plan in May 2004
        (the Plan). The maximum number of common shares to be issued
        upon the exercise of options granted under the Plan is 5,888,300 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.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | The following tables summarize information about the
        stock options outstanding and exercisable at December 31, 2006:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

| |                                          | 2006    | 2005          
| | ---------------------------------------- | ------- | --------------
| |                                          | Number  | Weighted-     
| |                                          | of      | Average       
| | (000s except
      per share amounts)   | Options | Exercise Price
| | Options outstanding at beginning of year | 3,361   | $2.76         
| | Granted                                  | 297     | $4.60         
| | Exercised                                | (410)   | $0.63         
| | Cancelled                                | (138)   | $4.85         
| | Options outstanding                      |         |               
| | at end of year                           | 3,110   | $3.12         
| | Options exercisable                      |         |               
| | at end of year                           | 2,143   | $2.20         

| |                | Options Outstanding | Options Exercisable
| | -------------- | ------------------- | -------------------
| |                | Number              | Weighted-          
| |                | Out-                | Average            
| |                | standing            | Remaining          
| |                | at Dec. 31          | Contractual        
| |                | 2006                | Life               
| | Exercise Price | (000s)             | (Years)            
| | C$0.50-C$0.63  | 800                 | 0.3                
| | C$3.26-C$4.50  | 955                 | 2.2                
| | C$6.03-C$7.74  | 1,109               | 3.8                
| | US$5.17        | 54                  | 3.9                
| | C$5.07-C$5.49  | 192                 | 4.8                
| |                | 3,110               | 2.5                

|d) | Stock-based Compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | Compensation expense of $1,168,000 has been recorded
        in general and administrative expenses in the Consolidated Statements
        of Income and Retained Earnings (Deficit) in 2006 (2005- $723,000). The
        fair value of all common stock options granted is estimated on the date
        of grant using the lattice-based binomial option pricing model in 2006,
        and the Black-Scholes option-pricing model prior to 2006. The weighted
        average fair value of options granted during the year and the assumptions
        used in their determination are as noted below:

53

TransGlobe Energy Corporation

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| |                                                           | 2006               |  |  | 2005  | 
| | --------------------------------------------------------- | ------------------ |  |  | ----- | 
| | Weighted average fair market value per option
      (C$)  | $  2.23            |  |  | 3.38  | 
| | Risk free interest rate (%)                               | 4.09               |  |  | 3.86  | 
| | Expected lives (years)                                    | 5.00               |  |  | 4.00  | 
| | Expected volatility (%)                                   | 48.79              |  |  | 68.19 | 
| | Dividend per share                                        | 0.00               |  |  | 0.00  | 
| | Early exercise (Year
      1/Year 2/Year 3/Year 4/Year 5) | 0%/10%/20%/30%/40% |  |  | N/A   | 

During the year, employees exercised
  410,000 stock options. In accordance with Canadian generally accepted accounting
  principles, the fair value related to these options was $141,000 at time of
  grant and has been transferred from contributed surplus to common shares.

| | (000s)                                                      |   | 2006  |   |   | 2005  |  
| | ------------------------------------------------------------ | - | ----- | - | - | ----- | -
| | Contributed surplus, beginning of year                       | $ | 1,908 |   | $ | 1,593 |  
| | Stock-based compensation expense                             |   | 1,096 |   |   | 723   |  
| | Transfer of stock-based compensation expense
      to common |   |       |   |   |       |  
| | shares related to stock options exercised                    |   | (141  | ) |   | (408  | )
| | Contributed surplus, end of year                             | $ | 2,863 |   | $ | 1,908 |  

9. INCOME TAXES

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

| | (000s)                                  |   | 2006  |  |   | 2005  | 
| | ---------------------------------------- | - | ----- |  | - | ----- | 
| | Temporary differences related to:        |   |       |  |   |       | 
| | Oil and gas properties                   | $ | 1,292 |  | $ | 1,555 | 
| | Non-capital
      losses carried forward |   | 214   |  |   | 118   | 
| | Share issue expenses                     |   | 120   |  |   | 213   | 
| |                                          | $ | 1,626 |  | $ | 1,886 | 

The Company has deductible temporary
  differences of C$818,000 related to non-capital losses carried forward, C$460,000
  related to share issuance expenses and C$4,941,000 related to income tax pools
  in excess of the carrying value of the Companys Canadian property and
  equipment. The Company also has $12,764,000 of income tax losses in the United
  States of America. The Canadian losses carried forward expire in 2009 and the
  United States of America losses carried forward expire between 2008 and 2020.

Current income taxes in the amount of
  $9,129,000 (2005 - $7,882,000) represents income taxes incurred and paid under
  the laws of the Republic of Yemen pursuant to the PSA on Block 32 and Block
  S-1.

The provision for income taxes has been
  computed as follows:

| | (000s)                                                                |   | 2006   |   |   | 2005   |  
| | ---------------------------------------------------------------------- | - | ------ | - | - | ------ | -
| | Computed Canadian expected income tax                                  |   |        |   |   |        |  
| | expense
      at 34.5% (2005 - 37.62%)                                 | $ | 12,276 |   | $ | 10,660 |  
| | Non-deductible Crown charges (net of Alberta
      Royalty Tax Credit) |   | 196    |   |   | 407    |  
| | Resource allowance                                                     |   | (239   | ) |   | (522   | )
| | Non-deductible stock-based compensation expense                        |   | 403    |   |   | 272    |  
| | Different tax rates in the Republic of Yemen                           |   | (3,523 | ) |   | (1,751 | )
| | Future income tax assets not previously recognized                     |   | -      |   |   | (594   | )
| | Other differences                                                      |   | 279    |   |   | (119   | )
| |                                                                        | $ | 9,392  |   | $ | 8,353  |  

54

2006 Annual Report

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10. SUPPLEMENTAL CASH FLOW INFORMATION

| | (000s)                                          |   | 2006  |   |   | 2005   |  
| | ------------------------------------------------ | - | ----- | - | - | ------ | -
| | Operating activities                             |   |       |   |   |        |  
| | Decrease (increase) in current
      assets      |   |       |   |   |        |  
| | Accounts receivable                              | $ | (556  | ) | $ | (591   | )
| | Prepaid expenses                                 |   | 61    |   |   | (189   | )
| | Product inventory                                |   | (60   | ) |   | 17     |  
| | Increase (decrease) in current
      liabilities |   |       |   |   |        |  
| | Accounts payable and accrued liabilities         |   | 1,175 |   |   | 2,043  |  
| |                                                  | $ | 620   |   | $ | 1,280  |  
| |                                                  |   |       |   |   |        |  
| | Investing activities                             |   |       |   |   |        |  
| | Decrease
      (increase) in current assets      |   |       |   |   |        |  
| | Accounts receivable                              | $ | 228   |   | $ | (795   | )
| | Prepaid expenses                                 |   | (379  | ) |   | -      |  
| |                                                  |   |       |   |   |        |  
| | Increase
      (decrease) in current liabilities |   |       |   |   |        |  
| | Accounts payable and accrued
      liabilities   |   | 1,186 |   |   | 286    |  
| |                                                  | $ | 1,035 |   | $ | (509   | )
| |                                                  |   |       |   |   |        |  
| | Financing activities                             |   |       |   |   |        |  
| | Increase (decrease) in current
      liabilities |   |       |   |   |        |  
| | Accounts payable and accrued liabilities         | $ | -     |   | $ | (24    | )
| |                                                  | $ | -     |   | $ | (24    | )
| |                                                  |   |       |   |   |        |  
| | Interest paid                                    | $ | -     |   | $ | 8      |  
| |                                                  |   |       |   |   |        |  
| | Taxes paid                                       | $ | 9,129 |   | $ | 7,882  |  
| |                                                  |   |       |   |   |        |  
| | Cash on hand and balances with banks             | $ | 8,836 |   | $ | 5,193  |  
| | Short-term investments                           |   | -     |   |   | 7,028  |  
| | Total cash and cash
      equivalents            | $ | 8,836 |   | $ | 12,221 |  

11. NET INCOME PER SHARE

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

| | (000s)                                                     |  | 2006   |   |  | 2005   |  
| | ----------------------------------------------------------- |  | ------ | - |  | ------ | -
| | Weighted average number of shares outstanding               |  | 58,663 |   |  | 57,903 |  
| | Shares issuable pursuant to stock options                   |  | 2,662  |   |  | 3,251  |  
| | Shares to be purchased from proceeds of stock
      options |  |        |   |  |        |  
| | under treasury stock method                                 |  | (763   | ) |  | (824   | )
| | Weighted average number of diluted shares outstanding       |  | 60,562 |   |  | 60,330 |  

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, 2006, the Company excluded 1,109,000 options (2005 - 63,000)
  because their exercise price was greater than the annual average common share
  market price in this period.

55

TransGlobe Energy Corporation

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12. SEGMENTED INFORMATION

In 2006 the Company had oil and natural
  gas production in two geographic segments, the Republic of Yemen and Canada,
  and has operations in a third geographic segment, the Arab Republic of Egypt.
  The property and equipment in each geographic segment are disclosed in Notes
  3, 4 and 5.

The results of operations for the year
  ended December 31, 2006 are comprised of the following:

| |                                                                                                      |   |          |  |   |        |  |   | Arab     |   |   |        | 
| | ---------------------------------------------------------------------------------------------------- | - | -------- |  | - | ------ |  | - | -------- | - | - | ------ | 
| |                                                                                                      |   | Republic |  |   |        |  |   | Republic |   |   |        | 
| | (000s)                                                                                              |   | of Yemen |  |   | Canada |  |   | of Egypt |   |   | Total  | 
| |                                                                                                      |   |          |  |   |        |  |   |          |   |   |        | 
| | Revenue                                                                                              |   |          |  |   |        |  |   |          |   |   |        | 
| | Oil and gas sales, net of
      royalties and other                                                  | $ | 56,836   |  | $ | 13,261 |  | $ | -        |   | $ | 70,097 | 
| |                                                                                                      |   |          |  |   |        |  |   |          |   |   |        | 
| | Expenses                                                                                             |   |          |  |   |        |  |   |          |   |   |        | 
| | Operating                                                                                            |   | 8,108    |  |   | 2,999  |  |   | -        |   |   | 11,107 | 
| | Depletion, depreciation and
      accretion                                                          |   | 11,623   |  |   | 7,281  |  |   | 37       |   |   | 18,941 | 
| | Income taxes                                                                                         |   | 9,129    |  |   | 263    |  |   | -        |   |   | 9,392  | 
| | Segmented operations                                                                                 | $ | 27,976   |  | $ | 2,718  |  | $ | (37      | ) |   | 30,657 | 
| | Foreign exchange gain                                                                                |   |          |  |   |        |  |   |          |   |   | 12     | 
| | Other income                                                                                         |   |          |  |   |        |  |   |          |   |   | 283    | 
| |                                                                                                      |   |          |  |   |        |  |   |          |   |   | 30,952 | 
| | General and administrative                                                                           |   |          |  |   |        |  |   |          |   |   | 4,674  | 
| | Unrealized loss on commodity contracts                                                               |   |          |  |   |        |  |   |          |   |   | 83     | 
| | Net income                                                                                           |   |          |  |   |        |  |   |          |   | $ | 26,195 | 
| |                                                                                                      |   |          |  |   |        |  |   |          |   |   |        | 
| | The results of operations for the
      year ended December 31, 2005 are comprised of the following: |   |          |  |   |        |  |  
| |                                                                                                      |   |          |  |   |        |  |   |          |   |   |        | 
| |                                                                                                      |   |          |  |   |        |  |   | Arab     |   |   |        | 
| |                                                                                                      |   | Republic |  |   |        |  |   | Republic |   |   |        | 
| | (000s)                                                                                              |   | of Yemen |  |   | Canada |  |   | of Egypt |   |   | Total  | 
| |                                                                                                      |   |          |  |   |        |  |   |          |   |   |        | 
| | Revenue                                                                                              |   |          |  |   |        |  |   |          |   |   |        | 
| | Oil and gas
      sales, net of royalties and other                                                  | $ | 47,384   |  | $ | 11,527 |  | $ | -        |   | $ | 58,911 | 
| |                                                                                                      |   |          |  |   |        |  |   |          |   |   |        | 
| | Expenses                                                                                             |   |          |  |   |        |  |   |          |   |   |        | 
| | Operating                                                                                            |   | 8,219    |  |   | 2,034  |  |   | -        |   |   | 10,253 | 
| | Depletion,
      depreciation and accretion                                                          |   | 13,172   |  |   | 3,812  |  |   | 6        |   |   | 16,990 | 
| | Income taxes                                                                                         |   | 7,882    |  |   | 471    |  |   | -        |   |   | 8,353  | 
| | Segmented operations                                                                                 | $ | 18,111   |  | $ | 5,210  |  | $ | (6       | ) |   | 23,315 | 
| | Unrealized gain on commodity contracts                                                               |   |          |  |   |        |  |   |          |   |   | 83     | 
| | Other income                                                                                         |   |          |  |   |        |  |   |          |   |   | 46     | 
| |                                                                                                      |   |          |  |   |        |  |   |          |   |   | 23,444 | 
| | General and administrative                                                                           |   |          |  |   |        |  |   |          |   |   | 3,544  | 
| | Foreign exchange loss                                                                                |   |          |  |   |        |  |   |          |   |   | 42     | 
| | Interest                                                                                             |   |          |  |   |        |  |   |          |   |   | 8      | 
| | Net income                                                                                           |   |          |  |   |        |  |   |          |   | $ | 19,850 | 

56

2006 Annual Report

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13. COMMITMENTS AND CONTINGENCIES

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

| | 2007 | 284,000 | 
| | ---- | ------- | 
| | 2008 | 386,000 | 
| | 2009 | 409,000 | 
| | 2010 | 402,000 | 
| | 2011 | 101,000 | 

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

Pursuant to the Nuqra Concession Agreement
  in the Arab Republic of Egypt, the Company and its partners have entered into
  the first three year extension period which requires the completion of a two
  well drilling program with a minimum expenditure of $4.0 million over a period
  of three years. As part of this extension, the Company made the mandatory relinquishment
  of 25% of the Block and issued a $4.0 million letter of credit (expiring March
  4, 2010) to guarantee the Companys performance under the extension period.
  This letter of credit was reduced to $1,225,699 during 2006 and is secured by
  a guarantee granted by Export Development Canada.

Pursuant to the PSA for Block 72, Yemen,
  the Contractor (Joint Venture Partners) has a minimum financial commitment of
  $4 million ($1.32 million to TransGlobe) during the first exploration period
  of 30 months (expiring January 12, 2008) for exploration work consisting of
  seismic acquisition (completed) and two exploration wells.

Pursuant to the bid awarded for Block
  75, Yemen, the Contractor (Joint Venture Partners) has a minimum financial commitment
  of $7 million ($1.75 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 will commence when the PSA has been
  approved and ratified by the government of Yemen, anticipated to occur during
  2007.

Pursuant to the bid awarded for Block
  84, Yemen, the Contractor (Joint Venture Partners) has a minimum financial commitment
  of $20.1 million ($6.63 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
  during 2007.

14. FINANCIAL INSTRUMENTS AND RISK
  MANAGEMENT

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

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

In the Republic of Yemen, the Company
  sold all of its 2006 Block 32 production to one purchaser and all of its 2006
  Block S-1 production to two purchasers. In Canada, the Company sold primarily
  all of its 2006 gas production to one purchaser and primarily all of its 2006
  oil production to another single purchaser.

Commodity Price Risk ManagementThe Company has commodity price risk associated with its sale of crude oil
  and natural gas.

The Company has entered into various
  financial derivative contracts and physical contracts to manage fluctuations
  in commodity prices in the normal course of operations.

57

TransGlobe Energy Corporation

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In March 2005, the Company entered into
  a physical contract to sell 2,000 gigajoules (GJ) per day of natural
  gas in Canada from April 1 to April 30, 2005 and from June 1 to October 31,
  2005 for C$6.95/GJ.

In September 2005, the Company entered
  into a crude oil costless collar for 15,000 barrels per month from January 1,
  2006 to December 31, 2006. The transaction consisted of the purchase of a $50.00
  per barrel dated Brent put (floor) and a $77.93 per barrel dated Brent call
  (ceiling).

The estimated fair value of unrealized
  commodity contracts is reported on the Consolidated Balance Sheet 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.

15. SUBSEQUENT EVENT

Subsequent to December 31, 2006, the
  Company entered into a physical contract to sell 2,500 GJ per day of natural
  gas in Canada from April 1, 2007 to October 31, 2007 for C$6.97/GJ.

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

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

| | (000s, except
      per share amounts)                    |   | 2006   |  |   | 2005   |  
| | ---------------------------------------------------------- | - | ------ |  | - | ------ | -
| | Net income for the year under Canadian GAAP                | $ | 26,195 |  | $ | 19,850 |  
| | Adjustments, before income taxes:                          |   |        |  |   |        |  
| | Stock-based compensation
      (b)                         |   | -      |  |   | 723    |  
| | Net income for the year under U.S. GAAP                    |   | 26,195 |  |   | 20,573 |  
| | Retained earnings (deficit), beginning of year - U.S. GAAP |   | 19,370 |  |   | (1,203 | )
| | Retained earnings,
      end of year - U.S. GAAP           | $ | 45,565 |  | $ | 19,370 |  
| |                                                            |   |        |  |   |        |  
| | Net income per share under U.S. GAAP                       |   |        |  |   |        |  
| | - Basic                                                    | $ | 0.45   |  | $ | 0.36   |  
| | - Diluted                                                  | $ | 0.43   |  | $ | 0.34   |  

58

2006 Annual Report

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**Statement of Other Comprehensive Income**

| | (000s)                                   |   | 2006   |   |   | 2005   | 
| | ----------------------------------------- | - | ------ | - | - | ------ | 
| | Net income - U.S. GAAP                    | $ | 26,195 |   | $ | 20,573 | 
| | Currency translation
      adjustment (d) |   | (430   | ) |   | 1,067  | 
| | Other comprehensive income                | $ | 25,765 |   | $ | 21,640 | 

Consolidated Balance Sheets

Had the Company followed U.S. GAAP, asset
  and liability sections of the balance sheet would not have changed from Canadian
  GAAP to U.S. GAAP, however the shareholders equity would have been reported
  as follows:

| |                                 |   | 2006            |  |   | 2005            | 
| | ------------------------------- | - | --------------- |  | - | --------------- | 
| |                                 |   | Cdn.
      GAAP |  |   | U.S.
      GAAP | 
| | Share capital (b, c, e)         | $ | 49,360          |  | $ | 51,063          | 
| | Contributed surplus (b)         |   | 2,863           |  |   | 955             | 
| | Cumulative translation          |   |                 |  |   |                 | 
| | adjustment
      (d)            |   | 3,212           |  |   | -               | 
| | Accumulated other comprehensive |   |                 |  |   |                 | 
| | income (d)                      |   | -               |  |   | 3,212           | 
| | Retained earnings (b, c, e)     |   | 45,360          |  |   | 45,565          | 
| |                                 | $ | 100,795         |  | $ | 100,795         | 

The reconciling items between share capital
  and retained earnings for Canadian and U.S. GAAP are $833,000 related to escrowed
  shares, and $1,278,000 related to flow through shares. The reconciling items
  between contributed surplus and deficit for Canadian and U.S. GAAP are $283,000
  for the adoption of stock-based compensation under Canadian GAAP and $2,033,000
  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 $408,000 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 to determine whether impairment exists. However,
        in Canada, the impaired amount is measured using the fair value of reserves.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | There are no impairment charges under Canadian GAAP
        or U.S. GAAP as at December 31, 2006. Under U.S. GAAP, the unamortized
        cost of the Companys Canadian oil and gas properties exceeded the
        full cost ceiling limitation by $3,060,000, net of taxes. The natural
        gas price for December 31, 2006 referenced an AECO price of C$6.50 per
        GJ adjusted for appropriate price differentials. As permitted by full
        cost accounting rules under U.S. GAAP, improvements in AECO spot natural
        gas prices subsequent to December 31, 2006 eliminated the necessity to
        record a writedown. 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.                                                                                        

59

TransGlobe Energy Corporation

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|b) | Stock-based Compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | The Company has a stock-based compensation plan as more
        fully described in Note 8. Under Canadian GAAP, compensation costs have
        been recognized in the financial statements for stock options granted
        to employees and directors since January 1, 2002. For U.S. GAAP, the Company
        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 prior
        periods, the Company used the intrinsic value method of accounting for
        stock options granted to employees directors whereby no costs were recognized
        in the financial statements, per APB Opinion No. 25 as interpreted by
        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 $723,000 (2004 -
        $1,310,000) and a corresponding decrease to the contributed surplus account.
        Also, the deficit would decrease by $283,000 in 2004 with a corresponding
        decrease to the contributed surplus account relating to the 2004 adoption
        entry for Canadian GAAP that is not required for U.S. GAAP. Also, the
        share capital would decrease by $408,000 for options exercised since the
        compensation expense was transferred into common shares for Canadian GAAP,
        this is not required for U.S. GAAP.                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | Had compensation expense been determined in 2005 based
        on fair value at the grant dates for the stock option consistent with
        the method under SFAS No. 123, the pro forma effect on the Companys
        net income under U.S. would be as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

| | (000s, except
      per share amounts) | 2005    
| | --------------------------------------- | --------
| | Compensation costs                      | $ 723   
| |                                         |         
| | Net Income (U.S. GAAP)                  |         
| | As reported                             | $ 20,573
| | Pro form                                | $ 19,850
| |                                         |         
| | Net Income per share (U.S. GAAP)        |         
| | As reported - Basic                     | $ 0.36  
| | -
      Diluted                         | $ 0.34  
| |                                         |         
| | Pro forma
      - Basic                 | $ 0.34  
| | - Diluted                               | $ 0.33  

|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 2006, $Nil in 2005, $Nil in 2004, $876,000 in
        2003, $67,000 in 2002 and $335,000 in 2000 representing the tax effect
        of the flow through shares and a corresponding increase to share capital
        and decrease to future tax liability by $Nil in 2006, $Nil in 2005, $Nil
        in 2004, $876,000 in 2003, $67,000 in 2002 and $335,000 in 2000 to record
        the recognition of the benefit of tax losses available to the Company
        equal to the liability arising from renouncing tax pools to the subscribers.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | Under U.S. 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
        $215,000 in 2006, $168,000 in 2005, $231,000 in 2004 and $435,000 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 $215,000 in 2006, $168,000 in 2005, $231,000 in
        2004 and $435,000 in 2003 to record an additional valuation allowance
        against the increased tax asset.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

60

2006 Annual Report

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|d) | Foreign Currency Translation Adjustments and Other
        Comprehensive Income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | U. S. GAAP requires gains or losses arising
        from the translation of self-sustaining operations to be included in other
        comprehensive income. Canadian GAAP requires these amounts to be recorded
        in a separate component of Shareholders Equity. Other comprehensive
        income arose from the translation adjustment resulting from the translation
        of Canadian currency financial statements into U.S. dollars under FAS
        52, Foreign Currency Translation. At December 31, 2006, accumulated
        other comprehensive income related to these items was a gain of $3,212,000
        (2005 - $3,642,000).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|e) | 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 $833,000 with
        the offset to deficit.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|f) | Derivative Instruments and Hedging                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | For U.S. GAAP, the Company adopted Statement of Financial
        Accounting Standards (SFAS) 133 effective January 1, 2001.
        SFAS 133 requires all derivatives to be recorded on the balance sheet
        as either assets or liabilities at their fair value. Changes in the derivatives
        fair value are recognized in current period earnings unless specific hedge
        accounting criteria are met. To eliminate future GAAP reconciling items
        the Company has not designated any of its financial instruments, for the
        year ended December 31, 2006, as hedges for U.S. GAAP purposes under SFAS
        133.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|g) | Recent Accounting Pronouncements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | The Fair Value Option for Financial Assets and Financial
        Liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | The FASB issued SFAS 159, The Fair Value Option for
        Financial Assets and Financial Liabilities. The Statement 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. This Statement
        is expected to expand the use of fair value measurement, which is consistent
        with the Boards long-term measurement objectives for accounting
        for financial instruments.                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | The Statement is effective as of the beginning of an
        entitys first fiscal year that begins after November 15, 2007. The
        Company is currently assessing the impact of these new requirements on
        the Consolidated Financial Statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | Employers Accounting for Defined
        Benefit Pension and Other Postretirement Plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | The FASB issued SFAS 158, Employers Accounting
        for Defined Benefit Pension Plans and Other
        Postretirement Plans, which amends SFAS 87, SFAS 88, Employers
        Accounting for Settlements and Curtailments of Defined Benefit
        Pension Plans and for Termination Benefits, SFAS 106,
        and SFAS 132R, Employers Disclosures about Pensions and Other
        Postretirement Benefits. The Statement improves financial
        reporting by requiring an employer to recognize the overfunded or underfunded
        status of a defined benefit postretirement plan (other than a multiemployer
        plan) as an asset or liability in its statement of financial position
        and to recognize changes in that funded status in the year in which the
        changes occur through comprehensive income of a business entity or changes
        in unrestricted net assets of a not-for-profit organization. The Statement
        also improves financial reporting by requiring an employer to measure
        the funded status of a plan as of the date of its year-end statement of
        financial position, with limited exceptions.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | The Statement requires the initial recognition of the
        funded status of a defined benefit postretirement plan and the required
        disclosures as of the end of the fiscal year ending after December 15,
        2006. This statement had no effect on the Consolidated Financial Statements
        upon adoption.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | Fair Value Measurements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | The FASB issued SFAS 157, Fair Value Measurements,which defines fair value, establishes a framework for measuring fair
        value in generally accepted accounting principles (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. Accordingly, this
        Statement does not require any new fair value measurements. However, for
        some entities, the application of this Statement will change current practice.                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

61

TransGlobe Energy Corporation

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The Statement is effective for financial
  statements issued for fiscal years beginning after November 15, 2007, and interim
  periods within those fiscal years. The Company is currently assessing the impact
  of these new requirements on the Consolidated Financial Statements.

Accounting for Certain Hybrid Financial
  InstrumentsThe FASB issued SFAS 155, Accounting for Certain Hybrid Financial Instruments,
  which amends SFAS 133, Accounting for Derivative Instruments and Hedging
  Activities, and SFAS 140, Accounting for Transfers and Servicing of Financial
  Assets and Extinguishments of Liabilities. The Statement resolves issues
  addressed in Statement 133 Implementation Issue No. D1, Application of Statement
  133 to Beneficial Interests in Securitized Financial Assets. This Statement:

a. Permits fair value remeasurement for
  any hybrid financial instrument that contains an embedded derivative that otherwise
  would require bifurcation

b. Clarifies which interest-only strips
  and principal-only strips are not subject to the requirements of Statement 133

c. Establishes a requirement to evaluate
  interests in securitized financial assets to identify interests that are freestanding
  derivatives or that are hybrid financial instruments that contain an embedded
  derivative requiring bifurcation

d. Clarifies that concentrations of credit
  risk in the form of subordination are not embedded derivatives

e. Amends Statement 140 to eliminate
  the prohibition on a qualifying special-purpose entity from holding a derivative
  financial instrument that pertains to a beneficial interest other than another
  derivative financial instrument.

The Statement is effective for all financial
  instruments acquired or issued after the beginning of an entitys first
  fiscal year that begins after September 15, 2006. The Company is currently assessing
  the impact of these new requirements on the Consolidated Financial Statements.

Accounting for Uncertainty in Income
  TaxesThe FASB issued Interpretation 48, Accounting For Uncertainty in Income
  Taxes, 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. This Interpretation
  also provides guidance on derecognition, classification, interest and penalties,
  accounting in interim periods, disclosure, and transition. Tax positions that
  previously failed to meet the more-likely-than-not recognition threshold should
  be recognized in the first subsequent financial reporting period in which that
  threshold is met. Previously recognized tax positions that no longer meet the
  more-likely-than-not recognition threshold should be derecognized in the first
  subsequent financial reporting period in which that threshold is no longer met.

The Interpretation is effective for fiscal
  years beginning after December 15, 2006. The Company is currently assessing
  the impact of these new requirements on the Consolidated Financial Statements.

Taxes Collected from CustomersThe EITF issues EITF Abstract 06-3, How Taxes Collected from Customers
  and Remitted to Government Authorities Should be Presented in the Income Statement.
  The abstract provides accounting guidance on how taxes ranging from sales taxes
  that are applied to a broad class of transactions involving a wide range of
  goods and services to excise taxes that are applied only to specific types of
  transactions or items should be presented in the income statement.

The consensuses in the Issue should be
  applied to financial reports for interim and annual reporting periods beginning
  after December 15, 2006. The Company does not expect there to be any material
  impact on the Consolidated Financial Statements upon adoption of this Abstract.

62

2006 Annual Report

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