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Consolidated Financial Statements of

TRANSGLOBE ENERGY CORPORATION

December 31, 2007



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REPORT OF INDEPENDENT REGISTERED CHARTERED
ACCOUNTANTS

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

We have audited the accompanying consolidated balance sheets of
TransGlobe Energy Corporation (the Company) as of December 31, 2007 and 2006
and the related consolidated statements of income, retained earnings,
comprehensive income and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, these consolidated financial statements present
fairly, in all material respects, the financial position of TransGlobe Energy
Corporation as ofDecember 31, 2007 and 2006, and the results of its
operations and its cash flows for the years then ended in accordance with
Canadian generally accepted accounting principles.

We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the Company's
internal control over financial reporting as of December 31, 2007, based onthe criteria established in Internal ControlIntegrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated February 29, 2008 expressed an unqualified opinion on the Companys
internal control over financial reporting.

Independent Registered Chartered Accountants Calgary,
Canada February 29, 2008 (except as to Notes 15 c, d, and e which are as of
February 10, 2009)

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

The standards of the Public Company Accounting Oversight Board
(United States) require the addition of an explanatory paragraph (following the
opinion paragraph) when there are changes in accounting principles that have a
material effect on the comparability of the Companys financial statements, such
as the changes described in Notes 2 and 16 to the financial statements. Although
we conducted our audits in accordance with both Canadian generally accepted
auditing standards and the standards of the Public Company Accounting Oversight
Board (United States), our report to the Board of Directors and Shareholders on
the consolidated financial statements of TransGlobe Energy Corporation, dated
February 29, 2008 (except as to Notes 15 c, d, and e which are as of February
10, 2009), is expressed in accordance with Canadian reporting standards which do
not require a reference to such changes in accounting principles in the
auditors report when the change is properly accounted for and adequately
disclosed in the financial statements.

Independent Registered Chartered Accountants Calgary,
Canada February 29, 2008 (except as to Notes 15 c, d, and e which are as of
February 10, 2009)

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REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS

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

We have audited the internal control over financial reporting of TransGlobe Energy Corporation (the “Company”) as of December 31, 2007, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control Over Financial Reporting.  Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. As described in the Management Report, management excluded from its assessment the internal control over financial reporting at Dublin International Petroleum (Egypt) Limited and Drucker Petroleum Inc., which was acquired on September 25, 2007 and whose financial statements constitute 55 percent and 35 percent of net and total assets, respectively, 8 percent of revenues, and 9 percent of net income of the consolidated financial statement amounts as of and for the year ended December 31, 2007. Accordingly, our audit did not include the internal control over financial reporting at Dublin International Petroleum (Egypt) Limited and Drucker Petroleum Inc.

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

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

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

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as at and for the year ended December 31, 2007 of the Company and our report dated February 29, 2008 expressed an unqualified opinion on those financial statements and included a separate report titled Comments by Independent Registered Chartered Accountants on Canada United States of America Reporting Difference referring to a change in accounting principle.

Independent Registered Chartered Accountants
Calgary, Canada
February 29, 2008

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TRANSGLOBE ENERGY CORPORATION

Consolidated Balance Sheets (Expressed in thousands of
U.S. Dollars)

|                                                         |   | December 31, 2007 |  |   | December 31, 2006 | 
|-------------------------------------------------------- | - | ----------------- |  | - | ----------------- | 
|                                                         |   | (Note 15e)        |  |   | (Note 15e)        | 
|ASSETS                                                   |   |                   |  |   |                   | 
|Current                                                  |   |                   |  |   |                   | 
|Cash and cash equivalents                                | $ | 12,729            |  | $ | 8,836             | 
|Accounts receivable                                      |   | 14,408            |  |   | 4,026             | 
|Prepaid expenses                                         |   | 320               |  |   | 437               | 
|Discontinued operations (Note 15e)                       |   | 4,300             |  |   | 4,569             | 
|                                                         |   | 31,757            |  |   | 17,868            | 
|                                                         |   |                   |  |   |                   | 
|Property and equipment (Note 4, 11)                      |   | 116,288           |  |   | 54,637            | 
|Deferred financing costs (Note 5)                        |   | -                 |  |   | 371               | 
|Goodwill (Note 3)                                        |   | 4,313             |  |   | -                 | 
|Discontinued
      operations (Note 15e)                 |   | 51,861            |  |   | 43,597            | 
|                                                         |   |                   |  |   |                   | 
|                                                         | $ | 204,219           |  | $ | 116,473           | 
|                                                         |   |                   |  |   |                   | 
|LIABILITIES                                              |   |                   |  |   |                   | 
|Current                                                  |   |                   |  |   |                   | 
|Accounts payable and accrued liabilities                 | $ | 7,790             |  | $ | 8,125             | 
|Derivative commodity contracts
      (Note 13)           |   | 7,098             |  |   | -                 | 
|Current portion of long-term debt (Note 5)               |   | 4,727             |  |   | -                 | 
|Discontinued operations (Note 15e)                       |   | 6,648             |  |   | 5,382             | 
|                                                         |   | 26,263            |  |   | 13,507            | 
|                                                         |   |                   |  |   |                   | 
|Long-term debt (Note 5)                                  |   | 51,958            |  |   | -                 | 
|Discontinued operations (Note 15e)                       |   | 2,755             |  |   | 2,171             | 
|                                                         |   | 80,976            |  |   | 15,678            | 
|                                                         |   |                   |  |   |                   | 
|Commitments and contingencies (Note 12)                  |   |                   |  |   |                   | 
|                                                         |   |                   |  |   |                   | 
|SHAREHOLDERS EQUITY                                     |   |                   |  |   |                   | 
|Share capital (Note 6)                                   |   | 50,128            |  |   | 49,360            | 
|Contributed surplus (Note 6d)                            |   | 3,562             |  |   | 2,863             | 
|Accumulated other comprehensive income
      (Note 2, 9) |   | 11,766            |  |   | 3,212             | 
|Retained earnings                                        |   | 57,787            |  |   | 45,360            | 
|                                                         |   | 123,243           |  |   | 100,795           | 
|                                                         |   |                   |  |   |                   | 
|                                                         | $ | 204,219           |  | $ | 116,473           | 

|See accompanying notes.         |                         
|------------------------------- | ------------------------
|                                |                         
|APPROVED ON BEHALF OF THE BOARD |                         
|                                |                         
|                                |                         
|Ross G. Clarkson, Director      | Fred J. Dyment, Director

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TRANSGLOBE ENERGY CORPORATION

Consolidated Statements of Income and Retained Earnings
(Expressed in thousands of U.S. Dollars)

|                                                               |   | Year Ended        |   |   | Year Ended        |  
|-------------------------------------------------------------- | - | ----------------- | - | - | ----------------- | -
|                                                               |   | December 31, 2007 |   |   | December 31, 2006 |  
|                                                               |   | (Note 15e)        |   |   | (Note 15e)        |  
|REVENUE                                                        |   |                   |   |   |                   |  
|Oil and gas sales, net of
      royalties and other            | $ | 67,628            |   | $ | 56,836            |  
|Derivative loss on commodity contracts (Note
      13)         |   | (7,979            | ) |   | (83               | )
|Other income                                                   |   | 183               |   |   | 283               |  
|                                                               |   | 59,832            |   |   | 57,036            |  
|                                                               |   |                   |   |   |                   |  
|EXPENSES                                                       |   |                   |   |   |                   |  
|Operating                                                      |   | 11,056            |   |   | 8,108             |  
|General and administrative                                     |   | 6,743             |   |   | 4,674             |  
|Foreign exchange loss (gain)                                   |   | 5                 |   |   | (12               | )
|Interest on long-term debt                                     |   | 1,450             |   |   | -                 |  
|Depletion, depreciation and accretion                          |   | 19,568            |   |   | 11,805            |  
|                                                               |   | 38,822            |   |   | 24,575            |  
|                                                               |   |                   |   |   |                   |  
|Income before income taxes                                     |   | 21,010            |   |   | 32,461            |  
|Income taxes  current (Note 7)                                |   | 12,630            |   |   | 9,129             |  
|                                                               |   |                   |   |   |                   |  
|Net income from continuing operations                          |   | 8,380             |   |   | 23,332            |  
|Net income from
      discontinued operations (Note 15e)       |   | 4,422             |   |   | 2,863             |  
|                                                               |   |                   |   |   |                   |  
|NET INCOME                                                     |   | 12,802            |   |   | 26,195            |  
|                                                               |   |                   |   |   |                   |  
|Purchase of common shares (Note 6b)                            |   | (375              | ) |   | -                 |  
|Retained earnings, beginning of year                           |   | 45,360            |   |   | 19,165            |  
|                                                               |   |                   |   |   |                   |  
|RETAINED EARNINGS, END OF YEAR                                 | $ | 57,787            |   | $ | 45,360            |  
|                                                               |   |                   |   |   |                   |  
|Net income per share from continuing
      operations(Note 10) |   |                   |   |   |                   |  
|Basic                                                          | $ | 0.14              |   | $ | 0.40              |  
|Diluted                                                        | $ | 0.14              |   | $ | 0.39              |  
|Net income per share from discontinued operations(Note 10)     |   |                   |   |   |                   |  
|Basic                                                          | $ | 0.07              |   | $ | 0.05              |  
|Diluted                                                        | $ | 0.07              |   | $ | 0.04              |  
|Net income per share(Note 10)                                  |   |                   |   |   |                   |  
|Basic                                                          | $ | 0.21              |   | $ | 0.45              |  
|Diluted                                                        | $ | 0.21              |   | $ | 0.43              |  

Consolidated Statements of Comprehensive Income
(Expressed in thousands of U.S. Dollars)

|                                        |   | Year Ended        |  |   | Year Ended        |  
|--------------------------------------- | - | ----------------- |  | - | ----------------- | -
|                                        |   | December 31, 2007 |  |   | December 31, 2006 |  
|Net income                              | $ | 12,802            |  | $ | 26,195            |  
|Other comprehensive income:             |   |                   |  |   |                   |  
|Foreign currency translation adjustment |   | 8,554             |  |   | (430              | )
|COMPREHENSIVE
      INCOME              | $ | 21,356            |  | $ | 25,765            |  

See accompanying notes.

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TRANSGLOBE ENERGY CORPORATION

Consolidated Statements of Cash Flows (Expressed in
thousands of U.S. Dollars)

|                                                                 |   | Year Ended        |   |   | Year Ended        |  
|---------------------------------------------------------------- | - | ----------------- | - | - | ----------------- | -
|                                                                 |   | December 31, 2007 |   |   | December 31, 2006 |  
|                                                                 |   | (Note 15e)        |   |   | (Note 15e)        |  
|CASH FLOWS RELATED TO THE FOLLOWING
      ACTIVITIES:            |   |                   |   |   |                   |  
|                                                                 |   |                   |   |   |                   |  
|OPERATING                                                        |   |                   |   |   |                   |  
|Net income                                                       | $ | 12,802            |   | $ | 26,195            |  
|Net income from discontinued operations                          |   | 4,422             |   |   | 2,863             |  
|Net income from continuing operations                            |   | 8,380             |   |   | 23,332            |  
|Adjustments for:                                                 |   |                   |   |   |                   |  
|Depletion, depreciation
      and accretion                      |   | 19,568            |   |   | 11,805            |  
|Amortization of deferred financing costs                         |   | 153               |   |   | 179               |  
|Stock-based compensation
      (Note 6d)                         |   | 1,086             |   |   | 1,168             |  
|Unrealized loss on commodity contracts                           |   | 7,098             |   |   | 83                |  
|Settlement of asset
      retirement obligations                 |   | (215              | ) |   | (66               | )
|Changes in non-cash working
      capital net of the effect of   |   |                   |   |   |                   |  
|acquisitions (Note 8)                                            |   | 1,370             |   |   | (755              | )
|Cash provided by continuing
      operations                     |   | 37,440            |   |   | 35,746            |  
|Cash
      provided by discontinued operations                   |   | 16,178            |   |   | 11,637            |  
|                                                                 |   | 53,618            |   |   | 47,383            |  
|FINANCING                                                        |   |                   |   |   |                   |  
|Increase in long-term debt                                       |   | 63,000            |   |   | -                 |  
|Repayment of long-term debt                                      |   | (5,000            | ) |   | -                 |  
|Purchase of common shares                                        |   | (472              | ) |   | -                 |  
|Issue of common shares for cash                                  |   | 605               |   |   | 297               |  
|Deferred financing costs                                         |   | (1,097            | ) |   | (438              | )
|                                                                 |   | 57,036            |   |   | (141              | )
|INVESTING                                                        |   |                   |   |   |                   |  
|Exploration and development expenditures                         |   | (25,362           | ) |   | (32,136           | )
|Acquisition (Note 3)                                             |   | (68,001           | ) |   | -                 |  
|Changes in non-cash working capital (Note 8)                     |   | (3,081            | ) |   | 4,620             |  
|Cash used by continuing
      operations                         |   | (96,444           | ) |   | (27,516           | )
|Cash
      used by discontinued operations                       |   | (10,535           | ) |   | (23,004           | )
|                                                                 |   | (106,979          | ) |   | (50,520           | )
|Effect of exchange rate changes on cash and                      |   |                   |   |   |                   |  
|cash equivalents                                                 |   | 218               |   |   | (107              | )
|                                                                 |   |                   |   |   |                   |  
|NET INCREASE (DECREASE) IN CASH AND
      CASH                   |   | 3,893             |   |   | (3,385            | )
|EQUIVALENTS                                                      |   |                   |   |   |                   |  
|                                                                 |   |                   |   |   |                   |  
|CASH AND CASH
      EQUIVALENTS, BEGINNING OF YEAR               |   | 8,836             |   |   | 12,221            |  
|                                                                 |   |                   |   |   |                   |  
|CASH AND CASH
      EQUIVALENTS, END OF YEAR                     | $ | 12,729            |   | $ | 8,836             |  
|                                                                 |   |                   |   |   |                   |  
|Supplemental Disclosure of Cash Flow
      Information           |   |                   |   |   |                   |  
|Cash interest paid                                               | $ | 1,384             |   |   | -                 |  
|Cash taxes paid                                                  | $ | 12,630            |   | $ | 9,129             |  
|Cash and cash
      equivalents is comprised of cash on hand and |   |                   |   |   |                   |  
|balances with banks                                              | $ | 12,729            |   | $ | 8,836             |  

See accompanying notes.

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|TRANSGLOBE ENERGY CORPORATION                                 | 1
|------------------------------------------------------------- | -
|Notes to the Consolidated Financial Statements                |  
|Years Ended December 31, 2007 and December 31,
      **2006** |  
|(Expressed in
      U.S. Dollars, unless otherwise stated)    |  

|1. | SUMMARY OF SIGNIFICANT ACCOUNTING
  POLICIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | The Consolidated Financial Statements include the
      accounts of TransGlobe Energy Corporation and subsidiaries (TransGlobe
      or the Company), and are presented in accordance with Canadian generally
      accepted accounting principles (information prepared in accordance with
      generally accepted accounting principles in the United States is included
      in Note 16). In these Consolidated Financial Statements, unless otherwise
      indicated, all dollar amounts are expressed in United States (U.S.)
      dollars. All references to US$ or to $ are to United States dollars and
      references to C$ are to Canadian dollars.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | Nature of Business and Principles of
      Consolidation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | The Company is engaged primarily in oil and gas
      exploration, development and production and the acquisition of properties.
      Such activities are concentrated in three geographic areas:                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | •                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | •                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | •                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | Joint Ventures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | Investments in unincorporated joint ventures are
      accounted for using the proportionate consolidation method, whereby the
      Companys proportionate share of revenues, expenses, assets and
      liabilities are included in the accounts.                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | Currency Translation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | The accounts of the self-sustaining Canadian operations
      are translated using the current rate method, whereby assets and
      liabilities are translated at year end exchange rates, while revenues and
      expenses are translated using average annual rates. Translation gains and
      losses relating to the self-sustaining Canadian operations are included in
      accumulated other comprehensive income as a separate component of
      shareholders equity.                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | Monetary assets and liabilities of the Company that are
      denominated in foreign currencies are translated into its functional
      currency at the rates of exchange in effect at the period end date. Any
      gains or losses are recorded in the Consolidated Statements of Income and
      Retained Earnings.                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | Revenue Recognition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | Revenues associated with the sales of the Companys crude
      oil, natural gas and natural gas liquids owned by the Company are
      recognized when title passes from the Company to its customer. Crude oil
      and natural gas produced and sold by the Company below or above its
      working interest share in the related resource properties results in
      production underliftings or overliftings. Underliftings are recorded as
      inventory and overliftings are recorded as deferred
  revenue.                                                                                                                                               

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|TRANSGLOBE ENERGY CORPORATION                              | 2
|---------------------------------------------------------- | -
|Notes to the Consolidated Financial Statements             |  
|Years Ended December 31, 2007 and December 31, **2006**    |  
|(Expressed in U.S.
      Dollars, unless otherwise stated) |  

|1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | Revenue Recognition (Continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | International operations conducted pursuant to production sharing agreements (PSAs) are reflected in the Consolidated Financial Statements based on the Companys working interest in such operations. Under the
PSAs, the Company and other non-governmental partners pay all operating and capital costs for exploring and developing the concessions. Each PSA establishes specific terms for the Company to recover these costs (Cost Recovery Oil) and to share
in the production sharing oil. Cost Recovery Oil is determined in accordance with a formula that is generally limited to a specified percentage of production during each fiscal year. Production sharing oil is that portion of production remaining
after Cost Recovery Oil and is shared between the joint venture partners and the government of each country, varying with the level of production. Production sharing oil that is attributable to the government includes an amount in respect of all
income taxes payable by the Company under the laws of the respective country. Revenue represents the Companys share and is recorded net of royalty payments to government and other mineral interest owners. For our international operations, all
government interests, except for income taxes, are considered royalty payments. Our revenue also includes the recovery of costs paid on behalf of foreign governments in international locations.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | Income Taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | The Company uses the liability method to account for income taxes. Under this method, future income taxes are based on the difference between assets and liabilities reported for financial accounting purposes from those reported
for income tax. Future income tax assets and liabilities are measured using the substantively enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered or settled. The
Companys contractual arrangements in foreign jurisdictions stipulate that income taxes are paid by the respective national oil company out of its entitlement share of production sharing oil. Such amounts are included in income tax expense at
the statutory rate in effect at the time of production.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | Flow Through Shares                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | The Company has financed a portion of its prior years exploration and development activities in Canada through the issue of flow through shares. Under the terms of these share issues, the tax attributes of the related
expenditures are renounced to subscribers. To recognize the foregone tax benefits, share capital is reduced and a future income tax liability is recorded for the income tax amount related to the renounced deductions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | Net Income Per Share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | Basic net income per share is calculated using the weighted average number of shares outstanding during the year. Diluted net income per share is calculated by giving effect to the potential dilution that would occur if stock
options were exercised. Diluted net income per share is calculated using the treasury stock method. The treasury stock method assumes that the proceeds received from the exercise of in-the-money stock options are used to repurchase
common shares at the average market price.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

---

|TRANSGLOBE ENERGY CORPORATION                              | 3
|---------------------------------------------------------- | -
|Notes to the Consolidated Financial Statements             |  
|Years Ended December 31, 2007 and December 31, **2006**    |  
|(Expressed in U.S.
      Dollars, unless otherwise stated) |  

|1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | Cash and Cash Equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | Cash and cash equivalents include cash on deposit with banks and short-term investments such as treasury bills with original maturity of less than 90 days.                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | Product inventories are valued at the lower of average cost and net realizable value on a first-in, first- out basis.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | Property and Equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | The Company follows the full cost method of accounting for oil and gas operations whereby all costs associated with the exploration for and development of oil and gas reserves are capitalized on a country-by-country basis. Such
costs include land acquisition costs, geological and geophysical expenses, carrying charges on non-producing properties, costs of drilling both productive and non- productive wells, production equipment and overhead charges directly related to
acquisition, exploration and development activities.                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | Expenditures related to renewals or betterments that improve the productive capacity or extend the life of an asset are capitalized. Maintenance and repairs are expensed as incurred.                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | Depreciation, Depletion, Amortization and Impairment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | Capitalized costs within each country are depleted and depreciated on the unit-of-production method based on the estimated gross proved reserves as determined by independent reserve evaluators. Gas reserves and production are
converted into equivalent units using the energy equivalency conversion method of 6,000 cubic feet of natural gas to one barrel of oil. Depletion and depreciation is calculated using the capitalized costs, including estimated asset retirement costs,
plus the estimated future costs to be incurred in developing proved reserves, net of estimated salvage value.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | Costs of acquiring and evaluating unproved properties and major development projects are initially excluded from the depletion and depreciation calculation until it is determined whether or not proved reserves can be assigned to
such properties. Costs of unproved properties and major development projects are transferred to depletable costs based on the percentage of reserves assigned to each project over the expected total reserves when the project was initiated. These
costs are assessed periodically to ascertain whether impairment has occurred.                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | Proceeds from the sale of oil and gas properties are applied against capitalized costs, with no gain or loss recognized, unless such a sale would alter the rate of depletion and depreciation by more than 20 percent in a particular
country, in which case a gain or loss on disposal is recorded.                                                                                                                                                                                                                                                                                                    

---

|TRANSGLOBE ENERGY CORPORATION                              | 4
|---------------------------------------------------------- | -
|Notes to the Consolidated Financial Statements             |  
|Years Ended December 31, 2007 and December 31, **2006**    |  
|(Expressed in U.S.
      Dollars, unless otherwise stated) |  

|1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
      (Continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | Depreciation, Depletion, Amortization and Impairment
      (Continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | An impairment loss is recognized in net income if the
      carrying amount of a country (cost centre) is not recoverable and the
      carrying amount of the cost centre exceeds its fair value. The carrying
      amount of the cost centre is not recoverable if the carrying amount
      exceeds the sum of the undiscounted cash flows from proved reserves. If
      the sum of the cash flows is less than carrying amount, the impairment is
      the amount by which the carrying amount exceeds the sum
  of:

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

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

Asset Retirement Obligations

The fair value of the statutory,
contractual or legal liability associated with the retirement and reclamation of
tangible long-lived assets is recognized when incurred. The asset retirement
cost, equal to the estimated fair value of the asset retirement obligation, is
capitalized as part of the cost of the related long-lived asset. Asset
retirement costs for natural gas and crude oil assets are amortized using the
unit-of-production method.

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

Stock-based Compensation

The Company records compensation
expense in the Consolidated Financial Statements for stock options granted to
employees and directors using the fair value method. Fair values are determined
using the lattice-based binomial option pricing model in 2007 and 2006 and the
Black-Scholes option pricing model in 2005 and prior years. Compensation costs
are recognized over the vesting period.

Derivative Financial Instruments

Derivative financial instruments are
used by the Company to manage its exposure to market risks relating to commodity
prices. The Companys policy is not to utilize derivative financial instruments
for speculative purposes.

Derivative instruments that do not
qualify as hedges, or are not designated as hedges, are recorded at fair values
where instruments are recorded in the Consolidated Balance Sheet as either an
asset or liability with changes in fair value recognized in net income. Realized
gains or losses from financial derivatives related to commodity prices are
recognized in 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.

---

|TRANSGLOBE ENERGY CORPORATION                              | 5
|---------------------------------------------------------- | -
|Notes to the Consolidated Financial Statements             |  
|Years Ended December 31, 2007 and December 31, **2006**    |  
|(Expressed in U.S.
      Dollars, unless otherwise stated) |  

|1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
      (Continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | Goodwill                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | Goodwill, which represents the excess of cost of an
      acquired enterprise over the net of the amounts assigned to assets
      acquired and liabilities assumed, is assessed at least annually for
      impairment. To assess impairment, the fair value of the reporting unit is
      determined and compared to the book value of the reporting unit. If the
      fair value is less than the book value, then a second test is performed to
      determine the amount of the impairment. The amount of the impairment is
      determined by deducting the fair value of the reporting units assets and
      liabilities from the fair value of the reporting unit to determine the
      implied fair value of goodwill and comparing that amount to the book value
      of the reporting units goodwill. Any excess of the book value of goodwill
      over the implied fair value of goodwill is the impaired amount. Goodwill
      is not amortized.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | Measurement Uncertainty                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | Timely preparation of the financial statements in
      conformity with Canadian generally accepted accounting principles requires
      that Management make estimates and assumptions and use judgment regarding
      assets, liabilities, revenues and expenses. Such estimates primarily
      relate to unsettled transactions and events as of the date of the
      financial statements. Accordingly, actual results may differ from
      estimated amounts as future confirming events occur.                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | Amounts recorded for depletion, depreciation and
      amortization, asset retirement costs and obligations, future income taxes,
      and amounts used for ceiling test and impairment calculations are based on
      estimates of oil and natural gas reserves and future costs required to
      develop those reserves. By their nature, these estimates of reserves and
      the related future cash flows are subject to measurement uncertainty, and
      the impact on the financial statements of future periods could be
      material.                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|2. | CHANGES IN ACCOUNTING POLICIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | Financial Instruments, Comprehensive Income, Hedges
      and Equity                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | Effective January 1, 2007, the Company adopted the new
      recommendations of the Canadian Institute of Chartered Accountants (CICA)
      under CICA Handbook Section 1530, Comprehensive Income, Section
      1651, Foreign Currency Translation, Section 3251, Equity,
      Section 3855, Financial Instruments  Recognition and Measurement,
      Section 3861, Financial Instruments Disclosure and Presentationand
      Section 3865, Hedges. These new Handbook Sections provide
      requirements for the recognition and measurement of financial instruments
      in the balance sheet, reporting gains or losses in the financial
      statements and the use of hedge accounting.                                                                                                                                                                                                                                                                  

---

|TRANSGLOBE ENERGY CORPORATION                              | 6
|---------------------------------------------------------- | -
|Notes to the Consolidated Financial Statements             |  
|Years Ended December 31, 2007 and December 31, **2006**    |  
|(Expressed in U.S.
      Dollars, unless otherwise stated) |  

|2. | CHANGES IN ACCOUNTING POLICIES
  (Continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | Under Section 3855, all 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.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | As a result of the adoption of these new standards, 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, 2007. 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, and
      the Company has maintained its policy not to use hedge accounting. The
      Company elected January 1, 2008 as the transition date for embedded
      derivatives.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | Carrying value and fair value of financial assets and
      liabilities as at December 31, 2007 are summarized as
  follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

| | Classification (000s) |   | Carrying Value |  |   | Fair Value | 
| | --------------------- | - | -------------- |  | - | ---------- | 
| | Held-for-trading      | $ | 5,631          |  | $ | 5,631      | 
| | Loans and receivables |   | 14,408         |  |   | 14,408     | 
| | Held-to-maturity      |   | -              |  |   | -          | 
| | Available-for-sale    |   | -              |  |   | -          | 
| | Other liabilities     |   | 64,232         |  |   | 65,547     | 

Section 1530 establishes standards for reporting and presenting
    comprehensive income which is defined as the change in equity from transactions
    and other events from non-owner sources. 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.
    Due to the issuance of Section 1530, Section 1650 has been replaced by Section
    1651 which establishes new standards for presentation of exchange gains and
    losses arising from the translation of self-sustaining foreign operation in
    Other Comprehensive Income. Therefore, the Company has restated prior periods
    to include cumulative translation adjustment on self-sustaining operations
    as Other Comprehensive Income.


---

|TRANSGLOBE ENERGY CORPORATION                              | 7
|---------------------------------------------------------- | -
|Notes to the Consolidated Financial Statements             |  
|Years Ended December 31, 2007 and December 31, **2006**    |  
|(Expressed in U.S.
      Dollars, unless otherwise stated) |  

|2. | CHANGES IN ACCOUNTING POLICIES (Continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | Section 3251, Equity, which replaces Section
        3250, Surplus, establishes standards for the presentation of equity
        and changes in equity during the reporting period. The main feature of
        this section is a requirement for an entity to present separately each
        of the changes in equity during the period, including comprehensive income,
        as well as components of equity at the end of the period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | Variable Interest Entities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | Effective January 1, 2007, the Company adopted EIC 163,
        Determining the variability to be considered in applying AcG-15 (Variable
        Interest Entities).The EIC provides guidance on those arrangements
        where application of either the cash flow method or the fair value method
        does not result in a clear determination as to whether those arrangements
        are variable interests or creators of variability. The Committee reached
        a consensus that variability to be considered should be based on the design
        of the entity as determined through analyzing the nature of the risks
        in the entity and the purpose for which the entity was created, as well
        as the variability (created by the risks) the entity is designed to create
        and pass along to its interest holders. The adoption of EIC 163 had no
        effect on the Companys Consolidated Financial Statements.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | Recent accounting pronouncements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | Capital Disclosures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | The Accounting Standards Board (AcSB) issued Canadian
        Institute of Chartered Accountants (CICA) Section 1535, Capital Disclosures.
        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
        new requirements are effective for annual and interim periods beginning
        on or after October 1, 2007, and, upon adoption, are not expected to materially
        impact the Consolidated Financial Statements.                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | Accounting Changes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | Effective January 1, 2007, the Company adopted the revised
        recommendations of Section 1506, Accounting Changes.The new recommendations
        permit voluntary changes in accounting policy only if they result in financial
        statements which provide more reliable and relevant information. Accounting
        policy changes are applied retrospectively unless it is impractical to
        determine the period or cumulative impact of the change. Corrections of
        prior period errors are applied retrospectively and changes in accounting
        estimates are applied prospectively by including these changes in earnings.
        The guidance was effective for all changes in accounting policies, changes
        in accounting estimates and corrections of prior period errors initiated
        in periods beginning on or after January 1, 2007.                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | The only impact of adopting this section is to provide
        disclosure of when an entity has not applied a new source of GAAP that
        has been issued but is not yet effective. This is the case with Section
        3862, Financial Instruments Disclosures, and Section 3863, Financial
        Instruments Presentations,which are required to be adopted for fiscal
        years beginning on or after October 1, 2007. The Company will adopt these
        standards on January 1, 2008 and it is expected the only effect on the
        Company will be 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.                                                                                                            

---

|TRANSGLOBE ENERGY CORPORATION                              | 8
|---------------------------------------------------------- | -
|Notes to the Consolidated Financial Statements             |  
|Years Ended December 31, 2007 and December 31, **2006**    |  
|(Expressed in U.S.
      Dollars, unless otherwise stated) |  

|2. | CHANGES IN ACCOUNTING POLICIES
  (Continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | Goodwill and intangible assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | In February 2008, the Canadian Institute of Chartered
      Accountants (CICA) issued Section 3064,                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | Goodwill and intangible assets, replacing Section
      3062, Goodwill and other intangible assetsand Section 3450,
      Research and development costs. Various changes have been made to
      other sections of the CICA Handbook for consistency purposes. The new
      Section will be applicable to financial statements relating to fiscal
      years beginning on or after October 1, 2008. Accordingly, the Company will
      adopt the new standards for its fiscal year beginning January 1, 2009. It
      establishes standards for the recognition, measurement, presentation and
      disclosure of goodwill subsequent to its initial recognition and of
      intangible assets by profit-oriented enterprises. Standards concerning
      goodwill are unchanged from the standards included in the previous Section
      3062. The Company is currently evaluating the impact of the adoption of
      this new Section on its Consolidated Financial Statements.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | 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 will replace Canadas current
      Generally Accepted Accounting Principles (GAAP) for all publicly
      accountable profit-oriented enterprises. The Company is currently
      evaluating the impact of this changeover on its Consolidated Financial
      Statements.                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|3. | BUSINESS COMBINATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | On September 25, 2007, TransGlobe acquired all of the
      common shares of two private companies, Dublin International Petroleum
      (Egypt) Limited (Dublin) and Drucker Petroleum Inc., (Drucker) for
      cash consideration of $67.7 million. The results of Dublins and Druckers
      operations have been included in the consolidated financial statements
      since that date. Dublin and Drucker hold interests in eight development
      leases and associated infrastructure in the West Gharib Concession area in
      Egypt (Dublin is the operator of this Concession). TransGlobe funded the
      acquisition from cash on hand and bank debt of $63.0 million.                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | The acquisition has been accounted for using the purchase
      method and the purchase price was allocated to the fair value of the
      assets acquired and the liabilities assumed as
follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

| | Cost of
      acquisition (000s)          |   |        | 
| | ----------------------------------------- | - | ------ | 
| | Cash paid, net of cash acquired           | $ | 67,684 | 
| | Transactions costs                        |   | 317    | 
| |                                           | $ | 68,001 | 
| |                                           |   |        | 
| |                                           |   |        | 
| | Allocation of
      purchase price (000s) |   |        | 
| | Property and equipment                    | $ | 54,823 | 
| | Goodwill                                  |   | 4,313  | 
| | Working capital, net of cash acquired     |   | 8,865  | 
| |                                           | $ | 68,001 | 

---

|TRANSGLOBE ENERGY CORPORATION                              | 9
|---------------------------------------------------------- | -
|Notes to the Consolidated Financial Statements             |  
|Years Ended December 31, 2007 and December 31, **2006**    |  
|(Expressed in U.S.
      Dollars, unless otherwise stated) |  

|3. | BUSINESS COMBINATION (Continued)                                                                                                                                                                                               
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                
|   | In December 2007, TransGlobe adjusted its estimate of
      acquisition costs and settlement of the post- closing adjustments relating
      to the acquisition. This resulted in a decrease to goodwill of $0.2
      million.
|   |                                                                                                                                                                                                                                
|4. | PROPERTY AND EQUIPMENT                                                                                                                                                                                                         

| | Egypt                             |   |        |   |   |       |  
| | --------------------------------- | - | ------ | - | - | ----- | -
| | (000s)                            |   | 2007   |   |   | 2006  |  
| | Oil and gas properties            | $ | 68,460 |   | $ | 7,683 |  
| | Furniture and fixtures            |   | 1,144  |   |   | 199   |  
| | Accumulated depreciation          |   | (3,177 | ) |   | (43   | )
| | Write-off of dry
      hole costs |   | (4,111 | ) |   | -     |  
| |                                   | $ | 62,316 |   | $ | 7,839 |  

During the year, the Company acquired
all of the shares of Dublin and Drucker who together hold a 70% working interest
in the West Gharib Production Sharing Concession (PSC). TransGlobe has assumed
operatorship of the West Gharib Concession Agreement. The eight approved West
Gharib development leases are valid for 20 years, expiring between 2019 and
2026. One additional development lease at East Hoshia was subsequently approved
by EGPC in early 2008. Eight of the nine development leases (excluding the Hana
development lease) are encumbered with a 25% financial interest through an
investment agreement between Dublin and a private company. The 25% financial
interest is non-voting but otherwise is treated as a 25% participating interest
partner.

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

The Company capitalized general and
administrative costs relating to exploration and development activities of $0.8
million (2006 - $1.1 million). The remaining costs related to drilling
preparation and geological and geophysical activity. Unproven property costs in
the amount of $13.3 million of which $4.1 million of dry hole costs were
considered impaired during the year and written off to depletion, depreciation
and accretion, leaving $9.2 million in 2007 (2006 - $7.7 million) of unproven
property costs that were excluded from costs subject to depletion and
depreciation.

| | Yemen                                  |   |         |   |   |         |  
| | -------------------------------------- | - | ------- | - | - | ------- | -
| | (000s)                                 |   | 2007    |   |   | 2006    |  
| |                                        |   |         |   |   |         |  
| | Oil and gas properties                 |   |         |   |   |         |  
| | - Block S-1                            | $ | 63,909  |   | $ | 54,410  |  
| | - Block 32                             |   | 40,449  |   |   | 34,060  |  
| | - Block
    72                         |   | 5,301   |   |   | 2,373   |  
| | - Block 75                             |   | 571     |   |   | 250     |  
| | - Block
    84                         |   | 41      |   |   | 15      |  
| | - Other                                |   | 129     |   |   | 96      |  
| | Accumulated depletion and depreciation |   | (57,237 | ) |   | (45,080 | )
| |                                        | $ | 53,163  |   | $ | 46,124  |  

---

|TRANSGLOBE ENERGY CORPORATION                              | 10
|---------------------------------------------------------- | --
|Notes to the Consolidated Financial Statements             |   
|Years Ended December 31, 2007 and December 31, **2006**    |   
|(Expressed in U.S.
      Dollars, unless otherwise stated) |   

|4. | PROPERTY AND EQUIPMENT (Continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | The Company has working interests in five blocks in
      Yemen: Block 32, Block S-1, Block 72, Block 75 and Block 84. The Block 32
      (13.81087%) Production Sharing Agreement (PSA) continues to 2020, with
      provision for a five year extension. The Block S-1 (25%) PSA continues to
      2023, with provision for a five year extension. The Contractor (Joint
      Venture Partners) is in the first exploration period of the Block 72 (33%)
      PSA which has been extended to January 2009, at which time the Contractor
      can elect to proceed to the second exploration period. The Block 84 (33%)
      and Block 75 (25%) PSAs are in the ratification process with the Republic
      of Yemen.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | During the year the Company capitalized overhead costs
      relating to exploration and development activities of $0.7 million (2006 -
      $0.4 million). Unproven property costs in the amount of $5.0 million in
      2007 ($2.6 million in 2006) were excluded in the costs subject to
      depletion and depreciation representing some of the costs incurred at
      Block 72, Block 75 and Block 84.                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | Ceiling Test                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | An impairment test calculation was performed on property
      and equipment at December 31, 2007 in which the estimated undiscounted
      future net cash flows based on estimated future prices associated with the
      proved reserves exceed the carrying amount of oil and gas property and
      equipment for each cost centre.                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | The following table outlines prices used in the
      impairment test at December 31, 2007:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

| |               |   | Oil   | 
| | ------------- | - | ----- | 
| | Year          |   | Egypt | 
| | 2008          | $ | 64.86 | 
| | 2009          |   | 62.29 | 
| | 2010          |   | 61.08 | 
| | 2011          |   | 59.93 | 
| | 2012          |   | 59.53 | 
| | Thereafter(1) |   | 2%    | 

| | (1) | Percentage change represents the increase in each year
      after 2012 to the end of the reserve life.
| | --- | -------------------------------------------------------------------------------------------------------

---

|TRANSGLOBE ENERGY CORPORATION                              | 11
|---------------------------------------------------------- | --
|Notes to the Consolidated Financial Statements             |   
|Years Ended December 31, 2007 and December 31, **2006**    |   
|(Expressed in U.S.
      Dollars, unless otherwise stated) |   

|5. | LONG-TERM DEBT
|-- | --------------

| | (000s)                              |   | 2007   |   |   | 2006 | 
| | ----------------------------------- | - | ------ | - | - | ---- | 
| | Revolving Credit Agreement          | $ | 50,000 |   | $ | -    | 
| | Term Loan
      Agreement           |   | 8,000  |   |   | -    | 
| |                                     |   | 58,000 |   |   | -    | 
| | Unamortized
      transaction costs |   | (1,315 | ) |   | -    | 
| |                                     |   | 56,685 |   |   | -    | 
| |                                     |   |        |   |   |      | 
| | Current portion of long-term debt   |   | 4,727  |   |   | -    | 
| |                                     | $ | 51,958 |   | $ | -    | 

In September 2007, the Company
increased its initial borrowing base of $25.0 million to $50.0 million under the
Revolving Credit Agreement and established a new Term Loan Agreement of $13.0
million, which both expire on September 19, 2010. Both borrowing facilities are
secured by a first floating charge debenture over all assets of the Company, a
general assignment of book debts, security pledge of the Companys subsidiaries
and certain covenants. The Revolving Credit Agreement and the Term Loan
Agreement bear interest at the Eurodollar Rate plus three percent and plus six
percent, respectively. The Company incurred fees of $1.1 million to establish
the long-term debt and reclassified previously unamortized financing costs in
the amount of $0.3 million.

The future debt payments on long-term
debt, as of December 31, 2007, are as follows:

| | (000s) |   |        | 
| | ------ | - | ------ | 
| | 2008   | $ | 4,727  | 
| | 2009   | $ | 3,273  | 
| | 2010   | $ | 50,000 | 

|6. | SHARE CAPITAL
|-- | -------------
|   |              
|   | a)           
|   |              
|   |              
|   |              
|   | b)           

| |                                      |  | 2007   |   |   | 2006   |  
| | ------------------------------------ |  | ------ | - | - | ------ | -
| |                                      |  | No. of |   |   |        |  
| | (000s)                               |  | Shares |   |   | Amount |  
| | Balance, beginning of year           |  | 58,883 |   | $ | 49,360 |  
| | Stock options exercised (c)          |  | 860    |   |   | 605    |  
| | Stock based compensation on exercise |  | -      |   |   | 260    |  
| | Purchase of common
      shares      |  | (116   | ) |   | (97    | )
| | Balance, end of year                 |  | 59,627 |   | $ | 50,128 |  

During the year ended December 31,
2007, TransGlobe repurchased 115,900 common shares of the Company pursuant to a
Normal Course Issuer Bid for a total of $0.5 million. The cost to repurchase
common shares in excess of their average book value has been charged to retained
earnings.

---

|TRANSGLOBE ENERGY CORPORATION                              | 12
|---------------------------------------------------------- | --
|Notes to the Consolidated Financial Statements             |   
|Years Ended December 31, 2007 and December 31, **2006**    |   
|(Expressed in U.S.
      Dollars, unless otherwise stated) |   

|6. | SHARE CAPITAL
(Continued)
|-- | -------------------------

| | c) | Stock Options                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | The Company adopted a stock option plan in May 2007 (the
      Plan). The maximum number of common shares to be issued upon the
      exercise of options granted under the Plan is 5,888,300 common shares. All
      incentive stock options granted under the Plan have a per-share exercise
      price not less than the trading market value of the common shares at the
      date of grant. Stock options granted prior to February 1, 2005 vest as to
      50% of the options, six months after the grant date, and as to the
      remaining 50%, one year from the grant date. Effective February 1, 2005;
      all new grants of stock options vest one-third on each of the first,
      second and third anniversaries of the grant date.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | The following tables summarize information about the
      stock options outstanding and exercisable at December 31,
  2007:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

| |                                          |  | 2007    |   |   | 2006           | 
| | ---------------------------------------- |  | ------- | - | - | -------------- | 
| |                                          |  | Number  |   |   | Weighted-      | 
| |                                          |  | of      |   |   | Average        | 
| | (000s except per share
      amounts)    |  | Options |   |   | Exercise Price | 
| | Options outstanding at beginning of year |  | 3,110   |   | $ | 3.12           | 
| | Granted                                  |  | 1,091   |   | $ | 4.44           | 
| | Exercised                                |  | (860    | ) | $ | 0.53           | 
| | Forfeited                                |  | (405    | ) | $ | 5.01           | 
| | Options outstanding                      |  |         |   |   |                | 
| | at end of year                           |  | 2,936   |   | $ | 4.11           | 
| | Options exercisable                      |  |         |   |   |                | 
| | at end of year                           |  | 1,602   |   | $ | 3.69           | 

| |                 |  | Options
      Outstanding |  |  | Options
      Exercisable | 
| | --------------- |  | ------------------------- |  |  | ------------------------- | 
| |                 |  | Number                    |  |  | Weighted-                 | 
| |                 |  | Out-                      |  |  | Average                   | 
| |                 |  | standing                  |  |  | Remaining                 | 
| |                 |  | at Dec. 31,               |  |  | Contractual               | 
| |                 |  | 2007                      |  |  | Life                      | 
| | Exercise Prices |  | (000s)                    |  |  | (Years)                   | 
| | C$0.63          |  | 20                        |  |  | 0.5                       | 
| | C$3.26-C$4.91   |  | 1,647                     |  |  | 2.7                       | 
| | C$6.03-C$7.74   |  | 975                       |  |  | 2.8                       | 
| | C$5.19-C$5.31   |  | 294                       |  |  | 4.5                       | 
| |                 |  | 2,936                     |  |  | 2.9                       | 

---

|TRANSGLOBE ENERGY CORPORATION                              | 13
|---------------------------------------------------------- | --
|Notes to the Consolidated Financial Statements             |   
|Years Ended December 31, 2007 and December 31, **2006**    |   
|(Expressed in U.S.
      Dollars, unless otherwise stated) |   

|6. | SHARE CAPITAL (Continued)
|-- | -------------------------

d)        Stock-based
Compensation

Compensation expense of $1.1 million
has been recorded in general and administrative expenses in the Consolidated
Statements of Income and Retained Earnings in 2007 (2006- $1.2 million). The
fair value of all common stock options granted is estimated on the date of grant
using the lattice-based binomial option pricing model. The weighted average fair
value of options granted during the year and the assumptions used in their
determination are as noted below:

| |                                          | 2007               | 2006              
| | ---------------------------------------- | ------------------ | ------------------
| | Weighted average fair market
      value |                    |                   
| | per option
      (C$)                    | $ 1.94             | $ 2.23            
| | Risk free interest rate (%)              | 4.60               | 4.09              
| | Expected lives (years)                   | 5.00               | 5.00              
| | Expected volatility (%)                  | 45.92              | 48.79             
| | Dividend per share                       | 0.00               | 0.00              
| | Early exercise (Year 1/Year
      2/Year |                    |                   
| | 3/Year 4/Year 5)                         | 0%/10%/20%/30%/40% | 0%/10%/20%/30%/40%

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

| | (000s)                                                       |   | 2007  |   |   | 2006  |  
| | ------------------------------------------------------------ | - | ----- | - | - | ----- | -
| | Contributed surplus, beginning of year                       | $ | 2,863 |   | $ | 1,908 |  
| | Stock-based compensation expense                             |   | 959   |   |   | 1,096 |  
| | Transfer of stock-based compensation
      expense to common |   |       |   |   |       |  
| | shares related to stock options exercised                    |   | (260  | ) |   | (141  | )
| | Contributed surplus, end of year                             | $ | 3,562 |   | $ | 2,863 |  

|7. | INCOME TAXES                                                                                                                                                                                                                                                            
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                         
|   | Current income taxes in the amount of $12.6 million (2006
      - $9.1 million) represents income taxes incurred and paid under the laws
      of Yemen pursuant to the PSA on Block 32 and Block S-1 and Egypt pursuant
      to the PSC on the West Gharib Concession.

---

|TRANSGLOBE ENERGY CORPORATION                              | 14
|---------------------------------------------------------- | --
|Notes to the Consolidated Financial Statements             |   
|Years Ended December 31, 2007 and December 31, **2006**    |   
|(Expressed in U.S.
      Dollars, unless otherwise stated) |   

|8. | SUPPLEMENTAL CASH FLOW INFORMATION                                             
|-- | -------------------------------------------------------------------------------
|   |                                                                                
|   | Changes in operating non-cash working capital consisted
      of the following:

| | (000s)                                           |   | 2007    |   |   | 2006   |  
| | ------------------------------------------------ | - | ------- | - | - | ------ | -
| | Operating activities                             |   |         |   |   |        |  
| | Decrease (increase) in current assets            |   |         |   |   |        |  
| | Accounts
      receivable                        | $ | (10,384 | ) | $ | (1,892 | )
| | Prepaid expenses                                 |   | (63     | ) |   | 187    |  
| | Product
      inventory                          |   | -       |   |   | 163    |  
| | Working capital acquired                         |   | 9,108   |   |   | -      |  
| | Increase in current
      liabilities            |   |         |   |   |        |  
| | Accounts payable and accrued liabilities         |   | 2,709   |   |   | 787    |  
| |                                                  | $ | 1,370   |   | $ | (755   | )
| | Investing activities                             |   |         |   |   |        |  
| | Decrease (increase) in current
      assets      |   |         |   |   |        |  
| | Accounts receivable                              | $ | -       |   | $ | 1,254  |  
| | Prepaid
      expenses                           |   | 180     |   |   | (378   | )
| |                                                  |   |         |   |   |        |  
| | Increase (decrease) in current
      liabilities |   |         |   |   |        |  
| | Accounts payable and accrued liabilities         |   | (3,261  | ) |   | 3,744  |  
| |                                                  | $ | (3,081  | ) | $ | 4,620  |  

|9. | ACCUMULATED OTHER COMPREHENSIVE INCOME                                                
|-- | --------------------------------------------------------------------------------------
|   |                                                                                       
|   | The balance of accumulated other comprehensive income
      consists of the following:

| | (000s)                                                          |   | 2007   |  |   | 2006  |  
| | --------------------------------------------------------------- | - | ------ |  | - | ----- | -
| | Accumulated other comprehensive income,
      beginning of year | $ | 3,212  |  | $ | 3,642 |  
| | Other comprehensive income:                                     |   |        |  |   |       |  
| | Foreign currency translation
      adjustment                   |   | 8,554  |  |   | (430  | )
| | Accumulated other
      comprehensive income, end of year       | $ | 11,766 |  | $ | 3,212 |  

---

|TRANSGLOBE ENERGY CORPORATION                              | 15
|---------------------------------------------------------- | --
|Notes to the Consolidated Financial Statements             |   
|Years Ended December 31, 2007 and December 31, **2006**    |   
|(Expressed in U.S.
      Dollars, unless otherwise stated) |   

|10. | NET INCOME PER SHARE                                                                                                                                                                                                                 
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                      
|    | In calculating the net income per share, net income from
      continuing operations per share and net income from discontinued
      operations per share, basic and diluted, the following weighted average
      shares were used:

| | (000s)                                                |  | 2007   |  |  | 2006   | 
| | ----------------------------------------------------- |  | ------ |  |  | ------ | 
| | Weighted average number of shares
      outstanding   |  | 59,595 |  |  | 58,663 | 
| | Dilution effect
      stock options                   |  | 930    |  |  | 1,899  | 
| | Weighted average number of diluted shares outstanding |  | 60,525 |  |  | 60,562 | 

|    | The treasury stock method assumes that the proceeds
      received from the exercise of in-the-money stock options are used to
      repurchase common shares at the average market price. In calculating the
      weighted average number of diluted common shares outstanding for the year
      ended December 31, 2007, the Company excluded 2,187,000 options (2006 
      1,109,000) because their exercise price was greater than the annual
      average common share market price in this period.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|11. | SEGMENTED INFORMATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    | In 2007 and 2006, the Company had oil and natural gas
      production in three geographic segments, Egypt, Yemen and Canada. The
      geographic segment of Canada is reported as discontinued
  operations.                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    | The results of operations for the year ended December 31,
      2007 and December 31, 2006 are comprised of the
  following:                                                                                                                                                                                                                                                                                                                                                                                   

---

|TRANSGLOBE ENERGY CORPORATION                              | 16
|---------------------------------------------------------- | --
|Notes to the Consolidated Financial Statements             |   
|Years Ended December 31, 2007 and December 31, **2006**    |   
|(Expressed in U.S.
      Dollars, unless otherwise stated) |   

|11. | SEGMENTED INFORMATION
(Continued)
|--- | ---------------------------------

| | (000s)                                                 |   | Egypt  |   |   | Yemen |   |   | Total  | 
| | ------------------------------------------------------ | - | ------ | - | - | ----- | - | - | ------ | 
| |                                                        |   | 2007   |   |   | 2006  |   |   | 2007   | 
| | Oil and gas sales, net of                              |   |        |   |   |       |   |   |        | 
| | royalties and other                                    | $ | 6,529  |   | $ | -     |   | $ | 61,099 | 
| | Other income                                           |   | 61     |   |   | -     |   |   | 39     | 
| |                                                        |   | 6,590  |   |   | -     |   |   | 61,138 | 
| | Segmented expenses                                     |   |        |   |   |       |   |   |        | 
| | Operating expenses                                     |   | 722    |   |   | -     |   |   | 10,334 | 
| | Depletion, depreciation                                |   |        |   |   |       |   |   |        | 
| | and accretion                                          |   | 7,255  |   |   | 37    |   |   | 12,157 | 
| | Income taxes                                           |   | 1,735  |   |   | -     |   |   | 10,895 | 
| | Total segmented expenses                               |   | 9,712  |   |   | 37    |   |   | 33,386 | 
| | Segmented income (loss)                                | $ | (3,122 | ) | $ | (37   | ) | $ | 27,752 | 
| |                                                        |   |        |   |   |       |   |   |        | 
| |                                                        |   |        |   |   |       |   |   |        | 
| | Non-segmented expenses                                 |   |        |   |   |       |   |   |        | 
| | Derivative loss on commodity contracts
      (Note 13) |   |        |   |   |       |   |   |        | 
| | General and administrative                             |   |        |   |   |       |   |   |        | 
| | Interest on long-term debt                             |   |        |   |   |       |   |   |        | 
| | Foreign exchange loss (gain)                           |   |        |   |   |       |   |   |        | 
| | Depreciation                                           |   |        |   |   |       |   |   |        | 
| | Other income                                           |   |        |   |   |       |   |   |        | 
| | Total non-segmented expenses                           |   |        |   |   |       |   |   |        | 
| | Net income from continuing operations                  |   |        |   |   |       |   |   |        | 
| | Net income from discontinued operations (Note 15e)     |   |        |   |   |       |   |   |        | 
| | Net income                                             |   |        |   |   |       |   |   |        | 
| |                                                        |   |        |   |   |       |   |   |        | 
| |                                                        |   |        |   |   |       |   |   |        | 
| | Exploration and development                            | $ | 6,904  |   | $ | 5,365 |   | $ | 18,437 | 
| | Corporate acquisition                                  |   |        |   |   |       |   |   |        | 
| | Corporate                                              |   |        |   |   |       |   |   |        | 
| |                                                        |   |        |   |   |       |   |   |        | 
| |                                                        |   |        |   |   |       |   |   |        | 
| | Property and equipment                                 | $ | 62,316 |   | $ | 7,839 |   | $ | 53,163 | 
| | Goodwill                                               |   | 4,313  |   |   | -     |   |   | -      | 
| | Other                                                  |   | 13,464 |   |   | 357   |   |   | 5,906  | 
| | Segmented assets                                       | $ | 80,093 |   | $ | 8,196 |   | $ | 59,069 | 
| | Non-segmented assets                                   |   |        |   |   |       |   |   |        | 
| | Discontinued operations                                |   |        |   |   |       |   |   |        | 
| | Total assets                                           |   |        |   |   |       |   |   |        | 

---

|TRANSGLOBE ENERGY CORPORATION                              | 17
|---------------------------------------------------------- | --
|Notes to the Consolidated Financial Statements             |   
|Years Ended December 31, 2007 and December 31, **2006**    |   
|(Expressed in U.S.
      Dollars, unless otherwise stated) |   

|12. | COMMITMENTS AND CONTINGENCIES                                                                     
|--- | --------------------------------------------------------------------------------------------------
|    |                                                                                                   
|    | The Company is committed to office and equipment leases
      over the next five years as follows:

| | (000s) |     | 
| | ------ | --- | 
| | 2008   | 372 | 
| | 2009   | 355 | 
| | 2010   | 301 | 
| | 2011   | 140 | 
| | 2012   | 21  | 

Pursuant to the Nuqra Concession
Agreement in Egypt, TransGlobe had a letter of credit in the amount of $0.3
million outstanding at December 31, 2007. As of January 9, 2008 the letter of
credit has been cancelled.

Pursuant to the East Hoshia Development
Lease in Egypt, the Company and its partners have committed to drilling three
exploration wells and submitted a letter of production guarantee for $4.0
million as security (expiring June 1, 2009).

Upon the determination that proved
recoverable reserves are 40 million barrels or greater for Block S-1, Yemen, the
Company will be required to pay a finders fee to third parties in the amount of
$0.3 million.

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 which has been extended to January 12, 2009, for exploration
work consisting of seismic acquisition (completed) and one remaining exploration
well.

Pursuant to the bid awarded 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 will commence when
the PSA has been approved and ratified by the government of Yemen, anticipated
to occur during 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 2008.

---

|TRANSGLOBE ENERGY CORPORATION                              | 18
|---------------------------------------------------------- | --
|Notes to the Consolidated Financial Statements             |   
|Years Ended December 31, 2007 and December 31, **2006**    |   
|(Expressed in U.S.
      Dollars, unless otherwise stated) |   

|13. | FINANCIAL INSTRUMENTS AND RISK
MANAGEMENT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | Carrying Values and Estimated Fair Values of Financial
      Assets and Liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | Carrying values of financial instruments, which include
      cash and cash equivalents, accounts receivable, accounts payable and
      accrued liabilities approximate their fair value due to the short-term
      nature of these amounts.                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | Credit Risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    | The majority of the accounts receivable are in respect of
      oil and gas operations. The Company generally extends unsecured credit to
      these customers and therefore the collection of accounts receivable may be
      affected by changes in economic or other conditions. Management believes
      the risk is mitigated by the size and reputation of the companies to which
      they extend credit. The Company has not experienced any material credit
      loss in the collection of accounts receivable to date.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | In Egypt, the Company sold all of its 2007 production to
      one purchaser. In Yemen, the Company sold all of its 2007 Block 32
      production to one purchaser and all of its 2007 Block S-1 production to
      one purchaser. In Canada, the Company sold primarily all of its 2007 gas
      production to one purchaser and primarily all of its 2007 oil production
      to another single purchaser.                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | Commodity Price Risk Management                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | The Company has commodity price risk associated with its
      sale of crude oil and natural gas.                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | The Company has entered into various financial derivative
      contracts and physical contracts to manage fluctuations in commodity
      prices in the normal course of operations.                                                                                                                                                                                                                                                                                                                                                

| |                                          |                   |                  | Dated Brent                
| | ---------------------------------------- | ----------------- | ---------------- | ---------------------------
| |                                          |                   |                  | Pricing                    
| | Period                                   | Volume            | Type             | Put             
      Call
| |                                          |                   |                  |                            
| | Crude Oil                                |                   |                  |                            
| | September 1, 2007-August 31, 2008        | 15,000 Bbls/month | Financial Collar | $60.00-$78.55              
| | January 1, 2008-December
      31, 2008  | 12,000 Bbls/month | Financial Collar | $60.00-$81.20              
| | January 1, 2009-December 31, 2009        | 12,000 Bbls/month | Financial Collar | $60.00-$82.10              
| | November 1, 2007-March
      31, 2008    | 5,000 Bbls/month  | Financial Collar | $65.00-$89.35              
| | September 1, 2008-January 31, 2009       | 11,000 Bbls/month | Financial Collar | $60.00-$88.80              
| | February 1, 2009-December
      31, 2009 | 6,000 Bbls/month  | Financial Collar | $60.00-$86.10              
| | January 1, 2010-August 31, 2010          | 12,000 Bbls/month | Financial Collar | $60.00-$84.25              

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

---

|TRANSGLOBE ENERGY CORPORATION                              | 19
|---------------------------------------------------------- | --
|Notes to the Consolidated Financial Statements             |   
|Years Ended December 31, 2007 and December 31, **2006**    |   
|(Expressed in U.S.
      Dollars, unless otherwise stated) |   

|13. | FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
      (Continued)                                                                                                                                                                                                                                                                                                                                                                
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | Foreign currency exchange and interest rate
      risk                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | The Companys operations are exposed to fluctuations in
      the foreign currency exchange rates. Variations in the foreign currency
      exchange rate could have a significant positive or negative impact. The
      Company manages its foreign currency exchange risk by maintaining foreign
      currency bank accounts and receivable accounts to offset foreign currency
      payable and planned expenditures.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | Fluctuations in interest rates could result in a
      significant change in the amount the Company pays to service variable
      interest U.S. dollar-denominated debt. No derivative contracts were
      entered into during 2007 to mitigate this risk.                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                            
|14. | COMPARATIVE FIGURES                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | Certain comparative figures have been reclassified to
      conform with current period presentation.                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                            
|15. | SUBSEQUENT EVENTS                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | a)                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | b)                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | c)                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | d)                                                                                                                                                                                                                                                                                                                                                                                                                         

---

|TRANSGLOBE ENERGY CORPORATION                              | 20
|---------------------------------------------------------- | --
|Notes to the Consolidated Financial Statements             |   
|Years Ended December 31, 2007 and December 31, **2006**    |   
|(Expressed in U.S.
      Dollars, unless otherwise stated) |   

|15. | SUBSEQUENT EVENTS
(Continued)
|--- | -----------------------------

| | e) | Discontinued operations
| | -- | -----------------------

On April 15, 2008, the Company entered
into an agreement with a third party for the sale of its Canadian oil and
natural gas interests. The sale price of the assets was C$56.7 million, subject
to normal closing adjustments. The sale closed on April 30, 2008. The Canadian
operations have been accounted for as discontinued operations in accordance with
Canadian GAAP on a retroactive basis and the consolidated financial statements
as at December 31, 2007 and 2006 and for the years then ended, have been
restated accordingly. Results of the Canadian operations have been included in
the financial statements up to the closing date of the sale (the date control
was transferred to the purchaser). The Company used the cash proceeds from the
sale and cash on hand to repay $55.0 million of debt.

Discontinued operations as at December
31, 2007 included current assets of $4.3 million (2006 - $4.6 million), property
and equipment of $50.0 million (2006 - $42.0 million), and a future income tax
asset of $1.9 million (2006 - $1.6 million). Discontinued operations also
included current liabilities of $6.6 million (2006 - $5.4 million) and asset
retirement obligations of $2.8 million (2006 - $2.2 million).

| |                                             |   | Year
      ended December 31 |  
| | ------------------------------------------- | - | ---------------------------- | -
| | (000s)                                      |   | 2007                         |  
| | Revenue                                     |   |                              |  
| | Oil and gas sales, net of royalties         | $ | 20,283                       |  
| |                                             |   |                              |  
| | Expenses                                    |   |                              |  
| | Operating                                   |   | 4,212                        |  
| | Depletion,
      depreciation and accretion |   | 11,604                       |  
| |                                             |   | 15,816                       |  
| | Income from discontinued operations before  |   |                              |  
| | taxes                                       |   | 4,467                        |  
| | Future income tax
      recovery (expense)  |   | (45                          | )
| | Net income from discontinued operations     | $ | 4,422                        |  

In Canada, the Company capitalized
overhead costs relating to exploration and development activities during the
year ended December 31, 2007 of $0.5 million (2006 - $0.5 million). Unproven
property costs of $3.9 million were excluded from the costs subject to depletion
and depreciation for 2007 (2006 - $Nil).

---

|TRANSGLOBE ENERGY CORPORATION                              | 21
|---------------------------------------------------------- | --
|Notes to the Consolidated Financial Statements             |   
|Years Ended December 31, 2007 and December 31, **2006**    |   
|(Expressed in U.S.
      Dollars, unless otherwise stated) |   

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

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

Consolidated Statements of Income
and Retained Earnings (Deficit)

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

| | (000s, except per
      share amounts)                                              |   | 2007    |   |   | 2006   |  
| | ----------------------------------------------------------------------------------- | - | ------- | - | - | ------ | -
| | Net income from continuing operations for
      the year under Canadian GAAP        | $ | 8,380   |   | $ | 23,332 |  
| | Adjustments:                                                                        |   |         |   |   |        |  
| | Impairment of Property and equipment and
      goodwill  Egypt (a)                 |   | (10,615 | ) |   | -      |  
| | Net (loss) income from continuing operations for the year
      under U.S. GAAP     |   | (2,235  | ) |   | 23,332 |  
| | Net income from discontinued operations for the year 
      Canadian and U.S. GAAP |   | 4,422   |   |   | 2,863  |  
| | Net income for the year under U.S. GAAP                                             |   | 2,187   |   |   | 26,195 |  
| | Purchase of common shares                                                           |   | (375    | ) |   | -      |  
| | Retained earnings,
      beginning of year - U.S. GAAP                              |   | 45,565  |   |   | 19,370 |  
| | Retained earnings, end of year - U.S. GAAP                                          | $ | 47,377  |   | $ | 45,565 |  
| |                                                                                     |   |         |   |   |        |  
| | Net (loss) income from continuing
      operations per share under U.S. GAAP        |   |         |   |   |        |  
| | - Basic                                                                             | $ | (0.03   | ) | $ | 0.40   |  
| | - Diluted                                                                           | $ | (0.03   | ) | $ | 0.39   |  
| | Net income from discontinued operations per share under
      U.S. GAAP             |   |         |   |   |        |  
| | - Basic                                                                             | $ | 0.07    |   | $ | 0.05   |  
| | - Diluted                                                                           | $ | 0.07    |   | $ | 0.04   |  
| | Net income per share under U.S. GAAP                                                |   |         |   |   |        |  
| | - Basic                                                                             | $ | 0.04    |   | $ | 0.45   |  
| | - Diluted                                                                           | $ | 0.04    |   | $ | 0.43   |  
| |                                                                                     |   |         |   |   |        |  
| | Statement of Other Comprehensive
      Income                                       |   |         |   |   |        |  
| | (000s)                                                                              |   | 2007    |   |   | 2006   |  
| | Net income  U.S. GAAP                                                              | $ | 2,187   |   | $ | 26,195 |  
| | Currency
      translation adjustment (d)                                           |   | 8,554   |   |   | (430   | )
| | Other comprehensive income                                                          | $ | 10,741  |   | $ | 25,765 |  

---

|TRANSGLOBE ENERGY CORPORATION                              | 22
|---------------------------------------------------------- | --
|Notes to the Consolidated Financial Statements             |   
|Years Ended December 31, 2007 and December 31, **2006**    |   
|(Expressed in U.S.
      Dollars, unless otherwise stated) |   

|16. | DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING
      PRINCIPLES IN CANADA AND THE UNITED STATES OF AMERICA
    (Continued)
|--- | -----------------------------------------------------------------------------------------------------------------------------

Consolidated Balance Sheets

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

| | (000s)                                     |   | 2007      |  |   | 2006          | 
| | ------------------------------------------ | - | --------- |  | - | ------------- | 
| |                                            |   | Cdn. GAAP |  |   | **U.S. GAAP** | 
| |                                            |   |           |  |   |               | 
| | Current assets                             | $ | 31,757    |  | $ | 31,757        | 
| | Property and equipment (a)                 |   | 116,288   |  |   | 109,986       | 
| |                                            |   |           |  |   |               | 
| | Deferred financing costs (f)               |   | -         |  |   | 1,315         | 
| | Goodwill (a)                               |   | 4,313     |  |   | -             | 
| | Other non-current
      assets             |   | 51,861    |  |   | 51,861        | 
| |                                            | $ | 204,219   |  | $ | 194,919       | 
| |                                            |   |           |  |   |               | 
| | Current liabilities                        | $ | 26,263    |  | $ | 26,263        | 
| | Long-term debt (f)                         |   | 51,958    |  |   | 53,273        | 
| | Other non-current liabilities              |   | 2,755     |  |   | 2,755         | 
| |                                            |   | 80,976    |  |   | 82,291        | 
| |                                            |   |           |  |   |               | 
| | Share capital (b, c)                       |   | 50,128    |  |   | 51,831        | 
| | Contributed surplus (b)                    |   | 3,562     |  |   | 1,654         | 
| | Accumulated other comprehensive income (d) |   | 11,766    |  |   | 11,766        | 
| | Retained earnings (b, c)                   |   | 57,787    |  |   | 47,377        | 
| |                                            |   | 123,243   |  |   | 112,628       | 
| |                                            | $ | 204,219   |  | $ | 194,919       | 

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

---

|TRANSGLOBE ENERGY CORPORATION                              | 23
|---------------------------------------------------------- | --
|Notes to the Consolidated Financial Statements             |   
|Years Ended December 31, 2007 and December 31, **2006**    |   
|(Expressed in U.S.
      Dollars, unless otherwise stated) |   

|16. | DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING
      PRINCIPLES IN CANADA AND THE UNITED STATES OF AMERICA
    (Continued)
|--- | -----------------------------------------------------------------------------------------------------------------------------

a)       Full Cost Accounting

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

There are no impairment charges under
Canadian GAAP as at December 31, 2007. Under U.S. GAAP, the unamortized
capitalized cost of the Companys Egyptian oil and gas properties exceeded the
full cost ceiling limitation by $6.3 million, net of taxes, which was written
off for U.S. GAAP purposes. This also resulted in an impairment charge to
goodwill of $4.3 million. Because of the volatility of oil and natural gas
prices, no assurance can be given that the Company will not experience a
writedown in future periods.

b)       Stock-based Compensation

The Company has a stock-based
compensation plan as more fully described in Note 7. Under Canadian GAAP,
compensation costs have been recognized in the financial statements for stock
options granted to employees and directors since January 1, 2002. For U.S. GAAP,
the Company has adopted SFAS No. 123R effective January 1, 2006. As permitted by
SFAS No. 123R, the Company has applied this change using modified prospective
application for new awards granted after January 1, 2006 and for the
compensation cost of awards that were not vested at December 31, 2005. In 2005
and prior periods, the Company used the intrinsic value method of accounting for
stock options granted to employees and directors whereby no costs were
recognized in the financial statements, per APB Opinion No. 25 as interpreted by
FASB Interpretation No. 44.

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

---

|TRANSGLOBE ENERGY CORPORATION                              | 24
|---------------------------------------------------------- | --
|Notes to the Consolidated Financial Statements             |   
|Years Ended December 31, 2007 and December 31, **2006**    |   
|(Expressed in U.S.
      Dollars, unless otherwise stated) |   

|16. | DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING
      PRINCIPLES IN CANADA AND THE UNITED STATES OF AMERICA
    (Continued)
|--- | -----------------------------------------------------------------------------------------------------------------------------

c)       Future Income Taxes

The Company records the renouncement of
tax deductions related to flow through shares by reducing share capital and
recording a future tax liability in the amount of the estimated cost of the tax
deductions flowed to the shareholders. U.S. GAAP requires that the share capital
on flow through shares be stated at the quoted market value of the shares at the
date of issuance. In addition, the temporary difference that arises as a result
of the renouncement of the deductions, less any proceeds received in excess of
the quoted market value of the shares is recognized in the determination of
income tax expense for the period. The effect of applying this provision to the
Companys financial statements would result in an increase in income tax expense
and future tax liability by $Nil in 2007, $Nil in 2006, $Nil in 2005, $Nil in
2004, $0.9 million in 2003, $0.1 million in 2002 and $0.3 million in 2000
representing the tax effect of the flow through shares and a corresponding
increase to share capital and decrease to future tax liability by $Nil in 2007,
$Nil in 2006, $Nil in 2005, $Nil in 2004, $0.9 million in 2003, $0.1 million in
2002 and $0.3 million in 2000 to record the recognition of the benefit of tax
losses available to the Company equal to the liability arising from renouncing
tax pools to the subscribers.

Under U.S. GAAP, enacted tax rates are
used to calculate future taxes, whereas Canadian GAAP uses substantively enacted
tax rates. The effect of this change between Canadian and U.S. GAAP would result
in an increase in future income tax expense and future tax liability of $Nil in
2007, $0.2 million in 2006, $0.2 million in 2005, $0.2 million in 2004 and $0.4
million in 2003 representing the higher enacted tax rates over the substantively
enacted tax rates and a corresponding reduction in future income tax expense and
future tax liability of $Nil in 2007, $0.2 million in 2006, $0.2 million in
2005, $0.2 million in 2004 and $0.4 million in 2003 to record an additional
valuation allowance against the increased tax asset.

d)       Escrowed Shares

For U.S. GAAP purposes, escrowed shares
would be considered a separate compensatory arrangement between the Company and
the holder of the shares. Accordingly, the fair market value of shares at the
time the shares are released from escrow will be recognized as a charge to
income in that year with a corresponding increase in share capital. The
difference in share capital between Canadian GAAP and U.S. GAAP represents the
effect of applying this provision in 1995 when 188,000 escrow shares were
released resulting in an increase in share capital of $0.8 million with the
offset to deficit.

---

|TRANSGLOBE ENERGY CORPORATION                              | 25
|---------------------------------------------------------- | --
|Notes to the Consolidated Financial Statements             |   
|Years Ended December 31, 2007 and December 31, **2006**    |   
|(Expressed in U.S.
      Dollars, unless otherwise stated) |   

|16. | DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING
      PRINCIPLES IN CANADA AND THE UNITED STATES OF AMERICA
    (Continued)
|--- | -----------------------------------------------------------------------------------------------------------------------------

e)       Accounting for
Uncertainty in Income Taxes

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

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

Tax positions for TransGlobe and its
subsidiaries are subject to income tax audits by tax jurisdictions throughout
the world. For the Companys major tax jurisdictions, examinations of tax
returns for certain prior tax periods had not been completed as of December 31,
2007. In this regard, examinations had not been finalized for years beginning
after 2003 for the Companys Canadian federal income taxes. The Canadian Revenue
Agency had commenced an examination of the Companys Canadian income tax returns
for 2005 to 2006 that is anticipated to be completed in 2008. For other tax
jurisdictions, the earliest years for which income tax examinations had not been
finalized were as follows: Egypt  2007 and Yemen  2007.

f)       Deferred Financing Costs

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

g)       Recent Accounting
Pronouncements

The Fair Value Option for Financial
Assets and Financial Liabilities

The FASB issued SFAS 159, The Fair
  Value Option for Financial Assets and Financial Liabilities.The Statement
  permits entities to choose to measure many financial instruments and certain
  other items at fair value. The objective is to improve financial reporting by
  providing entities with the opportunity to mitigate volatility in reported earnings
  caused by measuring related assets and liabilities differently without having
  to apply complex hedge accounting provisions. This Statement is expected to
  expand the use of fair value measurement, which is consistent with the Boards
  long-term measurement objectives for accounting for financial instruments.

---

|TRANSGLOBE ENERGY CORPORATION                              | 26
|---------------------------------------------------------- | --
|Notes to the Consolidated Financial Statements             |   
|Years Ended December 31, 2007 and December 31, **2006**    |   
|(Expressed in U.S.
      Dollars, unless otherwise stated) |   

|16. | **DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING
        PRINCIPLES IN CANADA AND THE UNITED STATES OF AMERICA (Continued)**
      The Statement is effective as of the beginning of an entity’s
        first fiscal year that begins after November 15, 2007. The Company is
        currently assessing the impact of these new requirements on the Consolidated
        Financial Statements.
      **Fair Value Measurements**
        The FASB issued SFAS 157, *Fair Value Measurements*, which defines
        fair value, establishes a framework for measuring fair value in generally
        accepted accounting principles (GAAP), and expands disclosures about fair
        value measurements. This Statement applies under other accounting pronouncements
        that require or permit fair value measurements, the Board having previously
        concluded in those accounting pronouncements that fair value is the relevant
        measurement attribute. Accordingly, this Statement does not require any
        new fair value measurements. However, for some entities, the application
        of this Statement will change current practice.
      The Statement is effective for financial statements issued
        for fiscal years beginning after November 15, 2007, and interim periods
        within those fiscal years. The Company is currently assessing the impact
        of these new requirements on the Consolidated Financial Statements.
      **Offsetting Amounts Related to Certain Contracts**
        The FASB issued an amendment to FIN 39, *Offsetting Amounts Related
        to Certain Contracts* to permit a reporting entity to offset fair
        value amounts recognized for the right to reclaim cash collateral (a receivable)
        or the obligation to return cash collateral (a payable) against fair value
        amounts recognized for derivative instruments executed with the same counterparty
        under the same master netting arrangement that have been offset in accordance
        with this Interpretation.
      The Amendment is effected for fiscal years beginning
        after November 15, 2007. The Company is currently assessing the impact
        of these new requirements on the Consolidated Financial Statements.
      **Business Combinations**
        In December 2007, the Financial Accounting Standards Board released FASB
        141-R, *Business Combinations*. This Statement applies prospectively
        to business combinations for which the acquisition date is on or after
        the beginning of the first annual reporting period beginning on or after
        December 15, 2008, which is business combinations in the year ending December
        31, 2009 for the Company. The objective of this Statement is to improve
        the relevance, representational faithfulness, and comparability of the
        information that a reporting entity provides in its financial reports
        about a business combination and its effects. The Company will assess
        the impact of this standard for Business Combinations occurring after
        January 1, 2009.
      **Noncontrolling Interests in Consolidated Financial
        Statements**
        In December 2007, the Financial Accounting Standards Board released FASB
        160, *Noncontrolling Interests in Consolidated Financial Statements
        – an amendment of ARB No. 51*. This Statement is effective for
        fiscal years, and interim periods within those fiscal years, beginning
        on or after December 15, 2008, which for the Company is the year ending
        December 31, 2009 and the interim periods within that fiscal year. The
        objective of this Statement is to improve the relevance, comparability,
        and transparency of the financial information that a reporting entity
        provides in its consolidated financial statements. This standard currently
        does not impact the Company as it has full controlling interest of all
        of its subsidiaries.
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