---

|TRANSGLOBE ENERGY
      CORPORATION       
|------------------------------------------
|MANAGEMENTS
      DISCUSSION AND ANALYSIS

March 10, 2009

The following discussion and analysis is managements opinion
of TransGlobes historical financial and operating results and should be read in
conjunction with the message to the shareholders and the audited consolidated
financial statements of the Company for the years ended December 31, 2008 and
2007, together with the notes related thereto. The consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in Canada in the currency of the United States (except where indicated
as being another currency). The effect of significant differences between
Canadian and United States accounting principles is disclosed in Note 21 of the
consolidated financial statements. Additional information relating to the
Company, including the Companys Annual Information Form, is on SEDAR at
www.sedar.com. The Companys annual report on Form 40-F may be found in the
Interactive Data Electronic Applications (IDEA) system at
http://idea.sec.gov.

Forward-looking Information

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

Use of Barrel of Oil Equivalents

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

Non-GAAP Measures

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

Reconciliation of Funds Flow from Operations and Funds Flow
from Continuing Operations

|($000s)                                       |  | 2008   |  |  | 2007   |  
|--------------------------------------------- |  | ------ |  |  | ------ | -
|Cash flow from operating activities           |  | 57,793 |  |  | 53,618 |  
|Changes in non-cash working capital from      |  |        |  |  |        |  
|continuing operations                         |  | 1,269  |  |  | (1,133 | )
|Changes in non-cash working capital from      |  |        |  |  |        |  
|discontinued operations                       |  | 205    |  |  | (344   | )
|Funds flow from operations                    |  | 59,267 |  |  | 52,141 |  
|Less: Funds flow from discontinued operations |  | 6,908  |  |  | 15,856 |  
|                                              |  |        |  |  |        |  
|Funds flow from continuing operations         |  | 52,359 |  |  | 36,285 |  

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

|1
|-

---

|TRANSGLOBE ENERGY
      CORPORATION       
|------------------------------------------
|MANAGEMENTS
      DISCUSSION AND ANALYSIS

TRANSGLOBES BUSINESS

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

SELECTED ANNUAL INFORMATION

|($000s, except per share, price and volume            |  |         |  |  |                |   |  |         |  |  |                |   |  |         | 
|----------------------------------------------------- |  | ------- |  |  | -------------- | - |  | ------- |  |  | -------------- | - |  | ------- | 
|amounts)                                              |  | 2008    |  |  | %
      Change |   |  | 2007    |  |  | %
      Change |   |  | 2006    | 
|Total Operations                                      |  |         |  |  |                |   |  |         |  |  |                |   |  |         | 
|Average production volumes
      (Boepd)              |  | 7,342   |  |  | 30             |   |  | 5,651   |  |  | 11             |   |  | 5,093   | 
|Average sales volumes (Boepd)                         |  | 7,342   |  |  | 29             |   |  | 5,692   |  |  | 12             |   |  | 5,077   | 
|Average price ($/Boe)                                 |  | 86.96   |  |  | 32             |   |  | 65.80   |  |  | 12             |   |  | 58.92   | 
|Oil and gas sales                                     |  | 233,695 |  |  | 71             |   |  | 136,709 |  |  | 25             |   |  | 109,190 | 
|Oil and gas sales, net of
      royalties and other   |  | 132,393 |  |  | 51             |   |  | 87,911  |  |  | 25             |   |  | 70,097  | 
|                                                      |  |         |  |  |                |   |  |         |  |  |                |   |  |         | 
|Cash flow from operating
      activities             |  | 57,793  |  |  | 8              |   |  | 53,618  |  |  | 13             |   |  | 47,383  | 
|Funds flow from operations*                           |  | 59,267  |  |  | 14             |   |  | 52,141  |  |  | 12             |   |  | 46,763  | 
|Funds flow from operations per
      share            |  |         |  |  |                |   |  |         |  |  |                |   |  |         | 
|- Basic                                               |  | 0.99    |  |  |                |   |  | 0.87    |  |  |                |   |  | 0.80    | 
|- Diluted                                             |  | 0.98    |  |  |                |   |  | 0.86    |  |  |                |   |  | 0.77    | 
|                                                      |  |         |  |  |                |   |  |         |  |  |                |   |  |         | 
|Net income                                            |  | 31,523  |  |  | 146            |   |  | 12,802  |  |  | (51            | ) |  | 26,195  | 
|Net income per share                                  |  |         |  |  |                |   |  |         |  |  |                |   |  |         | 
|- Basic                                               |  | 0.53    |  |  |                |   |  | 0.21    |  |  |                |   |  | 0.45    | 
|- Diluted                                             |  | 0.52    |  |  |                |   |  | 0.21    |  |  |                |   |  | 0.43    | 
|                                                      |  |         |  |  |                |   |  |         |  |  |                |   |  |         | 
|Continuing Operations                                 |  |         |  |  |                |   |  |         |  |  |                |   |  |         | 
|Average production volumes
      (Bopd)               |  | 6,858   |  |  | 61             |   |  | 4,258   |  |  | 6              |   |  | 4,021   | 
|Average sales volumes (Bopd)                          |  | 6,858   |  |  | 61             |   |  | 4,258   |  |  | 5              |   |  | 4,046   | 
|Average price from continuing
      operations        |  |         |  |  |                |   |  |         |  |  |                |   |  |         | 
|($/Bbl)                                               |  | 88.66   |  |  | 23             |   |  | 72.17   |  |  | 14             |   |  | 63.10   | 
|Oil sales                                             |  | 222,538 |  |  | 98             |   |  | 112,171 |  |  | 20             |   |  | 93,189  | 
|Oil sales, net of royalties and other                 |  | 123,231 |  |  | 82             |   |  | 67,628  |  |  | 19             |   |  | 56,836  | 
|                                                      |  |         |  |  |                |   |  |         |  |  |                |   |  |         | 
|Cash flow from operating activities                   |  | 51,090  |  |  | 37             |   |  | 37,418  |  |  | 4              |   |  | 35,812  | 
|Funds flow from continuing
      operations*          |  | 52,359  |  |  | 44             |   |  | 36,285  |  |  | (1             | ) |  | 36,501  | 
|Funds flow from continuing operations per             |  |         |  |  |                |   |  |         |  |  |                |   |  |         | 
|share                                                 |  |         |  |  |                |   |  |         |  |  |                |   |  |         | 
|- Basic                                               |  | 0.88    |  |  |                |   |  | 0.61    |  |  |                |   |  | 0.62    | 
|- Diluted                                             |  | 0.86    |  |  |                |   |  | 0.60    |  |  |                |   |  | 0.60    | 
|                                                      |  |         |  |  |                |   |  |         |  |  |                |   |  |         | 
|Net income                                            |  | 23,173  |  |  | 177            |   |  | 8,380   |  |  | (64            | ) |  | 23,332  | 
|Net income per share                                  |  |         |  |  |                |   |  |         |  |  |                |   |  |         | 
|- Basic                                               |  | 0.39    |  |  |                |   |  | 0.14    |  |  |                |   |  | 0.40    | 
|- Diluted                                             |  | 0.38    |  |  |                |   |  | 0.14    |  |  |                |   |  | 0.39    | 
|                                                      |  |         |  |  |                |   |  |         |  |  |                |   |  |         | 
|                                                      |  |         |  |  |                |   |  |         |  |  |                |   |  |         | 
|Total assets                                          |  | 228,238 |  |  | 12             |   |  | 204,219 |  |  | 75             |   |  | 116,473 | 
|Cash and cash equivalents                             |  | 7,634   |  |  | (40            | ) |  | 12,729  |  |  | 44             |   |  | 8,836   | 
|Total long-term debt,
      including current portion |  | 57,230  |  |  | 1              |   |  | 56,685  |  |  | -              |   |  | -       | 
|Debt-to-funds flow ratio**                            |  | 1.0     |  |  |                |   |  | 1.1     |  |  |                |   |  | -       | 
|                                                      |  |         |  |  |                |   |  |         |  |  |                |   |  |         | 
|                                                      |  |         |  |  |                |   |  |         |  |  |                |   |  |         | 
|Reserves                                              |  |         |  |  |                |   |  |         |  |  |                |   |  |         | 
|Total proved (MMboe)                                  |  | 12.6    |  |  | 6              |   |  | 11.9    |  |  | 28             |   |  | 9.3     | 
|Total proved plus probable (MMBoe)                    |  | 19.8    |  |  | 21             |   |  | 16.4    |  |  | 40             |   |  | 11.7    | 

|*  | Funds flow from operations and funds flow from continuing
      operations are non-GAAP measures that represent cash generated from
      operating activities and continuing operating activities, respectively,
      before changes in non-cash working capital.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|** | Calculated on a 12-month rolling
basis.                                                                                                                                                                                                                            

In 2008 compared with 2007, TransGlobe,

- Increased proved plus probable reserves by 3.4 MMBoe, representing a
  production replacement of 232% in 2008;
- Increased total production by 30% to 7,342 Boepd (continuing operations 
  61% increase to 6,859 Bopd);
- Increased funds flow by 14% to a record $59.3 million (continuing
  operations  44% to $52.4 million) due to increases in revenues, offset by
  increased royalties and taxes;
- Increased net income by 146% to a record $31.5 million (continuing
  operations  177% to $23.2 million) due to an unrealized derivative gain,
  increased revenues and a gain on disposition of the Canadian operations,
  offset by higher royalties and taxes, increased operating costs and depletion
  and depreciation rates;
- Reported an unrealized derivative gain of $9.9 million compared to an
  unrealized derivative loss of $7.1 million in 2007;
- Increased its ownership in the West Gharib Concession in Egypt to 100% as
  a result of a corporate acquisition in Q1-2008 and a property acquisition in
  Q3-2008;
- Completed the sale of its Canadian assets in Q2-2008 to allow the Company
  to focus on the development of its Middle East / North Africa assets; and
- Reported a debt-to-funds flow ratio of 1.0 at December 31, 2008 (December
  31, 2007  1.1).

|2
|-

---

|TRANSGLOBE ENERGY
      CORPORATION       
|------------------------------------------
|MANAGEMENTS
      DISCUSSION AND ANALYSIS

2008 TO 2007 NET INCOME VARIANCES

|                                             |  | $000s   |   |  | $ Per Share Diluted |   |  | Variance % |  
|-------------------------------------------- |  | ------- | - |  | ------------------- | - |  | ---------- | -
|2007 net income                              |  | 12,802  |   |  | 0.21                |   |  |            |  
|Cash items                                   |  |         |   |  |                     |   |  |            |  
|Volume variance                              |  | 84,779  |   |  | 1.40                |   |  | 662        |  
|Price variance                               |  | 25,587  |   |  | 0.42                |   |  | 200        |  
|Royalties                                    |  | (54,763 | ) |  | (0.90               | ) |  | (428       | )
|Expenses:                                    |  |         |   |  |                     |   |  |            |  
|Operating                                    |  | (8,277  | ) |  | (0.14               | ) |  | (65        | )
|Realized derivative loss                     |  | (6,020  | ) |  | (0.10               | ) |  | (47        | )
|Cash
      general and administrative        |  | (2,726  | ) |  | (0.04               | ) |  | (21        | )
|Current income taxes                         |  | (19,600 | ) |  | (0.32               | ) |  | (153       | )
|Realized
      foreign exchange loss         |  | 89      |   |  | -                   |   |  | 1          |  
|Interest on long-term debt                   |  | (2,982  | ) |  | (0.05               | ) |  | (23        | )
|Other income                                 |  | (13     | ) |  | -                   |   |  | -          |  
|Cash flow from
      discontinued operations |  | (8,948  | ) |  | (0.15               | ) |  | (71        | )
|Total cash items variance                    |  | 7,126   |   |  | 0.12                |   |  | 55         |  
|Non-cash items                               |  |         |   |  |                     |   |  |            |  
|Unrealized derivative gain                   |  | 17,004  |   |  | 0.28                |   |  | 133        |  
|Depletion, depreciation and accretion        |  | (15,810 | ) |  | (0.26               | ) |  | (123       | )
|Stock-based compensation                     |  | (744    | ) |  | (0.01               | ) |  | (6         | )
|Amortization of deferred financing costs     |  | (1,731  | ) |  | (0.03               | ) |  | (14        | )
|Non-cash income from discontinued operations |  | 12,876  |   |  | 0.21                |   |  | 101        |  
|Total non-cash
      items variance          |  | 11,595  |   |  | 0.19                |   |  | 91         |  
|                                             |  |         |   |  |                     |   |  |            |  
|2008 net
      income                        |  | 31,523  |   |  | 0.52                |   |  | 146        |  

Net income increased $18.7 million in 2008 compared with 2007
mainly as a result of higher volumes, higher commodity prices and an unrealized
derivative gain, offset by increased depletion and depreciation, increased
royalties and taxes and operating expenses in the year ended December 31, 2008.

BUSINESS ENVIRONMENT

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

|                                                 |  | 2008   |  |  | 2007   | 
|------------------------------------------------ |  | ------ |  |  | ------ | 
|                                                 |  |        |  |  |        | 
|Dated Brent average oil price ($/Bbl)            |  | 96.99  |  |  | 72.60  | 
|U.S./Canadian
      Dollar average exchange rate |  | 1.0671 |  |  | 1.0740 | 

The price of Dated Brent oil averaged $96.99/Bbl in 2008, a
increase of 34% from the 2007 price of $72.60/Bbl. The price of Dated Brent oil
reached a record high of $144.22 in July 2008. However, financial market
instability and a worldwide recession resulted in a steep decline in the price
of Dated Brent oil in the latter half of 2008.

The current global financial crisis has reduced liquidity in
financial markets, restricted access to financing and caused significant
volatility in commodity prices. These issues are expected to impact the
performance of the economy in 2009. TransGlobes management believes the Company
is well positioned to survive the current crisis due to manageable debt levels,
positive cash generation from operations, and the availability of cash and cash
equivalents.

However, in light of the current economic environment,
TransGlobe reduced its capital spending in 2009 and is reviewing costs and
efficiency opportunities in the organization. The Company designed its 2009
budget to be flexible, allowing spending to be adjusted as commodity prices
change and forecasts are reviewed. To enhance the Companys liquidity and to
fund capital projects in Egypt where a significant discovery in 2008 resulted in
production increases, the Company raised approximately C$20.0 million in gross
proceeds in February 2009 by issuing 5,798,000 common shares.

SIGNIFICANT ACQUISITIONS AND DISPOSITIONS

Corporate Acquisition

In the first quarter of 2008, the Company acquired all the
shares of GHP Exploration (West Gharib) Ltd. (GHP) for total consideration of
$40.2 million, plus transaction costs and working capital adjustments, effective
September 30, 2007. This acquisition was funded by bank debt and cash on hand.
GHP holds a 30% working interest in the West Gharib Concession area in the Arab
Republic of Egypt (Egypt). With the acquisition of GHP, the Company holds a
100% working interest in the West Gharib Production Sharing Concession (PSC),
with a working interest of 100% in the Hana development lease and an effective
working interest of 75% in the eight non-Hana development leases. TransGlobe is
the operator of the West Gharib Concession.

The adjustment date of the acquisition is September 30, 2007,
with all changes in working capital to February 5, 2008 (the closing date),
including oil production from September 30, 2007 to February 5, 2008, recorded
as a purchase price adjustment. Oil produced after February 5, 2008 is recorded
as TransGlobe production.

|3
|-

---

|TRANSGLOBE ENERGY
      CORPORATION       
|------------------------------------------
|MANAGEMENTS
      DISCUSSION AND ANALYSIS

Property Acquisition

On August 18, 2008, TransGlobe completed an oil and gas
property acquisition in Egypt for the remaining 25% financial interest in the
eight non-Hana development leases in the West Gharib Concession. The total cost
of the acquisition was $18.0 million. In addition, the Company could pay up to
$7.0 million if incremental reserve thresholds are reached in the East Hoshia
(up to $5.0 million) and in the South Rahmi (up to $2.0 million) development
leases, to be evaluated annually. As at December 31, 2008, no additional fees
are due in 2009. Following this acquisition, TransGlobe now holds a 100% working
interest in the West Gharib Concession in Egypt. Production from this
acquisition since August 18, 2008 was included in the production for the
Company.

Discontinued Operations

TransGlobe sold its Canadian segment of operations on April 30,
2008 to allow the Company to focus on the development of its Middle East/North
Africa assets. The sale price of the assets was C$56.7 million, subject to
normal closing adjustments. Accordingly, the Canadian segment has been
reclassified as discontinued operations in the Consolidated Financial
Statements. This is further discussed in the MD&A section entitled
Operating Results From Discontinued Operations.

SELECTED QUARTERLY INFORMATION

|                                    |  | 2008   |  |  | 2007   | 
|----------------------------------- |  | ------ |  |  | ------ | 
|($000s, except per share, price     |  |        |  |  |        | 
|and
      volume amounts)           |  | Q-4**  |  |  | Q-3    | 
|Total Operations                    |  |        |  |  |        | 
|Average sales volumes (Boepd)       |  | 6,893  |  |  | 6,935  | 
|Average price ($/Boe)               |  | 46.18  |  |  | 104.55 | 
|Oil and gas sales                   |  | 29,285 |  |  | 66,707 | 
|Oil and gas sales, net of royalties |  |        |  |  |        | 
|and other                           |  | 18,272 |  |  | 36,577 | 
|                                    |  |        |  |  |        | 
|Cash flow from operating activities |  | 11,252 |  |  | 20,652 | 
|Funds flow from operations*         |  | 6,134  |  |  | 16,775 | 
|Funds flow from operations per      |  |        |  |  |        | 
|share                               |  |        |  |  |        | 
|- Basic                             |  | 0.10   |  |  | 0.28   | 
|- Diluted                           |  | 0.10   |  |  | 0.27   | 
|                                    |  |        |  |  |        | 
|Net income (loss)                   |  | 7,640  |  |  | 24,790 | 
|Net income (loss) per share         |  |        |  |  |        | 
|- Basic                             |  | 0.14   |  |  | 0.41   | 
|- Diluted                           |  | 0.13   |  |  | 0.41   | 
|                                    |  |        |  |  |        | 
|Continuing Operations               |  |        |  |  |        | 
|Average sales volumes (Bopd)        |  | 6,893  |  |  | 6,935  | 
|Average price from continuing       |  |        |  |  |        | 
|operations ($/Bbl)                  |  | 45.97  |  |  | 104.55 | 
|Oil sales                           |  | 29,151 |  |  | 66,707 | 
|Oil sales, net of royalties         |  |        |  |  |        | 
|and other                           |  | 17,765 |  |  | 36,577 | 
|                                    |  |        |  |  |        | 
|Cash flow from operating activities |  | 11,010 |  |  | 20,483 | 
|Funds flow from continuing          |  |        |  |  |        | 
|operations*                         |  | 5,579  |  |  | 16,775 | 
|Funds flow from continuing          |  |        |  |  |        | 
|operations per share                |  |        |  |  |        | 
|- Basic                             |  | 0.09   |  |  | 0.28   | 
|- Diluted                           |  | 0.09   |  |  | 0.27   | 
|                                    |  |        |  |  |        | 
|Net income (loss)                   |  | 7,482  |  |  | 24,787 | 
|Net income (loss) per share         |  |        |  |  |        | 
|- Basic                             |  | 0.13   |  |  | 0.41   | 
|- Diluted                           |  | 0.12   |  |  | 0.41   | 

|*  | Funds flow from operations and funds flow from continuing
      operations are non-GAAP measures that represent cash generated from
      operating activities and continuing operating activities, respectively,
      before changes in non-cash working capital.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|** | Differences between total operations and continuing
      operations relate to post-closing adjustments on the Canadian
      disposition.                                                                                                                         

Net income decreased 69% in Q4-2008 compared with Q3-2008
mainly as a result of a 56% decrease in commodity prices, offset by lower
royalties and taxes in Egypt and Yemen.

Funds flow from operations decreased in Q4-2008 by $10.6
million (63%) compared with Q3-2008 mainly as a result of a 56% decrease in
average commodity prices, offset by lower royalties and taxes in Egypt and
Yemen.

|4
|-

---

|TRANSGLOBE ENERGY
      CORPORATION       
|------------------------------------------
|MANAGEMENTS
      DISCUSSION AND ANALYSIS

OPERATING RESULTS AND NETBACK

Daily Volumes, Working Interest Before Royalties and
Other

|                                    |  |                            |       |  |       |       |  | 2008   |       |  | 2007  | 
|----------------------------------- |  | -------------------------- | ----- |  | ----- | ----- |  | ------ | ----- |  | ----- | 
|Egypt                               |  | - Oil sales                |       |  | Bopd  |       |  | 3,072* |       |  | 432** | 
|Yemen                               |  | - Oil sales                |       |  | Bopd  |       |  | 3,786  |       |  | 3,826 | 
|Total continuing operations         |  |                            |       |  |       |       |  |        |       | 
|                                    |  | - daily sales volumes      |       |  | Bopd  |       |  | 6,858  |       |  | 4,258 | 
|Canada                              |  | - Oil and liquids sales*** |       |  | Bopd  |       |  | 115    |       |  | 402   | 
|                                    |  | - Gas sales***             |       |  | Mcfpd |       |  | 2,212  |       |  | 6,193 | 
|Canada                              |  |                            |       |  | Boepd |       |  | 484    |       |  | 1,434 | 
|                                    |  |                            |       |  |       |       |  |        |       |  |       | 
|Total Company  daily sales volumes |  |                            | Boepd |  |       | 7,342 |  |        | 5,692 | 

|*   | Egypt includes the operating results of GHP for the
      period February 5, 2008 to December 31, 2008 and the property acquisition
      for the period from August 18, 2008 to December 31, 2008. In that period,
      production averaged 1,037 Bopd and 369 Bopd, respectively, for a yearly
      average of 938 Bopd and 137 Bopd, respectively.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|**  | The 2007 sales represent the operating results of
      previously acquired companies for the period of September 25, 2007 to
      December 31, 2007. In that period, production averaged 1,607 Bopd for a
      yearly average of 432 Bopd.                                                                                                          
|*** | Canada includes the operating results for the period
      January 1, 2008 to April 30, 2008. In that period, production from the
      Canadian assets averaged 1,463 Boepd for a yearly average of 484
    Boepd.                                                                                                                                    

Netback from Continuing Operations

Consolidated

|                                     |  | 2008    |  |  | 2007  | 
|------------------------------------ |  | ------- |  |  | ----- | 
|(000s, except per
      Bbl amounts) |  | **$**   |  |  | $/Bbl | 
|Oil sales                            |  | 222,538 |  |  | 88.66 | 
|Royalties and other                  |  | 99,307  |  |  | 39.56 | 
|Current taxes                        |  | 32,230  |  |  | 12.84 | 
|Operating expenses                   |  | 19,333  |  |  | 7.70  | 
|                                     |  |         |  |  |       | 
|Netback                              |  | 71,668  |  |  | 28.56 | 

Egypt

|                                     |  | 2008   |  |  | 2007* | 
|------------------------------------ |  | ------ |  |  | ----- | 
|(000s, except per
      Bbl amounts) |  | **$**  |  |  | $/Bbl | 
|Oil sales                            |  | 86,778 |  |  | 77.18 | 
|Royalties and other                  |  | 35,410 |  |  | 31.49 | 
|Current taxes                        |  | 14,627 |  |  | 13.01 | 
|Operating expenses                   |  | 6,972  |  |  | 6.20  | 
|                                     |  |        |  |  |       | 
|Netback                              |  | 29,769 |  |  | 26.48 | 

|* | Represents 97 days of production.
|- | ---------------------------------

The netback for Egypt in 2008 includes average production of
369 Bopd from the property acquisition on August 18, 2008, and 1,037 Bopd from
the GHP acquisition on February 5, 2008. The weighted average selling price
during the year for the Egypt production was $77.18/Bbl, which represents an
annual average gravity/quality adjustment of $19.81/Bbl to an average Dated
Brent oil price for the year of $96.99/Bbl.

- Royalties and taxes as a percentage of revenue increased to 58% in 2008,
  compared with 55% in 2007. Royalty and tax rates fluctuate in Egypt due to
  changes in the cost oil whereby the PSC allows for recovery of operating and
  capital costs through a reduction in government take.
- Operating costs for the year ended December 31, 2008 increased 35% to
  $6.20/Bbl (2007 - $4.59/Bbl). The increased operating costs are due to a high
  number of workovers on the West Gharib PSC, higher diesel costs and increased
  staffing.

Yemen

|                                     |  | 2008    |  |  | 2007  | 
|------------------------------------ |  | ------- |  |  | ----- | 
|(000s, except per
      Bbl amounts) |  | **$**   |  |  | $/Bbl | 
|Oil sales                            |  | 135,760 |  |  | 97.97 | 
|Royalties and other                  |  | 63,897  |  |  | 46.11 | 
|Current taxes                        |  | 17,603  |  |  | 12.70 | 
|Operating expenses                   |  | 12,361  |  |  | 8.92  | 
|                                     |  |         |  |  |       | 
|Netback                              |  | 41,899  |  |  | 30.24 | 

In Yemen, netback increased 6% on a Bbl basis in 2008, compared
with 2007, primarily as a result of oil sales increasing by 34%, offset by
higher royalty and tax rates. The increase in sales was mainly due to oil prices
increasing in 2008 by 35%, over 2007. Sales volumes remained constant in 2008
compared with 2007.

- Royalties and taxes as a percentage of revenue increased to 60% in the
  year ended December 31, 2008 compared with 51% in 2007. Royalty and tax rates
  fluctuate in Yemen due to changes in the amount of cost sharing oil, whereby
  the Block 32 and Block S-1 PSAs allow for the recovery of operating and
  capital costs through a reduction in government take of oil production.
- Operating expenses on a Bbl basis for the year ended December 31, 2008
  increased 21%, mainly due to declining production in the Tasour field,
  increased diesel costs and well workovers.

|5
|-

---

|TRANSGLOBE ENERGY
      CORPORATION       
|------------------------------------------
|MANAGEMENTS
      DISCUSSION AND ANALYSIS

DERIVATIVE COMMODITY CONTRACTS

TransGlobe uses hedging arrangements as part of its risk
management strategy to manage commodity price fluctuations and stabilize cash
flows for future exploration and development programs. The hedging program was
expanded significantly in September 2007 to protect the cash flows from the
added risk of commodity price exposure following a marked increase in
TransGlobes debt levels resulting from the Dublin and Drucker acquisitions.

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

From a corporate perspective, the high oil prices in the first
nine months of 2008 had a positive impact on the Companys revenue, however,
these strong prices resulted in $7.5 million of realized losses recorded on the
derivative commodity contracts. In the fourth quarter, lower oil prices resulted
in the Company reporting a $0.6 million realized gain on the derivative
commodity contracts. The mark to market valuation of TransGlobes future
derivative commodity contracts reversed from a $7.1 million liability at
December 31, 2007 to a $2.8 million asset at December 31, 2008, thus resulting
in a $9.9 million unrealized gain on future derivative commodity contracts being
recorded in the year.

|($000s)                                               |  | 2008   |   |  | 2007   |  
|----------------------------------------------------- |  | ------ | - |  | ------ | -
|Realized cash loss on commodity contracts*            |  | (6,901 | ) |  | (881   | )
|Unrealized gain
      (loss) on commodity contracts** |  | 9,906  |   |  | (7,098 | )
|Total derivative gain (loss) on commodity contracts   |  | 3,005  |   |  | (7,979 | )

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

If the Dated Brent oil price remains at the level experienced
at the end of 2008, the derivative asset will be realized over the next two
years. However, a 10% decrease in Dated Brent oil prices would result in a $1.2
million increase in the derivative commodity contract asset, thus increasing the
unrealized gain by the same amount. Conversely, a 10% increase in Dated Brent
oil prices would decrease the unrealized gain on commodity contracts by $1.3
million. The following commodity contracts are outstanding at December 31,
2008:

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

The total volumes hedged for the following years are:

|     |  | 2009    |  |  | 2010   | 
|---- |  | ------- |  |  | ------ | 
|Bbls |  | 221,000 |  |  | 96,000 | 
|Bopd |  | 605     |  |  | 263    | 

As a result of the re-evaluation of managements intent for the
derivative commodity contracts, the contracts were classified as both current
and long-term assets on the Balance Sheet as there is no intent to settle these
derivative instruments early. At December 31, 2008, $2.3 million of the
derivative commodity contracts were classified as current assets and $0.5
million of the derivative commodity contracts were classified as long-term
assets.

GENERAL AND ADMINISTRATIVE EXPENSES

|                                     |  | 2008   |   |  | 2007  |  
|------------------------------------ |  | ------ | - |  | ----- | -
|(000s, except per
      Boe amounts) |  | **$**  |   |  | $/Boe |  
|G&A (gross)                          |  | 11,012 |   |  | 4.10  |  
|Stock-based compensation             |  | 1,830  |   |  | 0.68  |  
|Capitalized G&A                      |  | (2,583 | ) |  | (0.96 | )
|Overhead
      recoveries            |  | (46    | ) |  | (0.02 | )
|                                     |  |        |   |  |       |  
|G&A (net)                            |  | 10,213 |   |  | 3.80  |  

In 2008, G&A (net) increased 51% (on a Boe basis, 17%),
compared with 2007. The G&A per Boe is higher mainly as a result of the West
Gharib acquisitions, a new operated area for the Company, which required higher
staffing levels and increased travel costs. Higher professional fees resulting
from the acquisitions and increased compliance, higher stock-based compensation
expenses, as well as one-time charges relating to the disposition of the
Canadian operations also contributed to the rise in total G&A costs.

INTEREST ON LONG-TERM DEBT

Interest expense in the year ended December 31, 2008 increased
to $6.2 million (2007 - $1.5 million). Interest expense for the year ended
December 31, 2008 includes interest on long-term debt and amortization of
transaction costs associated with long-term debt. During the year, the Company
expensed $1.9 million of transaction costs (2007 - $0.2 million). The Company
had $58.0 million of debt outstanding on December 31, 2008 (December 31, 2007 -
$58.0 million). The long-term debt bears interest at the Eurodollar Rate plus
three percent.

|6
|-

---

|TRANSGLOBE ENERGY
      CORPORATION       
|------------------------------------------
|MANAGEMENTS
      DISCUSSION AND ANALYSIS

DEPLETION AND DEPRECIATION

|                                     |  | 2008   |  |  | 2007  | 
|------------------------------------ |  | ------ |  |  | ----- | 
|(000s, except per
      Bbl amounts) |  | **$**  |  |  | $/Bbl | 
|Egypt                                |  | 23,052 |  |  | 20.50 | 
|Yemen                                |  | 11,993 |  |  | 8.65  | 
|Dry hole costs write-off             |  | -      |  |  | -     | 
|Corporate                            |  | 333    |  |  | -     | 
|                                     |  |        |  |  |       | 
|                                     |  | 35,378 |  |  | 14.09 | 

|* | Egypt depletion and depreciation $/Bbl for the year ended
      December 31, 2007 excludes $4.1 million in dry hole costs on the Nuqra
      block written off prior to the West Gharib PSC
  acquisition.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In Egypt, depletion and depreciation (DD&A) in the year
ended December 31, 2008 increased to $23.0 million, due to DD&A charges from
the West Gharib acquisitions in Egypt. The high DD&A costs per Bbl result
from the fact that DD&A is depleted on proved reserves, while the purchase
price for the Egypt acquisitions were based on proved plus probable reserves.
The DD&A rate per Bbl is expected to decrease as the probable reserves are
converted to proved reserves.

In Yemen, DD&A on a Bbl basis remained consistent for the
year ended December 31, 2008 compared with 2007.

In Egypt, unproven property costs of $10.0 million (2007 - $7.2
million) relating to Nuqra ($8.0 million) and West Gharib ($2.0 million) were
excluded from costs subject to depletion and depreciation. In Yemen, unproven
property costs of $7.2 million (2007 -$7.1 million) relating to Block 72, Block
75 and Block 84 were excluded from costs subject to depletion and
depreciation.

CAPITAL EXPENDITURES/DISPOSITIONS

|             |  | 2008   |  |  | 2007   | 
|------------ |  | ------ |  |  | ------ | 
|(000s)       |  | **$**  |  |  | $      | 
|Egypt        |  | 34,797 |  |  | 6,904  | 
|Yemen        |  | 8,819  |  |  | 18,437 | 
|Corporate    |  | 241    |  |  | 21     | 
|             |  | 43,857 |  |  | 25,362 | 
|Acquisitions |  | 54,602 |  |  | 54,823 | 
|             |  |        |  |  |        | 
|Total        |  | 98,459 |  |  | 80,185 | 

In Egypt, the Company drilled 14 wells in the year ended
December 31, 2008, including one oil well at Hana West, five oil wells at Hana,
three oil wells at South Rahmi, one oil well at each of Arta, Hoshia and East
Hoshia, a water injection well at Hoshia and a dry hole at West Hoshia in the
West Gharib area. TransGlobe also completed a 3-D seismic program on the West
Gharib Block. In February 2008, the Company acquired the shares of GHP that owns
a 30% working interest in the West Gharib PSC and valued the property, plant and
equipment of GHP at $36.6 million. Goodwill of $3.6 million was recorded on this
acquisition. TransGlobe further increased its ownership in the remaining eight
non-Hana leases on the West Gharib PSC by 25% to 100% in August 2008 through an
$18.0 million property acquisition.

In Yemen, the Company drilled four wells on Block 32 and one
well on Block 72, completed the Block S-1 central production facility expansion,
increased gas injection on the An Nagyah field on Block S-1 and completed a 3-D
seismic program on Block 72 during the year ended December 31, 2008.

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

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

|Proved                                               |  |         |   |  |        |   |  |        |  
|---------------------------------------------------- |  | ------- | - |  | ------ | - |  | ------ | -
|($000s,
      except volumes and $/Boe amounts)      |  | 2008    |   |  | 2007   |   |  | 2006   |  
|Total capital expenditure                            |  | 43,292  |   |  | 37,015 |   |  | 51,555 |  
|Acquisitions                                         |  | 58,946  |   |  | 62,821 |   |  | -      |  
|Dispositions                                         |  | (57,295 | ) |  |        |   |  |        |  
|Net change
      from previous years future capital |  | (6,479  | ) |  | (2,467 | ) |  | (1,154 | )
|                                                     |  | 38,464  |   |  | 97,369 |   |  | 50,401 |  
|Reserve additions and revisions (MBoe)               |  |         |   |  |        |   |  |        |  
|Exploration and development                          |  | 3,474   |   |  | 1,634  |   |  | 3,371  |  
|Acquisitions, net of dispositions                    |  | (227    | ) |  | 2,953  |   |  | -      |  
|Total reserve additions (Mboe)                       |  | 3,247   |   |  | 4,587  |   |  | 3,371  |  
|                                                     |  |         |   |  |        |   |  |        |  
|Average cost per Boe                                 |  |         |   |  |        |   |  |        |  
|F&D                                                  |  | 11.77   |   |  | 21.14  |   |  | 14.95  |  
|FD&A                                                 |  | 11.85   |   |  | 21.23  |   |  | 14.95  |  
|                                                     |  |         |   |  |        |   |  |        |  
|Three-year weighted average cost per
      Boe       |  |         |   |  |        |   |  |        |  
|F&D                                                  |  | 14.97   |   |  | 15.77  |   |  | 11.85  |  
|FD&A                                                 |  | 16.62   |   |  | 17.25  |   |  | 11.85  |  

|7
|-

---

|TRANSGLOBE ENERGY
      CORPORATION       
|------------------------------------------
|MANAGEMENTS
      DISCUSSION AND ANALYSIS

|Proved Plus Probable                                 |  |         |   |  |        |   |  |        | 
|---------------------------------------------------- |  | ------- | - |  | ------ | - |  | ------ | 
|($000s,
      except volumes and $/Boe amounts)      |  | 2008    |   |  | 2007   |   |  | 2006   | 
|Total capital expenditure                            |  | 43,292  |   |  | 37,015 |   |  | 51,555 | 
|Acquisitions                                         |  | 58,946  |   |  | 68,716 |   |  | -      | 
|Dispositions                                         |  | (57,295 | ) |  |        |   |  |        | 
|Net change
      from previous years future capital |  | (8,602  | ) |  | (6,587 | ) |  | 3,943  | 
|                                                     |  | 36,341  |   |  | 99,144 |   |  | 55,498 | 
|Reserve additions and revisions (MBoe)               |  |         |   |  |        |   |  |        | 
|Exploration and development                          |  | 5,546   |   |  | 1,537  |   |  | 3,025  | 
|Acquisitions, net of dispositions                    |  | 363     |   |  | 5,264  |   |  | -      | 
|Total reserve additions (Mboe)                       |  | 5,909   |   |  | 6,801  |   |  | 3,025  | 
|                                                     |  |         |   |  |        |   |  |        | 
|Average cost per Boe                                 |  |         |   |  |        |   |  |        | 
|F&D                                                  |  | 6.67    |   |  | 19.79  |   |  | 18.35  | 
|FD&A                                                 |  | 6.15    |   |  | 14.58  |   |  | 18.35  | 
|                                                     |  |         |   |  |        |   |  |        | 
|Three-year weighted average cost per
      Boe       |  |         |   |  |        |   |  |        | 
|F&D                                                  |  | 12.35   |   |  | 19.88  |   |  | 12.83  | 
|FD&A                                                 |  | 12.14   |   |  | 16.81  |   |  | 12.83  | 

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

RECYCLE RATIO

|                          |  | Three Year       |  |  |       |  |  |       |  |  |       | 
|------------------------- |  | ---------------- |  |  | ----- |  |  | ----- |  |  | ----- | 
|Proved                    |  | Weighted Average |  |  | 2008  |  |  | 2007  |  |  | 2006  | 
|Netback ($/Boe)           |  | 23.90            |  |  | 22.05 |  |  | 25.10 |  |  | 25.23 | 
|Proved F&D costs ($/Boe)  |  | 14.97            |  |  | 11.77 |  |  | 21.14 |  |  | 14.95 | 
|Proved FD&A costs ($/Boe) |  | 16.62            |  |  | 11.85 |  |  | 21.23 |  |  | 14.95 | 
|F&D Recycle ratio         |  | 1.60             |  |  | 1.87  |  |  | 1.19  |  |  | 1.69  | 
|FD&A Recycle ratio        |  | 1.44             |  |  | 1.86  |  |  | 1.18  |  |  | 1.69  | 

|                                        |  | Three Year       |  |  |       |  |  |       |  |  |       | 
|--------------------------------------- |  | ---------------- |  |  | ----- |  |  | ----- |  |  | ----- | 
|Proved Plus
      Probable              |  | Weighted Average |  |  | 2008  |  |  | 2007  |  |  | 2006  | 
|Netback ($/Boe)                         |  | 23.90            |  |  | 22.05 |  |  | 25.10 |  |  | 25.23 | 
|Proved plus Probable F&D costs ($/Boe)  |  | 12.35            |  |  | 6.67  |  |  | 19.79 |  |  | 18.35 | 
|Proved plus Probable FD&A costs ($/Boe) |  | 12.14            |  |  | 6.15  |  |  | 14.58 |  |  | 18.35 | 
|F&D Recycle ratio                       |  | 1.93             |  |  | 3.31  |  |  | 1.27  |  |  | 1.38  | 
|FD&A Recycle ratio                      |  | 1.97             |  |  | 3.59  |  |  | 1.72  |  |  | 1.38  | 

The 2008 proved and the proved plus probable recycle ratios
increased from 2007 mainly as a result of higher reserve additions. The changes
in the 2007 proved plus probable recycle ratio from 2006 mainly relates to the
acquisition of the West Gharib PSC in Egypt.

The recycle ratio measures the efficiency of TransGlobes
capital program by comparing the cost of finding and developing proved reserves
with the netback from production. The ratio is calculated by dividing the
netback by the proved finding and development cost on a Boe basis. Netback, for
the purposes of calculating the recycle ratio, is defined as net sales less
operating, general and administrative (excluding non-cash items), foreign
exchange (gain) loss, interest and current income tax expense per Boe of
production.

|($000s, except
      volumes and per Boe amounts)   |  | 2008   |   |  | 2007   |   |  | 2006   |  
|--------------------------------------------------- |  | ------ | - |  | ------ | - |  | ------ | -
|Net income                                          |  | 31,523 |   |  | 12,802 |   |  | 26,195 |  
|Adjustments for non-cash items:                     |  |        |   |  |        |   |  |        |  
|Depletion,
      depreciation and accretion         |  | 38,056 |   |  | 31,172 |   |  | 18,941 |  
|Stock-based compensation                            |  | 1,830  |   |  | 1,086  |   |  | 1,168  |  
|Future income
      taxes                           |  | (82    | ) |  | 45     |   |  | 263    |  
|Amortization of deferred
      financing costs      |  | 1,884  |   |  | 153    |   |  | 179    |  
|Unrealized loss
      (gain) on commodity contracts |  | (9,906 | ) |  | 7,098  |   |  | 83     |  
|Gain on sale                                        |  | (4,012 | ) |  | -      |   |  | -      |  
|Settlement of asset retirement obligations          |  | (25    | ) |  | (215   | ) |  | (66    | )
|Netback                                             |  | 59,268 |   |  | 52,141 |   |  | 46,763 |  
|Sales volumes (MBoe)                                |  | 2,687  |   |  | 2,078  |   |  | 1,853  |  
|Netback per Boe                                     |  | 22.05  |   |  | 25.10  |   |  | 25.23  |  

OUTSTANDING SHARE DATA

As at December 31, 2008, the Company had 59,499,839 common
shares issued and outstanding. Following the bought-deal financing that closed
on February 25, 2009, the Company has 65,327,839 common shares issued and
outstanding.

In August 2008, the Company renewed its Normal Course Issuer
Bid (NCIB) with the Toronto Stock Exchange (TSX). Pursuant to the NCIB, the
Company may repurchase, from time to time, as it considers advisable, up to
5,558,322 common shares during the 12-month period commencing August 1, 2008 and
ending July 31, 2009. During 2008, the Company repurchased and cancelled 300,000
common shares at an average price of C$3.87 per share. During the year ended
December 31, 2007, the Company purchased 115,900 common shares at an average
price of C$4.07 per share.

|8
|-

---

|TRANSGLOBE ENERGY
      CORPORATION       
|------------------------------------------
|MANAGEMENTS
      DISCUSSION AND ANALYSIS

LIQUIDITY AND CAPITAL RESOURCES

Liquidity describes a companys ability to access cash.
Companies operating in the upstream oil and gas industry require sufficient cash
in order to fund capital programs necessary to maintain and increase production
and proved reserves, to acquire strategic oil and gas assets and to repay debt.
TransGlobes capital programs are funded principally by cash provided from
operating activities. A key measure that TransGlobe uses to measure the
Companys overall financial strength is debt-to-funds flow from operating
activities (calculated on a 12-month rolling basis). TransGlobes debt-to-funds
flow from operating activities ratio, a key short-term leverage measure,
remained strong at 1.0 times at December 31, 2008. This was within the Companys
target range of no more than 2.0 times.

The following table illustrates TransGlobes sources and uses
of cash during the years ended December 31, 2008 and 2007:

Sources and Uses of Cash

|($000s)                                             |  | 2008    |   |  | 2007    |  
|--------------------------------------------------- |  | ------- | - |  | ------- | -
|Cash sourced                                        |  |         |   |  |         |  
|Funds
      flow from operations*                   |  | 52,359  |   |  | 36,285  |  
|Increase in long-term
      debt                    |  | 55,000  |   |  | 63,000  |  
|Exercise
      of options                           |  | 514     |   |  | 605     |  
|Other                                               |  | 201     |   |  | 218     |  
|                                                    |  | 108,074 |   |  | 100,108 |  
|Cash used                                           |  |         |   |  |         |  
|Exploration and development expenditures            |  | 43,857  |   |  | 25,362  |  
|Bank financing costs                                |  | 1,339   |   |  | 1,097   |  
|Acquisitions                                        |  | 62,392  |   |  | 68,001  |  
|Repayment of long-term
      debt                   |  | 55,000  |   |  | 5,000   |  
|Purchase
      of common shares                     |  | 1,135   |   |  | 472     |  
|Options exercised for cash payments                 |  | 256     |   |  | -       |  
|                                                    |  | 163,979 |   |  | 99,932  |  
|Net cash from continuing operations                 |  | (55,905 | ) |  | 176     |  
|Net cash from discontinued operations               |  | 53,098  |   |  | 4,203   |  
|Increase in
      non-cash working capital          |  | (2,288  | ) |  | (486    | )
|Change in cash and cash equivalents                 |  | (5,095  | ) |  | 3,893   |  
|Cash and cash
      equivalents  beginning of year |  | 12,729  |   |  | 8,836   |  
|Cash and cash equivalents  end of year             |  | 7,634   |   |  | 12,729  |  

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

Funding for the Companys capital expenditures and the
acquisition of the remaining working interests in the West Gharib concession
area in Egypt was provided by funds flow from operations, working capital and
long-term debt.

Working capital is the amount by which current assets exceed
current liabilities. At December 31, 2008 the Company had working capital of
$24.0 million (2007 - $5.5 million). Accounts receivable increased primarily as
a result of increased sales in Egypt. These receivables are not considered to be
impaired. Accounts payable increased due to an increased working interest and
increased drilling activity in Egypt.

The Company expects to fund its 2009 exploration and
development program of $35.2 million and contractual commitments through the use
of working capital, cash generated by operating activities and equity financing
of up to C$23.0 million, before expenses, in Q1-2009. The use of new financing
during 2009 may also be utilized to accelerate existing projects, retire
existing debt or to finance new opportunities. Fluctuations in commodity prices,
product demand, foreign exchange rates, interest rates and various other risks
may impact capital resources.

At December 31, 2008, TransGlobe has a $60.0 million Revolving
Credit Agreement of which $58.0 million is drawn. In February 2008, the Company
increased its Term Loan Agreement from $8.0 million to $48.0 million in
connection with the acquisition of GHP. The entire amount of the Term Loan and
$7.0 million of the Revolving Credit Agreement was repaid in April 2008 with the
proceeds from the disposition of the Canadian operations. In August 2008, in
connection with the property acquisition in Egypt, a further $15.0 million was
drawn against the Revolving Credit Agreement.

|($000s)                             |  | December 31, 2008 |   |  | December 31, 2007 |  
|----------------------------------- |  | ----------------- | - |  | ----------------- | -
|Revolving Credit Agreement          |  | 58,000            |   |  | 50,000            |  
|Term Loan
      Agreement           |  | -                 |   |  | 8,000             |  
|                                    |  | 58,000            |   |  | 58,000            |  
|Unamortized
      transaction costs |  | (770              | ) |  | (1,315            | )
|                                    |  | 57,230            |   |  | 56,685            |  
|                                    |  |                   |   |  |                   |  
|Current portion of long-term debt   |  | -                 |   |  | 4,727             |  
|Long-term debt                      |  | 57,230            |   |  | 51,958            |  

|9
|-

---

|TRANSGLOBE ENERGY
      CORPORATION       
|------------------------------------------
|MANAGEMENTS
      DISCUSSION AND ANALYSIS

COMMITMENTS AND CONTINGENCIES

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

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

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

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

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

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

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

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

OFF BALANCE SHEET ARRANGEMENTS

The Company has certain lease agreements, all of which are
reflected in the Commitments and Contingencies table (above), which were entered
into in the normal course of operations. All leases have been treated as
operating leases whereby the lease payments are included in operating expenses
or G&A expenses depending on the nature of the lease. No asset or liability
value has been assigned to these leases in the balance sheet as of December 31,
2008.

OPERATING RESULTS FROM DISCONTINUED OPERATIONS

The following applies to the Canadian operations only. The sale
of the Canadian operations closed April 30, 2008. Year-to-date 2008 figures
include four months of operational and financial results. Comparative 2007
figures are for the full year. The Canadian operations and results have been
accounted for as discontinued operations.

Net Operating Results

Canada

|                                     |  | 2008   |  |  | 2007  | 
|------------------------------------ |  | ------ |  |  | ----- | 
|(000s, except per
      Boe amounts) |  | **$**  |  |  | $/Boe | 
|Oil sales                            |  | 2,198  |  |  | 96.75 | 
|Gas sales ($ per Mcf)                |  | 7,226  |  |  | 8.92  | 
|NGL sales                            |  | 1,638  |  |  | 84.38 | 
|Other sales                          |  | 94     |  |  | -     | 
|                                     |  | 11,156 |  |  | 63.00 | 
|Royalties and other                  |  | 1,994  |  |  | 11.26 | 
|Operating expenses                   |  | 2,228  |  |  | 12.58 | 
|                                     |  |        |  |  |       | 
|Netback                              |  | 6,934  |  |  | 39.16 | 

|10
|--

---

|TRANSGLOBE ENERGY
      CORPORATION       
|------------------------------------------
|MANAGEMENTS
      DISCUSSION AND ANALYSIS

Depreciation, Depletion and Accretion (DD&A)

|                                     |  | 2008  |  |  | 2007  | 
|------------------------------------ |  | ----- |  |  | ----- | 
|(000s, except per
      Boe amounts) |  | **$** |  |  | $/Boe | 
|                                     |  |       |  |  |       | 
|Canada                               |  | 2,678 |  |  | 15.12 | 

In Canada, DD&A decreased 32% per Boe to $15.12/Boe in the
year ended December 31, 2008 compared with $22.17/Boe in the same period in
2007. DD&A was not recognized on the Canadian assets after the held-for-sale
criterion had been met.

Capital expenditures

|($000s) |  | 2008 |  |  | 2007   | 
|------- |  | ---- |  |  | ------ | 
|Canada  |  | 857  |  |  | 11,653 | 

SUBSEQUENT EVENT

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

MANAGEMENT STRATEGY AND OUTLOOK FOR 2009

TransGlobe is committed to maintaining its strong financial
position to support capital programs and provide shareholders with an enhanced
return on investment during the current challenging economic environment.
Management has taken action to maintain the Companys strong balance sheet
including reduced capital spending, cost efficiency opportunities and raising up
to C$23.0 million, before expenses, in Q1-2009 through an issuance of common
shares.

The 2009 outlook provides information as to managements
expectation for results of operations for 2009. Readers are cautioned that the
2009 outlook may not be appropriate for other purposes. The Companys expected
results are sensitive to fluctuations in the business environment and may vary
accordingly. This outlook contains forward-looking statements that should be
read in conjunction with the Companys disclosure under Forward-Looking
Statements included on the first page of the MD&A.

2009 Outlook Highlights

- Production is expected to average between 8,500 and 9,000 Bopd, a 19%
  increase over the 2008 average production;
- Exploration and development spending is budgeted to be $35.2 million, a
  20% decrease from 2008 (allocated 60% to Egypt and 40% to Yemen) funded from
  funds flow from operations and cash on hand; and
- Using the mid-point of production expectations and an average oil price
  assumption for the year of $40.00/Bbl for Dated Brent oil, funds flow from
  operations is expected to be $24.0 million.

2009 Production Outlook

Production for 2009 is expected to average between 8,500 and
9,000 Bopd, representing a 16% to 22% increase over the 2008 average production
of 7,342 Boepd. This target includes preliminary results from the new Hana West
discovery. Production from the West Gharib fields in Egypt is expected to
average approximately 5,200 to 5,700 Bopd during 2009, with the balance of
approximately 3,300 Bopd coming from the Yemen properties.

|Production Forecast               |  |               |  |  |             |  |  |            | 
|--------------------------------- |  | ------------- |  |  | ----------- |  |  | ---------- | 
|                                  |  | 2009 Guidance |  |  | 2008 Actual |  |  | % Change * | 
|                                  |  |               |  |  |             |  |  |            | 
|Barrels of oil equivalent per day |  | 8,500-9,000   |  |  | 7,342       |  |  | 19*        | 

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

2009 Funds Flow From Operations Outlook

This outlook was developed using the above production forecast
and a Dated Brent oil price of $40.00/Bbl.

|2009 Funds Flow From Operations Outlook |  |               |  |  |             |  |  |            |  
|--------------------------------------- |  | ------------- |  |  | ----------- |  |  | ---------- | -
|($ million)                             |  | 2009 Guidance |  |  | 2008 Actual |  |  | % Change * |  
|                                        |  |               |  |  |             |  |  |            |  
|Funds flow from operations **           |  | 24.0          |  |  | 59.3        |  |  | (60        | )

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

While production is forecast to grow by 19% year-over-year,
funds flow from operations is expected to decrease by 60%, mainly as a result of
lower oil prices. Variations in production and commodity prices during 2009
could significantly change this outlook. An increase or decrease in the oil
price of $10.00/Bbl would change anticipated funds flow by approximately $10.0
million for the year.

|11
|--

---

|TRANSGLOBE ENERGY
      CORPORATION       
|------------------------------------------
|MANAGEMENTS
      DISCUSSION AND ANALYSIS

|2009 Capital Budget |  |      | 
|------------------- |  | ---- | 
|($ million)         |  | 2009 | 
|Egypt               |  | 21.0 | 
|Yemen               |  | 14.0 | 
|Corporate           |  | 0.2  | 
|Total               |  | 35.2 | 

In 2009, TransGlobes capital strategy is to maximize the value
of its assets in Egypt and Yemen. In Egypt, the Company will focus its efforts
on the new Hana West discovery and waterflood projects at Hana and Hoshia. The
Company plans to drill between 10-12 wells. In Yemen, the Company plans to drill
between five and nine wells. The 2009 capital budget is expected to be funded
from funds flow, working capital and equity financing (see Subsequent Events
section of the MD&A). The Company has designed its 2009 budget to be
flexible allowing spending to be adjusted as commodity prices change and
forecasts are reviewed.

RISKS

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

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

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

Financial risks

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

The global financial crisis, which developed in late 2008, has
increased the risk associated with timely access to debt, capital, and banking
markets, along with market instability which may have an impact on TransGlobes
ability to obtain additional funding in the future. To mitigate this risk,
management has been adjusting operational and financial risk strategies and
continues to monitor the 2009 capital budget and the Companys long-term plans.
The Company has designed its 2009 budget to be flexible allowing spending to be
adjusted as commodity prices change and forecasts are reviewed.

Market Risk

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

a) Commodity price risk

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

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

b) Foreign currency exchange risk

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

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

c) Interest rate risk

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

|12
|--

---

|TRANSGLOBE ENERGY
      CORPORATION       
|------------------------------------------
|MANAGEMENTS
      DISCUSSION AND ANALYSIS

Credit Risk

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

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

Liquidity Risk

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

To mitigate these risks, the Company actively maintains credit facilities to ensure it has sufficient available funds to meet current and foreseeable financial requirements at a reasonable cost.  Management believes that future cash flows from
operations, working capital and availability under existing banking arrangements will be adequate to support these financial liabilities, as well as its capital programs.

Operational Risks

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

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

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

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

Safety, Environmental and Regulatory Risks

To mitigate environmental risks the Company conducts its operations to ensure compliance with government regulations and guidelines. Monitoring and reporting programs for environmental health and safety performance in day-to-day operations, as well
as inspections and assessments, are designed to provide assurance that environmental and regulatory standards are met.

Security risks are managed through security policies designed to protect TransGlobes personnel and assets. The Company has a Whistleblower protection policy which protects employees if they raise any concerns regarding
TransGlobes operations, accounting or internal control matters.

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

Political Risks

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

|13
|--

---

|TRANSGLOBE ENERGY
      CORPORATION       
|------------------------------------------
|MANAGEMENTS
      DISCUSSION AND ANALYSIS

Oil and Gas Reserves

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

Full Cost Accounting for Oil and Gas Activities

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

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

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

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

Production Sharing Agreements

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

Derivative Financial Instruments and Hedging
Activities

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

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

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

|14
|--

---

|TRANSGLOBE ENERGY
      CORPORATION       
|------------------------------------------
|MANAGEMENTS
      DISCUSSION AND ANALYSIS

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

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

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

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

CHANGES IN ACCOUNTING POLICIES

The following accounting pronouncements had an impact on the
financial statements of the Company in 2008:

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

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

Foreign Currency Translation

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

NEW ACCOUNTING STANDARDS

The Company has assessed new and revised accounting
pronouncements that have been issued that are not yet effective and determined
that the following may have an impact on the Company:

Goodwill and Intangible Assets

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

Business Combinations

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

|15
|--

---

|TRANSGLOBE ENERGY
      CORPORATION       
|------------------------------------------
|MANAGEMENTS
      DISCUSSION AND ANALYSIS

Non-Controlling Interests

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

International Financial Reporting Standards

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

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

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

In 2009, the Company will begin the design, planning and solution development phase. Project team members will work in conjunction with representatives from the various operational areas to evaluate the specific impacts of IFRS conversion to
TransGlobe, including the Companys accounting policies, information and computer systems, internal and disclosure controls and financial reporting.  The project team will develop recommendations and accounting policies, including the
first-time adoption exemptions available upon initial transition to IFRS.

In addition, the Company is monitoring the International Accounting Standards Boards active projects and all changes to IFRS prior to January 1, 2011 will be incorporated as required

DISCLOSURE CONTROLS AND PROCEDURES

As of December 31, 2008, an evaluation was carried out under the supervision, and with the participation, of the Companys management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Companys
disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of the end of the fiscal year, the design and operation of these disclosure controls and procedures were
effective to ensure that information required to be disclosed by the Company in its annual filings is recorded, processed, summarized and reported within the specified time periods.

INTERNAL CONTROL OVER FINANCIAL REPORTING

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

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

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

|16
|--

---