---

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

March 9, 2010

The following discussion and analysis is managements opinion
of TransGlobes historical financial and operating results and should be read in
conjunction with the message to shareholders and the audited consolidated
financial statements of the Company for the years ended December 31, 2009 and
2008, together with the notes related thereto. The consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in Canada in the currency of the United States (except where otherwise
noted). The effect of significant differences between Canadian and United States
accounting principles is disclosed in Note 19 of the consolidated financial
statements. Additional information relating to the Company, including the
Companys Annual Information Form, is on SEDAR at www.sedar.com. The Companys
annual report on Form 40-F may be found on EDGAR at www.sec.gov.

READER ADVISORIES

Forward-Looking Statements

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

Use of Barrel of Oil Equivalents

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

Non-GAAP Measures

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

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

|($000s)                                                                |  | 2009   |   |  | 2008   | 
|---------------------------------------------------------------------- |  | ------ | - |  | ------ | 
|Cash flow from operating activities                                    |  | 36,799 |   |  | 57,793 | 
|Changes in non-cash working capital from continuing
      operations   |  | 8,458  |   |  | 1,269  | 
|Changes in non-cash working capital from discontinued
      operations |  | (193   | ) |  | 205    | 
|Funds flow from operations                                             |  | 45,064 |   |  | 59,267 | 
|Less: Funds flow from discontinued operations                          |  | -      |   |  | 6,908  | 
|                                                                       |  |        |   |  |        | 
|Funds flow from continuing operations                                  |  | 45,064 |   |  | 52,359 | 

Debt-to-funds flow ratioDebt-to-funds flow is a non-GAAP measure that
is used to assess the amount of capital in proportion to risk. The Companys
debt-to-funds flow ratio is computed as long-term debt, including the current
portion, over funds flow from operations for the trailing twelve months.
Debt-to-funds flow may not be comparable to similar measures used by other
companies.

|2009 | 1
|---- | -

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|MANAGEMENTS DISCUSSION AND
      ANALYSIS
|------------------------------------------

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

TRANSGLOBES BUSINESS

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

SELECTED ANNUAL INFORMATION

|($000s, except per share, price and volume             |  |         |   |  |                |   |  |         |  |  |                |   |  |         | 
|------------------------------------------------------ |  | ------- | - |  | -------------- | - |  | ------- |  |  | -------------- | - |  | ------- | 
|amounts)                                               |  | 2009    |   |  | %
      Change |   |  | 2008    |  |  | %
      Change |   |  | 2007    | 
|Total Operations                                       |  |         |   |  |                |   |  |         |  |  |                |   |  |         | 
|Average production volumes
      (Boepd)               |  | 8,980   |   |  | 22             |   |  | 7,342   |  |  | 30             |   |  | 5,651   | 
|Average sales volumes (Boepd)                          |  | 8,980   |   |  | 22             |   |  | 7,342   |  |  | 29             |   |  | 5,692   | 
|Average price ($/Boe)                                  |  | 51.19   |   |  | (41            | ) |  | 86.96   |  |  | 32             |   |  | 65.80   | 
|Oil and gas sales                                      |  | 167,798 |   |  | (28            | ) |  | 233,695 |  |  | 71             |   |  | 136,709 | 
|Oil and gas sales, net of
      royalties and other    |  | 102,805 |   |  | (22            | ) |  | 132,393 |  |  | 51             |   |  | 87,911  | 
|                                                       |  |         |   |  |                |   |  |         |  |  |                |   |  |         | 
|Cash flow from operating
      activities              |  | 36,799  |   |  | (36            | ) |  | 57,793  |  |  | 8              |   |  | 53,618  | 
|Funds flow from operations*                            |  | 45,064  |   |  | (24            | ) |  | 59,267  |  |  | 14             |   |  | 52,141  | 
|Funds flow from operations per
      share             |  |         |   |  |                |   |  |         |  |  |                |   |  |         | 
|- Basic                                                |  | 0.70    |   |  |                |   |  | 0.99    |  |  |                |   |  | 0.87    | 
|- Diluted                                              |  | 0.70    |   |  |                |   |  | 0.98    |  |  |                |   |  | 0.86    | 
|                                                       |  |         |   |  |                |   |  |         |  |  |                |   |  |         | 
|Net (loss) income                                      |  | (8,417  | ) |  | (127           | ) |  | 31,523  |  |  | 146            |   |  | 12,802  | 
|Net (loss) income per share                            |  |         |   |  |                |   |  |         |  |  |                |   |  |         | 
|- Basic                                                |  | (0.13   | ) |  |                |   |  | 0.53    |  |  |                |   |  | 0.21    | 
|- Diluted                                              |  | (0.13   | ) |  |                |   |  | 0.52    |  |  |                |   |  | 0.21    | 
|                                                       |  |         |   |  |                |   |  |         |  |  |                |   |  |         | 
|Continuing Operations                                  |  |         |   |  |                |   |  |         |  |  |                |   |  |         | 
|Average production volumes
      (Bopd)                |  | 8,980   |   |  | 31             |   |  | 6,858   |  |  | 61             |   |  | 4,258   | 
|Average sales volumes (Bopd)                           |  | 8,980   |   |  | 31             |   |  | 6,858   |  |  | 61             |   |  | 4,258   | 
|Average price from continuing
      operations ($/Bbl) |  | 51.19   |   |  | (42            | ) |  | 88.66   |  |  | 23             |   |  | 72.17   | 
|Oil sales                                              |  | 167,798 |   |  | (25            | ) |  | 222,538 |  |  | 98             |   |  | 112,171 | 
|Oil sales, net of royalties
      and other            |  | 102,805 |   |  | (17            | ) |  | 123,231 |  |  | 82             |   |  | 67,628  | 
|                                                       |  |         |   |  |                |   |  |         |  |  |                |   |  |         | 
|Cash flow from operating
      activities              |  | 36,606  |   |  | (28            | ) |  | 51,090  |  |  | 37             |   |  | 37,418  | 
|Funds flow from continuing operations*                 |  | 45,064  |   |  | (14            | ) |  | 52,359  |  |  | 44             |   |  | 36,285  | 
|Funds flow from continuing
      operations per share  |  |         |   |  |                |   |  |         |  |  |                |   |  |         | 
|- Basic                                                |  | 0.70    |   |  |                |   |  | 0.88    |  |  |                |   |  | 0.61    | 
|- Diluted                                              |  | 0.70    |   |  |                |   |  | 0.86    |  |  |                |   |  | 0.60    | 
|                                                       |  |         |   |  |                |   |  |         |  |  |                |   |  |         | 
|Net (loss) income                                      |  | (8,417  | ) |  | (136           | ) |  | 23,173  |  |  | 177            |   |  | 8,380   | 
|Net (loss) income per share                            |  |         |   |  |                |   |  |         |  |  |                |   |  |         | 
|- Basic                                                |  | (0.13   | ) |  |                |   |  | 0.39    |  |  |                |   |  | 0.14    | 
|- Diluted                                              |  | (0.13   | ) |  |                |   |  | 0.38    |  |  |                |   |  | 0.14    | 
|                                                       |  |         |   |  |                |   |  |         |  |  |                |   |  |         | 
|                                                       |  |         |   |  |                |   |  |         |  |  |                |   |  |         | 
|Total assets                                           |  | 228,882 |   |  | -              |   |  | 228,238 |  |  | 12             |   |  | 204,219 | 
|Cash and cash equivalents                              |  | 16,177  |   |  | 112            |   |  | 7,634   |  |  | (40            | ) |  | 12,729  | 
|Total long-term debt,
      including current portion  |  | 49,799  |   |  | (13            | ) |  | 57,230  |  |  | 1              |   |  | 56,685  | 
|Debt-to-funds flow ratio**                             |  | 1.1     |   |  |                |   |  | 1.0     |  |  |                |   |  | 1.1     | 
|                                                       |  |         |   |  |                |   |  |         |  |  |                |   |  |         | 
|Reserves                                               |  |         |   |  |                |   |  |         |  |  |                |   |  |         | 
|Total proved (MMboe)                                   |  | 19.2    |   |  | 53             |   |  | 12.6    |  |  | 6              |   |  | 11.9    | 
|Total
      proved plus probable (MMBoe)               |  | 24.2    |   |  | 22             |   |  | 19.8    |  |  | 21             |   |  | 16.4    | 

|*  | Funds flow from operations and funds flow from continuing
      operations are non-GAAP measures that represent cash generated from
      operating activities and continuing operating activities, respectively,
      before changes in non-cash working capital.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                    
|** | Debt-to-funds flow ratio is a non-GAAP measure that
      represents total current and long-term debt over funds flow from
      operations for the trailing 12 months.                                                                                            

In 2009 compared with 2008, TransGlobe,

- Increased Proved reserves by 6.6 MMBbl, representing a production
  replacement of 301%, primarily from the development of its operated West
  Gharib concession in Egypt;
- Increased total production by 22%, as a result of a 90% increase in
  production from Egypt offset by the loss of production from the sale of
  Canadian operations and declining production in Yemen;
- Funds flow decreased by 24% (down 14% from continuing operations)
  primarily due to a 41% decrease in realized oil prices, offset by increased
  production and lower royalties and taxes;
- Realized an operating loss of $8.4 million due to decreased revenues
  coupled by an unrealized derivative loss versus a gain in 2008 and a 34%
  increase in depreciation and depletion due to increased production; and
- Decreased debt by $8.0 million resulting in a debt-to-funds flow ratio of
  1.1 at December 31, 2009 (December 31, 2008  1.0).

|2009 | 2
|---- | -

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|MANAGEMENTS DISCUSSION AND ANALYSIS
|------------------------------------

|2009 TO 2008 NET INCOME (LOSS) VARIANCES     |  |         |   |  |                    |   |  |            |  
|-------------------------------------------- |  | ------- | - |  | ------------------ | - |  | ---------- | -
|                                             |  | $000s   |   |  | $Per Share Diluted |   |  | Variance % |  
|2008 net income                              |  | 31,523  |   |  | 0.52               |   |  |            |  
|Cash items                                   |  |         |   |  |                    |   |  |            |  
|Volume variance                              |  | 39,295  |   |  | 0.60               |   |  | 125        |  
|Price variance                               |  | (94,035 | ) |  | (1.46              | ) |  | (298       | )
|Royalties                                    |  | 34,314  |   |  | 0.53               |   |  | 109        |  
|Expenses:                                    |  |         |   |  |                    |   |  |            |  
|Operating                                    |  | (5,432  | ) |  | (0.08              | ) |  | (17        | )
|Realized
      derivative loss               |  | 6,010   |   |  | 0.09               |   |  | 19         |  
|Cash general and administrative              |  | (1,033  | ) |  | (0.02              | ) |  | (3         | )
|Current
      income taxes                   |  | 10,377  |   |  | 0.16               |   |  | 33         |  
|Realized foreign exchange loss               |  | 948     |   |  | 0.01               |   |  | 3          |  
|Interest on long-term debt                   |  | 2,387   |   |  | 0.04               |   |  | 8          |  
|Other income                                 |  | (126    | ) |  | -                  |   |  | -          |  
|Cash flow
      from discontinued operations |  | (6,908  | ) |  | (0.11              | ) |  | (22        | )
|Total cash items variance                    |  | (14,203 | ) |  | (0.24              | ) |  | (43        | )
|Non-cash items                               |  |         |   |  |                    |   |  |            |  
|Unrealized derivative loss                   |  | (13,228 | ) |  | (0.21              | ) |  | (42        | )
|Depletion, depreciation and accretion        |  | (12,201 | ) |  | (0.20              | ) |  | (40        | )
|Stock-based compensation                     |  | (181    | ) |  | -                  |   |  | (1         | )
|Amortization of deferred financing costs     |  | 1,315   |   |  | 0.02               |   |  | 4          |  
|Non-cash income from discontinued operations |  | (1,442  | ) |  | (0.02              | ) |  | (5         | )
|Total
      non-cash items variance          |  | (25,737 | ) |  | (0.41              | ) |  | (84        | )
|                                             |  |         |   |  |                    |   |  |            |  
|2009 net
      loss                          |  | (8,417  | ) |  | (0.13              | ) |  | (127       | )

Despite record production in 2009, net income decreased by
$39.9 million from 2008, resulting in a $8.4 million loss. This is mainly as a
result of a 41% decrease in realized oil prices, an unrealized derivative loss
(versus a gain in 2008) and a 34% increase in depreciation and depletion due to
increased production.

BUSINESS ENVIRONMENT

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

|                                                 |  | 2009   |  |  | 2008   | 
|------------------------------------------------ |  | ------ |  |  | ------ | 
|                                                 |  |        |  |  |        | 
|Dated Brent average oil price ($/Bbl)            |  | 61.51  |  |  | 96.99  | 
|U.S./Canadian
      Dollar average exchange rate |  | 1.1415 |  |  | 1.0671 | 

The average price of Dated Brent oil was 37% lower in 2009
versus 2008. Financial market instability and a worldwide recession resulted in
a steep decline in the price of Dated Brent oil in Q4-2008, with lower price
levels continuing into 2009. Oil prices partially recovered in the latter half
of 2009 and Dated Brent averaged $74.56/Bbl in Q4-2009 a 36% increase over the
same period last year.

The global financial crisis, which developed in late 2008 and
continued throughout 2009, has increased the risk associated with timely access
to debt, capital, and banking markets, along with market instability which may
have an impact on TransGlobes ability to obtain additional funding in the
future. To mitigate this risk, management has been adjusting operational and
financial risk strategies and continues to monitor the 2010 capital budget and
the Companys long-term plans. The Company has designed its 2010 budget to be
flexible allowing spending to be adjusted as commodity prices change and
forecasts are reviewed.

SIGNIFICANT ACQUISITIONS AND DISPOSITIONS

Corporate Acquisition

On February 5, 2008, the Company acquired all the shares of GHP
Exploration (West Gharib) Ltd. (GHP) for total consideration of $40.2 million,
plus transaction costs and working capital adjustments, effective September 30,
2007. This acquisition was funded by bank debt and cash on hand. GHP holds a 30%
working interest in the West Gharib Concession area in the Egypt. With the
acquisition of GHP, the Company held 100% working interest in the West Gharib
Production Sharing Concession (PSC), with a working interest of 100% in the
Hana development lease and an effective working interest of 75% in the eight
non-Hana development leases. TransGlobe is the operator of the West Gharib
Concession.

Property Acquisition

On August 18, 2008, TransGlobe completed an oil and gas
property acquisition in Egypt for the remaining 25% financial interest in the
eight non-Hana development leases in the West Gharib Concession. The total cost
of the acquisition was $18.0 million. In addition, the Company could pay up to a
maximum of $7.0 million if incremental reserve thresholds are reached in the
East Hoshia (up to $5.0 million) and in the South Rahmi (up to $2.0 million)
development leases, to be evaluated annually. As at December 31, 2009, no
additional fees are due in 2010. Following this acquisition, TransGlobe now
holds 100% working interest in the West Gharib Concession in Egypt.

|2009 | 3
|---- | -

---

|MANAGEMENTS DISCUSSION AND
      ANALYSIS
|------------------------------------------

Discontinued Operations

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

SELECTED QUARTERLY FINANCIAL INFORMATION

|                                                            |  | 2009    |  |  | 2008    |  
|----------------------------------------------------------- |  | ------- |  |  | ------- | -
|($000s, except per share, price                             |  |         |  |  |         |  
|and volume amounts)                                         |  | Q-4     |  |  | Q-3     |  
|Total Operations                                            |  |         |  |  |         |  
|Average sales volumes (Boepd)                               |  | 8,656   |  |  | 8,864   |  
|Average price
      ($/Boe)                                 |  | 62.84   |  |  | 57.41   |  
|Oil and gas sales                                           |  | 50,044  |  |  | 46,818  |  
|Oil and gas
      sales, net of      royalties and other    |  | 28,788  |  |  | 28,495  |  
|                                                            |  |         |  |  |         |  
|Cash flow from
      operating        activities            |  | 12,594  |  |  | 1,264   |  
|Funds flow from operations*                                 |  | 9,703   |  |  | 12,603  |  
|Funds flow from
      operations per 
          share       |  |         |  |  |         |  
|- Basic                                                     |  | 0.15    |  |  | 0.19    |  
|- Diluted                                                   |  | 0.15    |  |  | 0.19    |  
|                                                            |  |         |  |  |         |  
|Net (loss)
      income                                     |  | 2,516   |  |  | (1,618  | )
|Net (loss) income per share                                 |  |         |  |  |         |  
|-
      Basic                                               |  | 0.04    |  |  | (0.02   | )
|- Diluted                                                   |  | 0.04    |  |  | (0.02   | )
|                                                            |  |         |  |  |         |  
|Continuing Operations                                       |  |         |  |  |         |  
|Average sales
      volumes (Bopd)                          |  | 8,656   |  |  | 8,864   |  
|Average price ($/Bbl)                                       |  | 62.84   |  |  | 57.41   |  
|Oil sales                                                   |  | 50,044  |  |  | 46,818  |  
|Oil sales, net of royalties and
            other           |  | 28,788  |  |  | 28,495  |  
|                                                            |  |         |  |  |         |  
|Cash flow from continuing
            operating activities  |  | 12,593  |  |  | 1,137   |  
|Funds flow from
      continuing       operations*          |  | 9,703   |  |  | 12,603  |  
|Funds flow from continuing
            operations per share |  |         |  |  |         |  
|- Basic                                                     |  | 0.15    |  |  | 0.19    |  
|- Diluted                                                   |  | 0.15    |  |  | 0.19    |  
|                                                            |  |         |  |  |         |  
|Net (loss) income                                           |  | 2,516   |  |  | (1,618  | )
|Net (loss)
      income per share                           |  |         |  |  |         |  
|- Basic                                                     |  | 0.04    |  |  | (0.02   | )
|- Diluted                                                   |  | 0.04    |  |  | (0.02   | )
|                                                            |  |         |  |  |         |  
|                                                            |  |         |  |  |         |  
|Total assets                                                |  | 228,882 |  |  | 228,964 |  
|Cash and cash
      equivalents                             |  | 16,177  |  |  | 14,804  |  
|Total long-term debt, including
            current portion |  | 49,799  |  |  | 52,686  |  
|Debt-to-funds flow ratio**                                  |  | 1.1     |  |  | 1.3     |  

|*  | Funds flow from operations and funds flow from continuing
      operations are non-GAAP measures that represent cash generated from
      operating activities and continuing operating activities, respectively,
      before changes in non-cash working capital.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|** | Debt-to-funds flow ratio is a non-GAAP measure that
      represents total current and long-term debt over funds flow from
      operations for the trailing 12 months.                                                                                            

During the fourth quarter of 2009, TransGlobe:

- Funded capital programs entirely with funds flow from operations;
- Increased production by 26% compared with Q4-2008 due to drilling
  successes in the West Gharib Concession in Egypt;
- Increased funds flow from continuing operations by 74% from Q4-2008 due to
  a 36% increase in commodity prices and a 26% increase in sales volumes;
- Net income decreased $5.1 million from Q4-2008 despite higher prices and
  volumes, primarily due to an unrealized derivative gain decreasing from $11.8
  million in Q4-2008 to $0.4 million; and
- Net income increased by $4.1 million from Q3-2009 primarily due to a 51%
  decrease in depletion and depreciation (DD&A) as a result of the West
  Gharib reserve additions at the end of 2009.

|2009 | 4
|---- | -

---

|MANAGEMENTS DISCUSSION AND ANALYSIS | 
|------------------------------------ | 

OPERATING RESULTS AND NETBACK

Daily Volumes, Working Interest, Before Royalties and Other

|                                    |                             |       | 2009  | 2008  
|----------------------------------- | --------------------------- | ----- | ----- | ------
|Egypt                               | - Oil sales                 | Bopd  | 5,828 | 3,072*
|Yemen                               | - Oil
      sales           | Bopd  | 3,152 | 3,786 
|Total continuing operations         |                             |       |      
|                                    | -
      daily sales volumes | Bopd  | 8,980 | 6,858 
|Canada                              | - Oil and liquids sales**   | Bopd  | -     | 115   
|                                    | - Gas
      sales**         | Mcfpd | -     | 2,212 
|Canada                              |                             | Boepd | -     | 484   
|                                    |                             |       |       |       
|Total Company  daily sales volumes | Boepd                       | 8,980 | 7,342

|*  | Egypt includes the operating results of GHP for the
      period February 5, 2008 to December 31, 2008 and the property acquisition
      for the period from August 18, 2008 to December 31, 2008. In those
      periods, production averaged 1,037 Bopd and 369 Bopd, respectively, for
      yearly averages of 938 Bopd and 137 Bopd, respectively.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|** | Canada includes the operating results for the period
      January 1, 2008 to April 30, 2008. In that period, production from the
      Canadian assets averaged 1,463 Boepd for a yearly average of 484
    Boepd.                                                                                                                                     

Netback from Continuing Operations

|Consolidated                         |  |         |  |  |       |  |  |         |  |  |       | 
|------------------------------------ |  | ------- |  |  | ----- |  |  | ------- |  |  | ----- | 
|                                     |  | 2009    |  |  | 2008  | 
|(000s,
      except per Bbl amounts) |  | **$**   |  |  | $/Bbl |  |  | $       |  |  | $/Bbl | 
|Oil sales                            |  | 167,798 |  |  | 51.19 |  |  | 222,538 |  |  | 88.66 | 
|Royalties and other                  |  | 64,993  |  |  | 19.83 |  |  | 99,307  |  |  | 39.56 | 
|Current taxes                        |  | 21,853  |  |  | 6.67  |  |  | 32,230  |  |  | 12.84 | 
|Operating
      expenses             |  | 24,765  |  |  | 7.56  |  |  | 19,333  |  |  | 7.70  | 
|                                     |  |         |  |  |       |  |  |         |  |  |       | 
|Netback                              |  | 56,187  |  |  | 17.13 |  |  | 71,668  |  |  | 28.56 | 

|Egypt                                |  |        |  |  |       |  |  |        |  |  |       | 
|------------------------------------ |  | ------ |  |  | ----- |  |  | ------ |  |  | ----- | 
|                                     |  | 2009   |  |  | 2008  | 
|(000s,
      except per Bbl amounts) |  | **$**  |  |  | $/Bbl |  |  | $      |  |  | $/Bbl | 
|Oil sales                            |  | 98,801 |  |  | 46.45 |  |  | 86,778 |  |  | 77.18 | 
|Royalties and other                  |  | 34,684 |  |  | 16.30 |  |  | 35,410 |  |  | 31.49 | 
|Current taxes                        |  | 13,980 |  |  | 6.57  |  |  | 14,627 |  |  | 13.01 | 
|Operating
      expenses             |  | 14,703 |  |  | 6.91  |  |  | 6,972  |  |  | 6.20  | 
|                                     |  |        |  |  |       |  |  |        |  |  |       | 
|Netback                              |  | 35,434 |  |  | 16.67 |  |  | 29,769 |  |  | 26.48 | 

In Egypt, the netback per Bbl decreased 37% in 2009 compared
with 2008, mainly as a result of oil prices decreasing by 40%. The oil price
decrease was partially offset by lower realized royalty and tax rates. In 2009,
the average realized oil price for the West Gharib crude had a gravity/quality
adjustment of approximately $15.06/Bbl (24%) to the average Dated Brent oil
price versus a $19.82/Bbl (20%) differential in 2008. In 2010, the Company
expects these differentials to narrow to the 10% range.

- Royalties and taxes as a percentage of revenue decreased to 49% in 2009,
  compared with 58% in 2008. Royalty and tax rates fluctuate in Egypt due to
  changes in the cost oil whereby the PSC allows for recovery of operating and
  capital costs through a reduction in government take.
- Operating expenses for 2009 increased 11% on a per Bbl basis, due to an
  increased number of workovers and higher staffing levels.

|Yemen                                |  |        |  |  |       |  |  |         |  |  |       | 
|------------------------------------ |  | ------ |  |  | ----- |  |  | ------- |  |  | ----- | 
|                                     |  | 2009   |  |  | 2008  | 
|(000s,
      except per Bbl amounts) |  | **$**  |  |  | $/Bbl |  |  | $       |  |  | $/Bbl | 
|Oil sales                            |  | 68,997 |  |  | 59.97 |  |  | 135,760 |  |  | 97.97 | 
|Royalties and other                  |  | 30,309 |  |  | 26.34 |  |  | 63,897  |  |  | 46.11 | 
|Current taxes                        |  | 7,873  |  |  | 6.84  |  |  | 17,603  |  |  | 12.70 | 
|Operating
      expenses             |  | 10,062 |  |  | 8.75  |  |  | 12,361  |  |  | 8.92  | 
|                                     |  |        |  |  |       |  |  |         |  |  |       | 
|Netback                              |  | 20,753 |  |  | 18.04 |  |  | 41,899  |  |  | 30.24 | 

|2009 | 5
|---- | -

---

| | MANAGEMENTS DISCUSSION AND
      ANALYSIS
| | ------------------------------------------

In Yemen, the netback per Bbl decreased 40% in 2009 compared
with 2008, primarily as a result of the 39% decrease in oil prices.

- Royalties and taxes as a percentage of revenue decreased to 55% in 2009
  compared with 60% in 2008. Royalty and tax rates fluctuate in Yemen due to
  changes in the amount of cost oil, whereby the Block 32 and Block S-1
  Production Sharing Agreements (PSAs) allow for the recovery of operating and
  capital costs through a reduction in the Ministry of Oil and Minerals take of
  oil production.
- Operating expenses on a per Bbl basis remained flat year over year.

DERIVATIVE COMMODITY CONTRACTS

TransGlobe uses hedging arrangements as part of its risk
management strategy to manage commodity price fluctuations and to stabilize cash
flows for future exploration and development programs. The hedging program was
expanded significantly in 2007 due to a marked increase in debt levels and again
in 2009 to protect the cash flows from the added risk of commodity price
exposure and in order to comply with the covenants set forth by the Companys
lending institutions.

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

From a corporate perspective, the weak oil prices in 2009 had a
negative impact on the Companys revenue; however, these prices resulted in only
$0.9 million of realized loss recorded on the derivative commodity contracts
compared with $6.9 million of realized losses in 2008. The mark-to-market
valuation of TransGlobes future derivative commodity contracts decreased from a
$2.8 million asset at December 31, 2008 to a $0.5 million liability at December
31, 2009 due to the strengthening of commodity prices since December 31, 2008,
thus resulting in a $3.3 million unrealized loss on future derivative commodity
contracts being recorded in the year.

|($000s)                                                   |  | 2009   |   |  | 2008   |  
|--------------------------------------------------------- |  | ------ | - |  | ------ | -
|Realized cash loss on commodity contracts*                |  | (891   | ) |  | (6,901 | )
|Unrealized (loss)
      gain on commodity contracts**     |  | (3,322 | ) |  | 9,906  |  
|                                                          |  |        |   |  |        |  
|Total derivative
      (loss) gain on commodity contracts |  | (4,213 | ) |  | 3,005  |  

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

If the Dated Brent oil prices in 2010 are consistent with the
estimated Dated Brent forward curve prices at the end of 2009, the derivative
liability will be realized over the year. However, a 10% decrease in Dated Brent
oil prices would result in a $0.9 million decrease in the derivative commodity
contract liability, thus decreasing the unrealized loss by the same amount.
Conversely, a 10% increase in Dated Brent oil prices would increase the
unrealized loss on commodity contracts by $0.7 million. The following commodity
contracts are outstanding at December 31, 2009:

|                                  |  |                         |  |  |                  |  |   | Dated Brent Pricing | 
|--------------------------------- |  | ----------------------- |  |  | ---------------- |  | - | ------------------- | 
|Period                            |  | Volume                  |  |  | Type             |  |   | Put-Call            | 
|Crude Oil                         |  |                         |  |  |                  |  |   |                     | 
|January 1, 2010-August 31, 2010   |  | 12,000
      Bbls/month |  |  | Financial Collar |  | $ | 60.00- $84.25       | 
|January 1, 2010-August 31, 2010   |  | 9,000 Bbls/month        |  |  | Financial Collar |  | $ | 40.00- $80.00       | 
|January 1, 2010-December 31, 2010 |  | 10,000 Bbls/month       |  |  | Financial Floor  |  | $ | 60.00               | 

The total volumes hedged for 2010 are:

|     |  | 2010    | 
|---- |  | ------- | 
|Bbls |  | 288,000 | 
|Bopd |  | 789     | 

At December 31, 2009, all of the derivative commodity contracts
were classified as current liabilities.

GENERAL AND ADMINISTRATIVE EXPENSES (G&A)

|                                     |  | 2009   |   |  | 2008  |  
|------------------------------------ |  | ------ | - |  | ----- | -
|(000s, except per
      Boe amounts) |  | **$**  |   |  | $/Bbl |  
|G&A (gross)                          |  | 12,550 |   |  | 3.83  |  
|Stock-based compensation             |  | 2,011  |   |  | 0.61  |  
|Capitalized G&A                      |  | (3,109 | ) |  | (0.95 | )
|Overhead
      recoveries            |  | (25    | ) |  | (0.01 | )
|                                     |  |        |   |  |       |  
|G&A (net)                            |  | 11,427 |   |  | 3.48  |  

G&A increased 12% in 2009, compared with 2008 mostly as a
result of higher insurance costs and increased staffing levels in Egypt. On a
per Bbl basis, G&A was down 8% from 2008 due to increased production.

|2009 | 6
|---- | -

---

|MANAGEMENTS DISCUSSION AND ANALYSIS | 
|------------------------------------ | 

INTEREST ON LONG-TERM DEBT

Interest expense for 2009 decreased to $2.5 million (2008 -
$6.2 million), as a result of lower debt levels throughout 2009 coupled with
lower interest rates. Interest expense includes interest on long-term debt and
amortization of transaction costs associated with long-term debt. In 2009, the
Company expensed $0.6 million of transaction costs (2008 - $1.9 million). The
Company had $50.0 million of debt outstanding at December 31, 2009 (December 31,
2008 - $58.0 million). The long-term debt bears interest at the Eurodollar Rate
plus three percent.

DEPLETION AND DEPRECIATION (DD&A)

|                                     |  | 2009   |  |  | 2008  | 
|------------------------------------ |  | ------ |  |  | ----- | 
|(000s, except per
      Bbl amounts) |  | **$**  |  |  | $/Bbl | 
|Egypt                                |  | 37,942 |  |  | 17.84 | 
|Yemen                                |  | 9,436  |  |  | 8.20  | 
|Corporate                            |  | 201    |  |  | -     | 
|                                     |  |        |  |  |       | 
|                                     |  | 47,579 |  |  | 14.52 | 

In Egypt, DD&A increased 65% in 2009, due to DD&A
charges on increased production from the West Gharib PSC in Egypt. Property and
equipment are depleted based on proved reserves; therefore, the 13% decrease on
a Bbl basis of Egypt DD&A was due to a 125% increase in proved reserves in
Egypt at the end of 2009. As a result of the reserve increases the Q4-2009
DD&A in Egypt was down to $8.96/Bbl, compared with an average DD&A rate
of $20.82/Bbl during the first three quarters of 2009.

In Yemen, DD&A, on a per Bbl basis for the year ended
December 31, 2009, decreased 5% over 2008 due to decreased capital spending and
reserve additions on Block S-1 and Block 32 at year-end 2009.

In Egypt, unproven properties of $9.8 million (2008 - $10.0
million) relating to Nuqra ($7.9 million) and West Gharib ($1.9 million) were
excluded from the costs subject to depletion and depreciation. In Yemen,
unproven property costs of $10.8 million (2008 - $7.2 million) relating to Block
72, Block 75 and Block 84 were excluded from the costs subject to depletion and
depreciation.

CAPITAL EXPENDITURES

|($000s)     |  | 2009   |  |  | 2008   | 
|----------- |  | ------ |  |  | ------ | 
|Egypt       |  | 28,349 |  |  | 34,797 | 
|Yemen       |  | 7,013  |  |  | 8,819  | 
|Corporate   |  | 184    |  |  | 241    | 
|            |  | 35,546 |  |  | 43,857 | 
|Acquisition |  | -      |  |  | 54,602 | 
|            |  |        |  |  |        | 
|Total       |  | 35,546 |  |  | 98,459 | 

In Egypt, total capital expenditures for the year ended
December 31, 2009 were down 19% from 2008, due to a reduced capital program in
response to lower oil prices in 2009. The Company drilled 13 wells, resulting in
eight oil wells (six in Hana West, one in East Hoshia and one in Arta), one dry
hole in East Hoshia and four water source wells as part of the waterflood
projects at Hana and Hoshia.

In Yemen, total capital expenditures in the year ended December
31, 2009 were $7.0 million (2008 - $8.8 million). The Company drilled two oil
wells on Block 32 and completed a 3-D seismic acquisition program on Block 75.

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

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

|2009 | 7
|---- | -

---

| | MANAGEMENTS DISCUSSION AND
      ANALYSIS
| | ------------------------------------------

|Proved                                               |        |          |        
|---------------------------------------------------- | ------ | -------- | -------
|($000s,
      except volumes and $/Boe amounts)      | 2009   | 2008     | 2007   
|Total capital expenditure                            | 35,546 | 43,292   | 37,015 
|Acquisitions                                         | -      | 58,946   | 62,821 
|Dispositions                                         | -      | (57,295) | -      
|Net change
      from previous years future capital | 1,816  | (6,479)  | (2,467)
|                                                     | 37,362 | 38,464   | 97,369 
|Reserve additions and revisions (MBoe)               |        |          |        
|Exploration and development                          | 9,921  | 3,129    | 1,634  
|Acquisitions, net of dispositions                    | -      | 118      | 2,953  
|Total reserve additions (Mboe)                       | 9,921  | 3,247    | 4,587  
|                                                     |        |          |        
|Average cost per Boe                                 |        |          |        
|F&D                                                  | 3.77   | 11.77    | 21.14  
|FD&A                                                 | 3.77   | 11.85    | 21.23  
|                                                     |        |          |        
|Three-year weighted average cost per
      Boe       |        |          |        
|F&D                                                  | 7.40   | 14.97    | 15.77  
|FD&A                                                 | 9.75   | 16.62    | 17.25  
|                                                     |        |          |        
|Proved Plus Probable                                 |        |          |        
|($000s,
      except volumes and $/Boe amounts)      | 2009   | 2008     | 2007   
|Total capital expenditure                            | 35,546 | 43,292   | 37,015 
|Acquisitions                                         | -      | 58,946   | 68,716 
|Dispositions                                         | -      | (57,295) | -      
|Net change
      from previous years future capital | 4,112  | (8,602)  | (6,587)
|                                                     | 39,658 | 36,341   | 99,144 
|Reserve additions and revisions (MBoe)               |        |          |        
|Exploration and development                          | 7,670  | 5,200    | 1,537  
|Acquisitions, net of dispositions                    | -      | 709      | 5,264  
|Total reserve additions (Mboe)                       | 7,670  | 5,909    | 6,801  
|                                                     |        |          |        
|Average cost per Boe                                 |        |          |        
|F&D                                                  | 5.17   | 6.67     | 19.79  
|FD&A                                                 | 5.17   | 6.15     | 14.58  
|                                                     |        |          |        
|Three-year weighted average cost per
      Boe       |        |          |        
|F&D                                                  | 7.27   | 12.35    | 19.88  
|FD&A                                                 | 8.59   | 12.14    | 16.81  

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

|RECYCLE RATIO             |  |            |  |  |       |  |  |       |  |  |       | 
|------------------------- |  | ---------- |  |  | ----- |  |  | ----- |  |  | ----- | 
|                          |  | Three Year |  |  |       |  |  |       |  |  |       | 
|Proved                    |  | Weighted   |  |  |       |  |  |       |  |  |       | 
|                          |  | Average    |  |  | 2009  |  |  | 2008  |  |  | 2007  | 
|Netback ($/Boe)*          |  | 19.45      |  |  | 13.75 |  |  | 22.05 |  |  | 25.10 | 
|Proved F&D costs ($/Boe)  |  | 7.40       |  |  | 3.77  |  |  | 11.77 |  |  | 21.14 | 
|Proved FD&A costs ($/Boe) |  | 9.75       |  |  | 3.77  |  |  | 11.85 |  |  | 21.23 | 
|F&D Recycle ratio         |  | 2.63       |  |  | 3.65  |  |  | 1.87  |  |  | 1.19  | 
|FD&A Recycle ratio        |  | 1.99       |  |  | 3.65  |  |  | 1.86  |  |  | 1.18  | 

|* | Netback, for the purposes of calculating the recycle
      ratio, is defined as net sales less operating, G&A (excluding non-cash
      items), foreign exchange (gain) loss, interest and current income tax
      expense per Boe of production.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                        |  | Three Year |  |  |       |  |  |       |  |  |       | 
|--------------------------------------- |  | ---------- |  |  | ----- |  |  | ----- |  |  | ----- | 
|Proved Plus Probable                    |  | Weighted   |  |  |       |  |  |       |  |  |       | 
|                                        |  | Average    |  |  | 2009  |  |  | 2008  |  |  | 2007  | 
|Netback ($/Boe)*                        |  | 19.45      |  |  | 13.75 |  |  | 22.05 |  |  | 25.10 | 
|Proved plus Probable F&D costs ($/Boe)  |  | 7.27       |  |  | 5.17  |  |  | 6.67  |  |  | 19.79 | 
|Proved plus Probable FD&A costs ($/Boe) |  | 8.59       |  |  | 5.17  |  |  | 6.15  |  |  | 14.58 | 
|F&D Recycle ratio                       |  | 2.67       |  |  | 2.66  |  |  | 3.31  |  |  | 1.27  | 
|FD&A Recycle ratio                      |  | 2.26       |  |  | 2.66  |  |  | 3.59  |  |  | 1.72  | 

|* | Netback, for the purposes of calculating the recycle
      ratio, is defined as net sales less operating, G&A (excluding non-cash
      items), foreign exchange (gain) loss, interest and current income tax
      expense per Boe of production.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Despite a 38% decrease in netback, the 2009 proved recycle
ratios increased from 2008 mainly as a result of probable reserves being
converted to proved, mainly as a result of waterflood simulation and field
response at Hoshia and Hana and the development of Hana West pool. The proved
plus probable ratios decreased from 2008 mainly due to a lower netback per Bbl
in 2009 compared to 2008. The increase in the 2008 proved and proved plus
probable recycle ratios, from 2007, was mainly as a result of higher reserve
additions.

The recycle ratio measures the efficiency of TransGlobes
capital program by comparing the cost of finding and developing proved reserves
with the netback from production. The ratio is calculated by dividing the
netback by the proved finding and development cost on a per Boe basis.

|2009 | 8
|---- | -

---

|MANAGEMENTS DISCUSSION AND ANALYSIS | 
|------------------------------------ | 

|($000s, except
      volumes and per Boe amounts)   |  | 2009   |   |  | 2008   |   |  | 2007   |  
|--------------------------------------------------- |  | ------ | - |  | ------ | - |  | ------ | -
|Net income                                          |  | (8,417 | ) |  | 31,523 |   |  | 12,802 |  
|Adjustments for non-cash items:                     |  |        |   |  |        |   |  |        |  
|Depletion,
      depreciation and accretion         |  | 47,579 |   |  | 38,056 |   |  | 31,172 |  
|Stock-based compensation                            |  | 2,011  |   |  | 1,830  |   |  | 1,086  |  
|Future income
      taxes                           |  | -      |   |  | (82    | ) |  | 45     |  
|Amortization of deferred
      financing costs      |  | 569    |   |  | 1,884  |   |  | 153    |  
|Unrealized loss
      (gain) on commodity contracts |  | 3,322  |   |  | (9,906 | ) |  | 7,098  |  
|Gain on sale                                        |  | -      |   |  | (4,012 | ) |  | -      |  
|Settlement of asset retirement obligations          |  | -      |   |  | (25    | ) |  | (215   | )
|Netback*                                            |  | 45,064 |   |  | 59,268 |   |  | 52,141 |  
|Sales volumes (MBoe)                                |  | 3,278  |   |  | 2,687  |   |  | 2,078  |  
|                                                    |  |        |   |  |        |   |  |        |  
|Netback per Boe*                                    |  | 13.75  |   |  | 22.05  |   |  | 25.10  |  

|* | Netback, for the purposes of calculating the recycle
      ratio, is defined as net sales less operating, G&A (excluding non-cash
      items), foreign exchange (gain) loss, interest and current income tax
      expense per Boe of production.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

OUTSTANDING SHARE DATA

As at December 31, 2009, the Company had 65,398,639 common
shares issued and outstanding.

In the first quarter of 2009, the Company issued 5,798,000
common shares at C$3.45 per common share for gross proceeds of C$20.0 million
(US$16.3 million).

The Company has received regulatory approval to purchase, from
time to time, as it considers advisable, up to 6,116,905 common shares under a
Normal Course Issuer Bid, which commenced September 7, 2009 and will terminate
September 6, 2010. During the year ended December 31, 2009, the Company did not
repurchase any common shares. During the year ended December 31, 2008, the
Company repurchased and cancelled 300,000 common shares at an average price of
C$3.87 (US$3.66) per share. In 2008, the excess of the purchase price over the
book value in the amount of $0.9 million was charged to retained earnings.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity describes a companys ability to access cash.
Companies operating in the upstream oil and gas industry require sufficient cash
in order to fund capital programs necessary to maintain and increase production
and proved reserves, to acquire strategic oil and gas assets and to repay debt.
TransGlobes capital programs are funded principally by cash provided from
operating activities. A key measure that TransGlobe uses to measure the
Companys overall financial strength is debt-to-funds flow from operating
activities (calculated on a 12-month trailing basis). TransGlobes debt-to-funds
flow from operating activities ratio, a key short-term leverage measure,
remained strong at 1.1 times at December 31, 2009. This was within the Companys
target range of no more than 2.0 times.

The following table illustrates TransGlobes sources and uses
of cash during the years ended December 31, 2009 and 2008:

Sources and Uses of Cash

|($000s)                                                      |  | 2009   |   |  | 2008    |  
|------------------------------------------------------------ |  | ------ | - |  | ------- | -
|Cash sourced                                                 |  |        |   |  |         |  
|Funds flow from
      continuing operations*                 |  | 45,064 |   |  | 52,359  |  
|Increase
      in long-term debt                             |  | -      |   |  | 55,000  |  
|Exercise of options                                          |  | -      |   |  | 514     |  
|Issuance
      of common shares, net of share issuance costs |  | 15,374 |   |  | -       |  
|Other                                                        |  | -      |   |  | 201     |  
|                                                             |  | 60,438 |   |  | 108,074 |  
|Cash used                                                    |  |        |   |  |         |  
|Capital
      expenditures                                   |  | 35,546 |   |  | 43,857  |  
|Bank financing costs                                         |  | -      |   |  | 1,339   |  
|Acquisitions                                                 |  | -      |   |  | 62,392  |  
|Repayment of long-term
      debt                            |  | 8,000  |   |  | 55,000  |  
|Repurchase of common shares                                  |  | -      |   |  | 1,135   |  
|Options surrendered for cash payments                        |  | 13     |   |  | 256     |  
|                                                             |  | 43,559 |   |  | 163,979 |  
|Net cash from continuing operations                          |  | 16,879 |   |  | (55,905 | )
|Net cash from discontinued operations                        |  | 193    |   |  | 53,098  |  
|Changes in
      non-cash working capital                    |  | (8,529 | ) |  | (2,288  | )
|Increase (decrease) in cash and cash
      equivalents       |  | 8,543  |   |  | (5,095  | )
|Cash and cash
      equivalents  beginning of year          |  | 7,634  |   |  | 12,729  |  
|                                                             |  |        |   |  |         |  
|Cash and cash
      equivalents  end of year                |  | 16,177 |   |  | 7,634   |  

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

|2009 | 9
|---- | -

---

| | MANAGEMENTS DISCUSSION AND
      ANALYSIS
| | ------------------------------------------

Funding for the Companys capital expenditures and long-term
debt repayment was provided by funds flow from operations and the proceeds from
the issuance of common shares. The Company expects to fund its 2010 exploration
and development program of $63.0 million and contractual commitments through the
use of working capital and cash generated by operating activities. The use of
new financing during 2010 may also be utilized to accelerate existing projects,
retire existing debt or to finance new opportunities. Fluctuations in commodity
prices, foreign exchange rates, interest rates and various other risks may
impact capital resources.

Working capital is the amount by which current assets exceed
current liabilities. At December 31, 2009, the Company had negative working
capital of $11.8 million (December 31, 2008  $24.0 million). The decrease in
working capital in 2009 is due to the re-classing of long-term debt to current
as the current Revolving Credit facility expires in September 2010. Accounts
receivable have mainly increased in Egypt due to increased production and
increased prices at the end of 2009 versus 2008. These receivables are not
considered to be impaired. However, to mitigate this risk, the Company has
insured the receivable balance. Since year end, the collection period for the
Egypt receivables has decreased.

At December 31, 2009, TransGlobe had a $60.0 million Revolving
Credit Agreement of which $50.0 million was drawn. Amounts drawn under the
Revolving Credit Agreement are due September 25, 2010. The Company is in
discussion on a new credit facility and expects to enter into a new facility in
the second quarter of 2010.

|($000s)                             |  | December 31, 2009 |   |  | December 31, 2008 |  
|----------------------------------- |  | ----------------- | - |  | ----------------- | -
|Revolving Credit Agreement          |  | 50,000            |   |  | 58,000            |  
|Unamortized
      transaction costs |  | (201              | ) |  | (770              | )
|                                    |  | 49,799            |   |  | 57,230            |  
|                                    |  |                   |   |  |                   |  
|Current portion of long-term debt   |  | 49,799            |   |  | -                 |  
|                                    |  |                   |   |  |                   |  
|Long-term debt                      |  | -                 |   |  | 57,230            |  

COMMITMENTS AND CONTINGENCIES

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

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

|1 | Payments exclude ongoing operating costs related to
      certain leases, interest on long-term debt and payments made to settle
      derivatives.       
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|2 | Payments denominated in foreign currencies have been
      translated at December 31, 2009 exchange rates.                                                
|3 | Minimum work commitments include contracts awarded for
      capital projects and those commitments related to exploration and drilling
      obligations.

Pursuant to the Concession Agreement for Nuqra Block 1 in
Egypt, the Contractor (Joint Venture Partners) has a minimum financial
commitment of $5.0 million ($4.4 million to TransGlobe) and a work commitment of
two exploration wells in the second exploration extension. The second, 36-month
extension period commenced on July 18, 2009. The Contractor has met the second
extension financial commitment of $5.0 million in the prior periods. At the
request of the government, the Company provided a $4.0 million production
guarantee from the West Gharib Concession prior to entering the second extension
period.

TransGlobe has signed a farm-out agreement and has committed to
pay 100% of three exploration wells to a maximum of $9.0 million to earn a 50%
working interest in the East Ghazalat Concession in the Western Desert of Egypt,
subject to the approval of the Egyptian Government.

Pursuant to the Production Sharing Agreement (PSA) for Block
72 in Yemen, the Contractor (Joint Venture Partners) has a minimum financial
commitment of $2.0 million ($0.7 million to TransGlobe) during the second
exploration period. The second, 30-month, exploration period commenced on
January 12, 2009.

Pursuant to the PSA for Block 75 in Yemen, the Contractor
(Joint Venture Partners) has a remaining minimum financial commitment of $3.0
million ($0.8 million to TransGlobe) for one exploration well. The first,
36-month exploration period commenced March 8, 2008. The Company issued a $1.5
million letter of credit (expiring November 15, 2011) to guarantee the Companys
performance under the first exploration period. The letter is secured by a
guarantee granted by Export Development Canada.

|2009 | 10
|---- | --

---

|MANAGEMENTS DISCUSSION AND ANALYSIS | 
|------------------------------------ | 

Pursuant to the bid awarded for Block 84 in Yemen, the
Contractor (Joint Venture Partners) has a minimum financial commitment of $4.1
million ($1.4 million to TransGlobe) for the signature bonus and a $16.0 million
($5.3 million to TransGlobe) first exploration period work program, consisting
of seismic acquisition and four exploration wells. The first, 42-month
exploration period will commence if the PSA is finalized and ratified by the
Government of Yemen.

Pursuant to the August 18, 2008 asset purchase agreement for a
25% financial interest in eight development leases on the West Gharib Concession
in Egypt, the Company has committed to paying the vendor a success fee to a
maximum of $7.0 million if incremental reserve thresholds are reached in the
East Hoshia (up to $5.0 million) and South Rahmi (up to $2.0 million)
development leases, to be evaluated annually. As at December 31, 2009, no
additional fees are due in 2010.

In the normal course of its operations, the Company may be
subject to litigations and claims. Although it is not possible to estimate the
extent of potential costs, if any, management believes that the ultimate
resolution of such contingencies would not have a material adverse impact on the
results of operations, financial position or liquidity of the Company.

OPERATING RESULTS FROM DISCONTINUED OPERATIONS

The following applies to the Canadian operations only, the sale
of which closed April 30, 2008. The Canadian operations and results have been
accounted for as discontinued operations.

|                                            |  | 2009  |  |  | 2008  | 
|------------------------------------------- |  | ----- |  |  | ----- | 
|(000s, except per
      Boe amounts)        |  | **$** |  |  | $/Boe | 
|Net operating results                       |  |       |  |  |       | 
|Oil sales                                   |  | -     |  |  | -     | 
|Gas sales ($ per Mcf)                       |  | -     |  |  | -     | 
|NGL sales                                   |  | -     |  |  | -     | 
|Other sales                                 |  | -     |  |  | -     | 
|                                            |  | -     |  |  | -     | 
|Royalties and other                         |  | -     |  |  | -     | 
|Operating
      expenses                    |  | -     |  |  | -     | 
|                                            |  |       |  |  |       | 
|Netback                                     |  | -     |  |  | -     | 
|                                            |  |       |  |  |       | 
|Depletion,
      depreciation and accretion |  | -     |  |  | -     | 
|                                            |  |       |  |  |       | 
|Future income
      taxes                   |  | -     |  |  | -     | 
|                                            |  |       |  |  |       | 
|Capital
      expenditures                  |  | -     |  |  |       | 

OFF BALANCE SHEET ARRANGEMENTS

The Company has certain lease agreements, all of which are
reflected in the Commitments and Contingencies table, which were entered into in
the normal course of operations. All leases have been treated as operating
leases whereby the lease payments are included in operating expenses or G&A
expenses depending on the nature of the lease. No asset or liability value has
been assigned to these leases in the balance sheet as of December 31, 2009.

MANAGEMENT STRATEGY AND OUTLOOK FOR 2010

The 2010 outlook provides information as to managements
expectation for results of operations for 2010. Readers are cautioned that the
2010 outlook may not be appropriate for other purposes. The Companys expected
results are sensitive to fluctuations in the business environment and may vary
accordingly. This outlook contains forward-looking statements that should be
read in conjunction with the Companys disclosure under Forward-Looking
Statements included on the first page of the MD&A.

2010 Outlook Highlights

- Production is expected to average between 10,000 Bopd and 10,500 Bopd, a
  14% increase over the 2009 average production;
- Exploration and development spending is budgeted to be $63.0 million, an
  77% increase from 2009 (allocated 77% to Egypt and 23% to Yemen) funded by
  funds flow from operations and cash on hand; and
- Using the mid-point of production expectations and an average oil price
  assumption for the year of $65.00/Bbl for Dated Brent oil, funds flow from
  operations is expected to be $67.0 million.

2010 Production Outlook

Production for 2010 is expected to average between 10,000 Bopd
and 10,500 Bopd, representing a 14% increase over the 2009 average production of
8,980 Bopd. This target includes increased production from the Hana, Hana West,
Hoshia, Arta and East Arta in Egypt, and production from the development
drilling program on Block S-1 in Yemen. Production from Egypt is expected to
average approximately 7,550 Bopd during 2010, with the balance of approximately
2,700 Bopd coming from the Yemen properties.

|2009 | 11
|---- | --

---

| | MANAGEMENTS DISCUSSION AND
      ANALYSIS
| | ------------------------------------------

|Production Forecast    |  |                |  |  |                   |  |  |                 | 
|---------------------- |  | -------------- |  |  | ----------------- |  |  | --------------- | 
|                       |  | 2010 Guidance  |  |  | 2009
      Actual |  |  | %
      Change* | 
|                       |  |                |  |  |                   |  |  |                 | 
|Barrels of oil per day |  | 10,000- 10,500 |  |  | 8,980             |  |  | 14              | 

* % growth based on mid-point of outlook.

2010 Funds Flow From Operations Outlook

This outlook was developed using the above production forecast
and a Dated Brent oil price of $65.00/Bbl.

2010 Funds Flow From Operations Outlook

|($ million)                  |  | 2010 Guidance |  |  | 2009
      Actual |  |  | %
      Change* | 
|---------------------------- |  | ------------- |  |  | ----------------- |  |  | --------------- | 
|Funds flow from operations** |  | 67.0          |  |  | 45.1              |  |  | 49              | 

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

Due in part to higher expected prices and higher production,
funds flow from operations is expected to increase by 49% in 2010. One of the
key factors in the increased funds flow in 2010 is due to a better expected oil
price differential, to average Dated Brent benchmark price, in Egypt. In 2009
the Company has been experiencing Egypt price differentials, to average Dated
Brent, in the 24% range, while in 2010 we expect these differentials to narrow
to the 10% range. Variations in production and commodity prices during 2010
could significantly change this outlook. An increase in the oil price of
$10.00/Bbl would increase anticipated funds flow by approximately $10.0 million
for the year, while a $10.00/Bbl decrease in the oil price would result in
anticipated funds flow decreasing by approximately $7.0 million.

|2010 Capital Budget |  |      | 
|------------------- |  | ---- | 
|                    |  |      | 
|($ million)         |  | 2010 | 
|Egypt               |  | 48.7 | 
|Yemen               |  | 14.1 | 
|Corporate           |  | 0.2  | 
|                    |  |      | 
|Total               |  | 63.0 | 

The 2010 capital program is split 68:32 between development and
exploration, respectively. The Company plans to participate in 37 wells in 2010.
It is anticipated the Company will fund its entire 2010 capital budget from
funds flow and working capital. The Company has designed its 2010 budget to be
flexible allowing spending to be adjusted as commodity prices change and
forecasts are reviewed.

RISKS

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

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

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

Financial Risks

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

The global financial crisis, which developed in late 2008 and
continued throughout 2009, has increased the risk associated with timely access
to debt, capital, and banking markets, along with market instability which may
have an impact on TransGlobes ability to obtain additional funding in the
future. To mitigate this risk, management has been adjusting operational and
financial risk strategies and continues to monitor the 2010 capital budget and
the Companys long-term plans. The Company has designed its 2010 budget to be
flexible allowing spending to be adjusted as commodity prices change and
forecasts are reviewed.

|2009 | 12
|---- | --

---

|MANAGEMENTS DISCUSSION AND ANALYSIS | 
|------------------------------------ | 

Market Risk

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

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

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

b) Foreign currency exchange riskAs the
Companys business is conducted primarily in U.S. dollars and its financial
instruments are primarily denominated in U.S. dollars, the Companys exposure to
foreign currency exchange risk relates to certain cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities denominated in
Canadian dollars and Egyptian pounds. The Company does not utilize derivatives
to manage this risk.

When assessing the potential impact of foreign currency
exchange risk, the Company believes 10% volatility is a reasonable measure. The
Company estimates that a 10% increase or a 10% decrease in the value of the
Canadian dollar against the U.S. dollar would result in a decrease to net income
of $0.1 million or an increase to net income of $0.1 million, respectively, for
the year ended December 31, 2009. The Company maintains Egyptian pound cash
balances to offset the Egyptian pound liabilities, and therefore, the Company
believes its exposure to Egyptian pound fluctuations is not significant.

c) Interest rate risk 
Fluctuations in
interest rates could result in a change in the amount the Company pays to
service variable-interest, U.S.-dollar-denominated debt. No derivative contracts
were entered into during 2009 to mitigate this risk. When assessing interest
rate risk applicable to the Companys variable-interest, U.S.-dollar-denominated
debt, the Company believes 1% volatility is a reasonable measure. The effect of
interest rates increasing by 1% would decrease the Companys net income by $0.5
million for the year ended December 31, 2009. The effect of interest rates
decreasing by 1% would increase the Companys net income by $0.6 million for
year ended December 31, 2009.

Credit Risk

Credit risk is the risk of loss if counterparties do not
fulfill their contractual obligations. The Companys exposure to credit risk
primarily relates to accounts receivable, the majority of which are in respect
of oil operations and derivative commodity contracts. The Company is and may in
the future be exposed to third-party credit risk through its contractual
arrangements with its current or future joint venture partners, marketers of its
petroleum production and other parties, including the governments of Egypt and
Yemen. Significant changes in the oil industry, including fluctuations in
commodity prices and economic conditions, environmental regulations, government
policy, royalty rates and other geopolitical factors, could adversely affect the
Companys ability to realize the full value of its accounts receivable. The
Company currently has, and historically has had, a significant account
receivable outstanding from the Government of Egypt. While the Government of
Egypt does make regular payments on these amounts owing, the timing of these
payments has historically been longer than normal industry standard. While the
Company has no reason to believe that it will not collect this account
receivable in full, there can be no assurance that this will occur. In the event
the government of Egypt fails to meet its obligations, or other third-party
creditors fail to meet their obligations to the Company, such failures could
individually or in the aggregate have a material adverse effect on the Company,
its cash flow from operating activities and its ability to conduct its ongoing
capital expenditure program. To mitigate this risk, the Company has entered into
an insurance program on a portion of the receivable balance. The Company
assesses the need for this program on a monthly basis. 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 2009 production to one
purchaser. In Yemen, the Company sold all of its 2009 Block 32 production to one
purchaser and all of its 2009 Block S-1 production to one purchaser. Management
considers such transactions normal for the Company and the international oil
industry in which it operates.

Liquidity Risk

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

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

|2009 | 13
|---- | --

---

| | MANAGEMENTS DISCUSSION AND
      ANALYSIS
| | ------------------------------------------

Operational Risks

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

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

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

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

Safety, Environmental and Regulatory Risks

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

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

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

Political Risks

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

Oil and Gas Reserves

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

Full Cost Accounting for Oil and Gas Activities

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

|2009 | 14
|---- | --

---

|MANAGEMENTS DISCUSSION AND ANALYSIS | 
|------------------------------------ | 

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

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

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

Production Sharing Agreements

International operations conducted pursuant to production
sharing agreements (PSAs) are reflected in the Consolidated Financial Statements
based on the Companys working interest in such operations. Under the PSAs, the
Company and other 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.

Derivative Financial Instruments and Hedging Activities

a) Financial Instruments 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.

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, 2009. The Company has elected to classify all derivatives and
embedded derivatives as held-for trading, which are measured at fair value with
changes being recognized in net income.

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

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

|2009 | 15
|---- | --

---

| | MANAGEMENTS DISCUSSION AND
      ANALYSIS
| | ------------------------------------------

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

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

CHANGES IN ACCOUNTING POLICIES

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 is
applicable to financial statements relating to fiscal years beginning on or
after October 1, 2008. Accordingly, the Company adopted the new standards for
its fiscal year beginning January 1, 2009. It establishes standards for the
recognition, measurement, presentation and disclosure of goodwill subsequent to
its initial recognition and of intangible assets by profit-oriented enterprises.
Standards concerning goodwill are unchanged from the standards included in the
previous Section 3062. The adoption of this Standard did not have an impact on
the Consolidated Financial Statements.

Credit Risk and Fair Value of Financial Assets and
Liabilities

In January 2009, the CICA issued EIC-173, Credit Risk and
the Fair Value of Financial Assets and Financial Liabilities. The EIC
provides guidance on how to take into account credit risk of an entity and
counterparty when determining the fair value of financial assets and financial
liabilities, including derivative instruments. This standard is effective for
the Companys fiscal periods ending on or after January 20, 2009 with
retrospective application. The application of this EIC did not have a material
effect on the Companys Consolidated Financial Statements.

Financial Instruments

Effective July 1, 2009, the Company prospectively adopted an
amendment to CICA 3855, Financial Instruments  Recognition and
Measurement, in relation to embedded derivatives. This amendment prohibits
the reclassification of a financial asset out of the held-for-trading category
when the fair value of the embedded derivative in a combined contract cannot be
reasonably measured. The adoption of the amendments to this Standard did not
have an impact on the Consolidated Financial Statements.

In June 2009, the CICA issued amendments to CICA Handbook
Section 3862, Financial Instruments - Disclosures. The amendments include
enhanced disclosures related to the fair value of financial instruments and the
liquidity risk associated with financial instruments. The amendments are
effective for annual financial statements for fiscal years ending after
September 30, 2009. The amendments are consistent with recent amendments to
financial instrument disclosure standards in International Financial Reporting
Standards (IFRS). The Company included these additional disclosures in its
Consolidated Financial Statements for the year ending December 31, 2009.

In August 2009, the CICA issued amendments to CICA 3855,
Financial Instruments  Recognition and Measurement,in relation to the
impairment of assets. The amendments are effective for annual financial
statements for fiscal years beginning on or after November 1, 2008. The adoption
of the amendments to this standard did not have an impact on the Consolidated
Financial Statements.

New Accounting Standards

a) Business Combinations

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

b) Non-Controlling Interests

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

|2009 | 16
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|MANAGEMENTS DISCUSSION AND ANALYSIS | 
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c) International Financial Reporting Standards (IFRS)

On February 13, 2008 the Canadian Accounting Standards Board
has confirmed that effective for interim and annual financial statements related
to fiscal years beginning on or after January 1, 2011, IFRS will replace
Canadas current GAAP for all publicly accountable profit-oriented enterprises.
The adoption of IFRS will require the restatement, for comparative purposes, of
amounts reported by the Company for the year ended December 31, 2010, including
the opening balance sheet as at January 1, 2010.

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

TransGlobes IFRS transition project consists of three key
phases; the diagnostic assessment phase, the design, planning and solution
development phase and finally the implementation phase.

In 2009, the Company made significant progress on its IFRS
transition project. The Company is completing the diagnostic assessment phase in
which the project team has performed comparisons of the differences between
Canadian GAAP and IFRS, analyzed accounting policy alternatives and drafted its
preliminary IFRS accounting policies. The project team has also presented
preliminary accounting assessments on key IFRS transition issues for the
steering committees initial review and evaluation. These assessments include
Exploration for and Evaluation of Mineral Resources, Property, Plant and
Equipment, Impairments of Assets, Intangible Assets, Leases, Revenue,
Inventories, Effects of changes in Foreign Exchange Rates, Borrowing Costs,
Interest in Joint Ventures, Earnings per Share, Provisions, Contingent
Liabilities and Contingent Assets and Employee Benefits. The Company continues
to perform assessments on the remaining IFRS transition issues and has commenced
analysis of IFRS financial statement presentation and disclosure requirements.

Concurrently, the project team is working on the design,
planning and solution development phase. In this phase, the focus is on
determining the specific qualitative and quantitative impact the application of
IFRS requirement has on the Company. The project team members continue to work
with representatives from the various operational areas to develop
recommendations including first- time adoption exemptions available upon initial
transition to IFRS. The results from the consultations with the various
operational areas are used to draft accounting policies. One of the sections in
each of the draft accounting policy is the disclosure section which includes the
financial statements disclosure as required by IFRS. First-time adoption
exemptions were analyzed by the project team and a schedule has been presented
for the steering committee to review and evaluate the exemptions.

A detailed implementation plan and timeline has been developed,
which also includes the development of a training plan.

In the first half of 2010, the Company will move into the
implementation phase of its project and will work on the development of
processes and systems to ensure that IFRS comparative data is captured, and to
position it for reporting under IFRS in 2011.

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

Expected Accounting Policy Impacts

The Company has determined that the most significant impact of
IFRS conversion is to property and equipment (PP&E). IFRS does not
prescribe specific oil and gas accounting guidance other than for costs
associated with the exploration and evaluation phase. The Company currently
follows full cost accounting as prescribed in Accounting Guideline 16, Oil
and Gas Accounting  Full Cost. Transition to IFRS may have a significant
impact on how the Company accounts for costs pertaining to oil and gas
activities:

Pre-exploration and evaluation costs  which are expenditures
incurred prior to obtaining the legal right to explore. Currently the Company
capitalizes these costs and depletes them at the country level. Under IFRS these
costs must be expensed when incurred.

Exploration and evaluation (E&E) costs - Currently these
costs are included in the PP&E balance on the Consolidated Balance Sheet,
and include undeveloped land and costs relating to pre-commercial exploration of
development. These costs are currently not being depleted. Under IFRS these
costs will be moved out of the PP&E balance, and reported separately as
E&E assets on the balance sheet. E&E costs will not be depleted but
assessed for impairment and unrecoverable costs associated with a specific area
will be expensed. When a project is determined to be technically feasible and
commercially viable, the costs will be moved to PP&E and depletion will
commence.

Development costs  will continue to be capitalized as
PP&E, however depletion will no longer be calculated at the country level
but on an area level. TransGlobe has not finalized the areas or the inputs to be
used in the deletion calculation. Also the level at which impairment tests are
performed and the impairment testing methodology will differ under IFRS.

IFRS conversion will also result in other impacts, some of
which may be significant in nature. The impact on the Companys Consolidated
Financial Statements cannot reasonably be determined at this time.

|2009 | 17
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|MANAGEMENTS DISCUSSION AND ANALYSIS | 
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IFRS 1, First-Time Adoption of International Financial
Reporting Standards, permits first time adopters of IFRS a number of
exemptions. The Company is in the process of analyzing the full extent these
exemptions. The Company expects to utilize the following exemptions, subject to
final approval:

Business combinations exemption, which allows for an
implementation of the IFRS business combination rules on a prospective basis,
therefore, business combinations entered into prior to January 1, 2010 will not
be retrospectively restated.

Foreign currency translation adjustments classified in
accumulated other comprehensive income will be deemed zero and reclassified to
retained earnings on January 1, 2010, and the retrospective restatement of
foreign currency translation under IFRS will not be performed.

Share-based payment transactions, TransGlobe intends to use
this exemption under which stock options that vest prior to January 1, 2010 are
not required to be retrospectively restated.

In July 2009, IASB approved an exposure draft which allows
additional exemptions for entities adopting IFRS for the first time. The Company
expects to utilize the deemed cost for oil and gas asset exemption which would
allow the Company to allocate their oil and gas asset balance, as determined
under full cost accounting, to the IFRS categories of exploration and evaluation
assets and development and producing properties on a cost centre basis. This
exemption would relieve the Company from significant adjustments resulting from
retrospective adoption of IFRS.

Any changes in accounting policies required to address
reporting and first-time adoption of IFRS will be made in consideration of the
integrity of internal control over financial reporting and disclosure controls
and procedures. Throughout 2010, TransGlobe will work to ensure that all changes
in accounting polices relating to IFRS have controls and procedures to ensure
that information is captured appropriately.

TransGlobe has completed its assessment of IT systems
requirements in order to ready the Company for IFRS reporting. The IT system
modifications will not be significant and will allow for reporting under both
Canadian GAAP and IFRS in 2010.

DISCLOSURE CONTROLS AND PROCEDURES

As of December 31, 2009, an evaluation was carried out under
the supervision, and with the participation, of the Companys management,
including the Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the Companys disclosure controls and procedures. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that as of the end of the fiscal year, the design and operation of these
disclosure controls and procedures were effective to ensure that information
required to be disclosed by the Company in its annual filings is recorded,
processed, summarized and reported within the specified time periods.

INTERNAL CONTROLS OVER FINANCIAL REPORTING

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

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

Management has assessed the effectiveness of the Companys
internal control over financial reporting based on the Committee of Sponsoring
Organizations of the Treadway Commission framework on Internal Control 
Integrated Framework.Based on this assessment, management concluded that
the Companys internal control over financial reporting was effective as at
December 31, 2009.

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

|2009 | 18
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