<PAGE>   1
 
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                    U.S. SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549
                      ------------------------------------
                                  FORM 10-KSB
(Mark One)
    [X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
        OF 1934 (FEE REQUIRED)
                  For the fiscal year ended September 30, 1997
 
    [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
        ACT OF 1934 (NO FEE REQUIRED)
 
              For the transition period from          to
 
                         Commission file number 0-11378
 
                         TRANSGLOBE ENERGY CORPORATION
                 (Name of Small Business Issuer in Its Charter)
 
<TABLE>
<S>                                           <C>
               BRITISH COLUMBIA                                    N/A
 State or other Jurisdiction of Incorporation      (I.R.S. Employer Identification No.)
                or Organization)
</TABLE>
 
                 1450, 505 - 3 STREET S.W., CALGARY, AB T2P 3E6
             (Address of Principal Executive Office)  (Postal Code)
                                  403-264-9888
                (Issuer's Telephone Number, Including Area Code)
         Securities registered under Section 12(b) of the Exchange Act
 
<TABLE>
<S>                                           <C>
             TITLE OF EACH CLASS                          NAME OF EACH EXCHANGE
                     N/A                                   ON WHICH REGISTERED
</TABLE>
 
         Securities registered under Section 12(g) of the Exchange Act:
                      ------------------------------------
                         COMMON SHARES -- NO PAR VALUE
                                (Title of Class)
 
    Check whether the issue: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [ ]
No [X].
 
    Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10 KSB [ ].
 
    Issuer's revenues for its most recent fiscal year were $1,502,395.
 
    The aggregate market value of the voting stock held by non-affiliates
computed by reference to the average bid and asked prices of the stock, as of
December 9, 1997 was $18,173,618.
 
     ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS
    Check whether the issuer has filed all documents and reports required to be
filed by section 1, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [ ] No [ ]
 
                    APPLICABLE ONLY TO CORPORATE REGISTRANTS
    As of December 9 1997 18,181,377 common shares were outstanding.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
    If the following documents are incorporated by reference, briefly describe
the part of the Form 10-KSB (e.g., part I, Part II, etc.) into which the
document is incorporated: (1) any annual report to security holders; (2) any
proxy or information statement; and (3) any prospectus filed pursuant to Rule
424(b) or (c) of the Securities Act of 1933 ("Securities Act"). The listed
documents should be clearly described for identification purposes (e.g., annual
report to security holders for fiscal year ended December 24, 1990). NONE
 
    Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
 
================================================================================
<PAGE>   2
 
                                     PART I
 
ITEM 1.  BUSINESS
 
GENERAL
 
     TransGlobe Energy Corporation (referred to herein as "TransGlobe" or the
"Company") and its wholly owned subsidiaries TransGlobe Oil and Gas Corporation,
TransGlobe International (Holdings) Inc., (referred to herein as "TransGlobe
International") and TG Holdings Yemen Inc. ("TG Yemen") are primarily engaged in
the exploration for, development, and production of, oil and gas in New Mexico
and Montana in the United States and the Republic of Yemen.
 
     The Company was organized under variations of the name "Dusty Mac" in 1968
as a mineral exploration and extraction venture. In 1992 the company entered
into the oil and gas exploration and development field. In 1995 the Company was
renamed "TransGlobe Energy Corporation" and its U.S. subsidiary was renamed
"TransGlobe Oil and Gas Corporation". As of December 9, 1997 the Company was not
under any form of bankruptcy, receivership or similar proceeding and there has
not been any material reclassification, merger, consolidation not in the
ordinary course of business. The Company has made significant acquisitions in
the fiscal year ended September 30, 1997 as described herein.
 
     All of the Company's U.S. oil and gas properties are held through its
subsidiary -- "TransGlobe Oil and Gas Corporation," -- a Washington State
Corporation ("TransGlobe US"). The Company operates in the Madera field, New
Mexico; and participates as a working interest partner in the East Meridian
lands in Montana. During the year, October 1, 1996 to September 30, 1997
("fiscal 1997"), TransGlobe participated in the drilling of five wells on the
East Meridian lands resulting in four oil wells and one dry and abandoned well.
 
     The Company incorporated TransGlobe International and TG Yemen under the
laws of Turks and Caicos Islands during fiscal 1997. The Company's oil and gas
interests located in the Republic of Yemen have been transferred to TG Yemen. A
more detailed description of the oil and gas properties can be found under Item
2 -- Properties.
 
     In addition to its oil and gas properties, the Company holds the Barstow
silver claim, located in Barstow, California.
 
     The Company owns no oil or gas properties in Canada. The Company does not
refine any crude oil, or market at retail, any oil or petroleum products. The
Company does not own any drilling rigs, and generally, all of its drilling
activities are performed by independent drilling contractors on a contract
basis.
 
     All dollar amounts in this document are expressed in United States dollars
unless otherwise noted.
 
     As of September 30, 1997 the Company's net proved reserves totalled 145,719
barrels of oil and natural gas liquids and 2,213 MMcf of natural gas, which had
an after tax present value at constant prices of $4,659,000 (see ("Reserves" and
"Estimated Future Revenues and Present Worth"). The Proved Reserves are
primarily found in two Madera wells, located in New Mexico, and four wells
producing on the East Meridian lands, located in Montana. TransGlobe U.S. holds
mineral rights on undrilled lands in New Mexico, Texas, Colorado, Wyoming, and
Montana. A summary table of the Company's land position is found under
"Productive Wells and Acreage".
 
     In January, 1997, the Company entered into a farm-out agreement with Clyde
Expro plc ("Clyde"), and Oranje-Nassau Yemen B.V. ("Oranje-Nassau") concerning
an exploration concession, Block 32, in the Republic of Yemen. The Company has
since participated in the acquisition of seismic data and the drilling of three
exploratory wells in Block 32.
 
     The Company entered into a Memorandum of Understanding (MOU) in August
1997, as a first step towards a Production Sharing Agreement ("PSA") on an
exploration block, Block S1, in the Republic of Yemen. The MOU spells out all
the major financial terms of the PSA. The Company is presently in discussions
with the Ministry of Oil and Mineral Resources (the "MOMR") in the Republic of
Yemen and concluded negotiations on the PSA during December 1997.
 
                                        2
<PAGE>   3
 
     During 1996, the Company acquired a 15 percent equity interest in IPC
International Power Corporation ("IPC") for $750,000. In May 1997, the Company
sold its investment in IPC for proceeds of $1,012,500, resulting in a gain of
$262,500 to the Company.
 
GENERAL CONDITIONS RELATING TO OIL AND GAS EXPLORATION AND PRODUCTION OPERATIONS
 
     The Company's operations are subject to all the risks normally incident to
the exploration for and production of oil and gas including geological risks,
operating risks, political risks, development risks, marketing risks, and
logistical risks of operating in Yemen.
 
INDUSTRY RISKS
 
     The Company is subject to normal industry risks due to the relatively small
size of the Company, its low level of cash flow and lack of earnings to date,
and the nature of the Company's involvement in the exploration for, and the
acquisition, development and production of, oil and natural gas. Exploration for
oil and natural gas involves many risks, which even a combination of experience,
knowledge and careful evaluation may not be able to overcome. There is no
assurance that further commercial quantities of oil and natural gas will be
discovered by the Company.
 
     The Company's operations are subject to the risks normally incident to the
operation and development of oil and natural gas properties and the drilling of
oil and natural gas wells, including encountering unexpected formations or
pressures, premature decline of reservoirs, invasion of water into producing
formations, blow-outs, cratering, fires and oil spills, all of which could
result in personal injuries, loss of life and damage to the property of the
Company and others. Although the Company maintains insurance, in amounts and
coverages which its considers adequate, in accordance with customary industry
practice, the Company is not fully insured against all of these risks, nor are
all such risks insurable, and, as a result, liability of the Company arising
from these risks could have material adverse effect upon its financial
condition.
 
     The operations and earnings of the Company may be affected from time to
time in varying degrees by political developments and laws and regulations, such
as forced divestiture of assets; restrictions on production, imports and
exports; price controls, tax increases and retroactive tax claims;
expropriations of property; and cancellation of contract rights. Both the
likelihood of such occurrences and their overall effect upon the Company can
vary greatly and are not predictable.
 
     The marketability and price of oil and natural gas which may be acquired or
discovered by the Company may be affected by numerous factors beyond the control
of the Company. The Company may be affected by the differential between the
price paid by refiners for light, quality oil and various grades of oil produced
by the Company. The Company is subject to market fluctuations in the prices of
oil and natural gas, deliverability uncertainties related to the proximity of
its reserves to pipeline and processing facilities and extensive government
regulation relating to prices, taxes, royalties, land tenure, allowable
production, the export of oil and natural gas and many other aspects of the oil
and natural gas business. The Company's operations will be further affected by
the remoteness of, and restrictions on access to, certain properties as well as
climatic conditions. The Company is also subject to compliance with federal,
state and local laws and regulations controlling the discharge of materials into
the environment or otherwise relating to the protection of the environment. The
Company is not aware of present material liability related to environmental
matters. However, it may, in the future, be subject to liability for
environmental offenses of which it is presently unaware.
 
EXPLORATION AND DEVELOPMENT
 
     The Company's participation in Block 32 and Block S-1 in Yemen, represent a
major undertaking. The exploration program in Yemen is a high-risk venture with
uncertain prospects for success. There are no assurances that commercial amounts
of oil and natural gas will be discovered in either Block 32 or Block S-1. So
far the five wells drilled by the Contractors in Block 32 have been dry holes.
There are eight wells on Block S-1 and although some of the wells have
encountered shows of hydrocarbons, none have produced commercial quantities.
 
                                        3
<PAGE>   4
 
     Even if commercial amounts of oil are discovered in Block S-1 or Block 32,
development of it, including the required pipeline and production facilities,
would take several years. The Company's development plan would likely involve
drilling several wells in an attempt to demonstrate to financiers an economic
reserve size exists, and contingent on financing, pipelines and production
facilities would be constructed to produce the oil. The assumptions in the
Company's development plan are based on the experience of management and the
historical operational experience of other companies working in the vicinity.
The assumptions may not be accurate in the future and therefore the project
economics may be adversely affected. The harsh operating climate, adverse
topography, or unanticipated drilling or logistical problems may cause cost
overruns or may make a development project uneconomic. Future development of
either Block 32 or Block S-1 will require additional financing which may not be
available or if available may not be on favourable terms.
 
     The operations and earnings of the Company and its subsidiaries are also
affected by local, regional and global events or conditions that affect supply
and demand for oil and natural gas. These events or conditions are generally not
predictable and include, among other things, the development of new supply
sources; supply disruptions; weather; international political events;
technological advances; and the competitiveness of alternative energy sources or
product substitutes.
 
TITLE TO PROPERTIES
 
     The Company's interests in the U.S. producing properties and non-producing
properties are in the form of direct or indirect interests in leases. Such
properties are subject to customary royalty interests generally contracted for
in connection with the acquisition of properties, liens incident to operating
agreements, liens for current taxes and other burdens and mineral encumbrances
and restrictions. The Company believes that none of these burdens materially
interferes with the use of such properties in the operation of the Company's
business.
 
     As is customary in the oil and gas industry, little or no investigation of
title is made at the time of acquisition of undeveloped properties (other than a
preliminary review of local minerals records). Investigations are generally
made, including, in most cases, receiving title opinion of local counsel, before
the commencement of drilling operations. A thorough examination of title has
been performed with respect to substantially all of the Company's producing
properties in the United States and the Company believes that it has generally
satisfactory title to such properties.
 
     The Company participates, in Yemen and the United States, with industry
partners with access to greater resources from which to meet their joint venture
capital commitments. Should the Company be unable to meet its commitments, the
joint venture partners may assume some or all of the Company's deficiency and
thereby assume a pro-rata portion of the Company's interest in production from
the joint venture lands. The Company is not a majority interest owner in many of
its properties and does not have sole control over the future course of
development in those properties.
 
EMPLOYEES
 
     At September 30, 1997 the Company had three full time and four part time
employees or independent consultants. All other personnel engaged in the
Company's offices are contracted on a part time, retainer or day rate basis. The
Company employs the services of consulting geologists and engineers as well as
oil field personnel as needed. In February 1997, the Company hired Mr. C. S.
(Juneyt) Tirmandi, as Chief Financial Officer. Mr. Tirmandi, a Chartered
Accountant and Chartered Business Valuator, has over twenty one years of
financial experience, eleven of which were directly acquired in the oil and gas
industry. In September 1997, the Company hired Dr. James Bambrick, a
geophysicist, who has over twenty years of experience in the oil and gas
industry.
 
COMPETITION
 
     The Company encounters strong competition from other independent operators
and from major oil companies in acquiring properties suitable for development,
in contracting for drilling equipment and in securing trained personnel. Many of
these competitors have financial resources and staffs substantially larger
 
                                        4
<PAGE>   5
 
than those available to the Company. The availability of a ready market for oil
and gas discovered by the Company depends on numerous factors beyond its
control, including the extent of production and imports of oil and gas, the
demand for its products from the United States and Republic of Yemen, the
proximity and capacity of natural gas pipelines and the effect of state or
federal regulations.
 
GOVERNMENT REGULATION
 
     In the areas where the Company conducts activities there are statutory laws
and regulations governing the activities of oil and gas companies. These laws
and regulations allow administrative agencies to govern the activities of oil
companies in the development, production and sale of both oil and gas. Changes
in these laws and regulations may substantially increase or decrease the costs
of conducting any exploration or development project. The Company believes that
its operations comply with all applicable legislation and regulations and that
the existence of such regulations have no more restrictive effect on the
Company's method of operations than on similar companies in the industry.
 
POLITICAL RISKS RELATING TO YEMEN
 
     Beyond the risks inherent in the oil and gas industry, the Company is
subject to additional risks resulting from doing business in Yemen. While the
Company has attempted to reduce many of these risks through agreements with the
Government of Yemen and others, no assurance can be given that such risks have
been mitigated. These risks can involve matters arising out of the evolving laws
and policies of Yemen, the imposition of special taxes or similar charges, oil
export or pipeline restrictions, foreign exchange fluctuations and currency
controls, the unenforceability of contractual rights or the taking of property
without fair compensation, restrictions on the use of expatriates in the
operations and other matters.
 
     There can be no assurance that the agreements entered into with the
Government of Yemen and the MOMR and others are enforceable or binding in
accordance with TransGlobe's understanding of their terms or that if breached,
the Company would be able to find a remedy. The Company bears the risk that a
change of government could occur and a new government may void the agreements,
laws and regulations that the Company is relying on. Operations in Yemen are
subject to risks due to the harsh climate, difficult topography and the
potential for social, political, economic, legal and financial instability.
 
     PROJECTIONS, ESTIMATES AND DESCRIPTIONS OF THE COMPANY'S PLANS AND
OBJECTIVES INCLUDED OR INCORPORATED IN THIS REPORT ARE FORWARD-LOOKING
STATEMENTS. ACTUAL FUTURE PROJECT DATES, PRODUCTION RATES, CAPITAL EXPENDITURES,
COSTS AND BUSINESS PLANS COULD DIFFER MATERIALLY DUE TO, AMONG OTHER THINGS, THE
OUTCOME OF COMMERCIAL NEGOTIATIONS; RESULTS OF DRILLING ACTIVITIES; CHANGES IN
OPERATING CONDITIONS AND COSTS; TECHNICAL DIFFICULTIES; AND OTHER FACTORS
DISCUSSED ABOVE AND ELSEWHERE IN THIS REPORT.
 
ITEM 2.  DESCRIPTION OF PROPERTY
 
     The Company operates a natural gas and natural gas liquids producing
property in the Madera field in south-eastern New Mexico. During fiscal 1997,
the Company participated in the drilling of five wells in the East Meridian
field, in Montana which resulted in four producing oil wells. Productive wells
and acreage as of December 9, 1997 were as follows:
 
<TABLE>
<CAPTION>
                                                                   GROSS                NET
                                                              ----------------    ---------------
                                                                OIL       GAS      OIL       GAS
                                                              -------    -----    ------    -----
<S>                                                           <C>        <C>      <C>       <C>
Productive wells*..........................................         6        3       1.3      1.3
Developed acreage**........................................     2,600      680       809      380
Undeveloped acreage***.....................................   123,276    9,467    28,006    2,842
                                                              -------    -----    ------    -----
</TABLE>
 
---------------
 
A "gross" acre or gross well is an acre or well in which an interest is owned.
The number of gross acres or wells is the total number of acres or well in which
an interest is owned. A "net" acre or well is deemed to exist when the sum of
the fractional interests owned in gross acres or wells equals one. The number of
net acres or wells is
 
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<PAGE>   6
 
the sum of fractional working interests owned by the Company in gross acres or
wells, expressed as whole numbers and fractions thereof.
 
*   "Productive wells" are wells producing oil or gas.
 
**  "Developed acreage" is acreage assignable to productive wells.
 
*** "Undeveloped acreage" refers to lease acres on which wells have not been
     drilled or completed to a point that would permit the production of
     commercial quantities of oil and gas regardless of whether or not such
     acreage contains proved reserves.
 
PRODUCTION RESULTS:
 
     The Company's average production, sales price and average production
(lifting) cost per equivalent barrel of oil for the three years ended September
30, 1997 were as follows:
 
<TABLE>
<CAPTION>
                                                                                            AVERAGE
                                                                                           PRODUCTION
                                                      PRODUCTION         AVERAGE PRICE      COST PER
                                                   -----------------   -----------------   EQUIVALENT
FISCAL YEAR ENDED SEPTEMBER 30                      OIL       GAS       OIL       GAS      BARREL***
-------------------------------------------------  ------   --------   ------   --------   ----------
                                                   (Bbl*)   (Mmcf**)   (Bbl*)   (Mmcf**)
<S>                                                <C>      <C>        <C>      <C>        <C>
1997.............................................  17,396      280     $20.23    $ 2.67      $ 2.81
1996.............................................  15,330      400     $19.81    $ 1.85      $ 2.44
1995.............................................  15,200      388     $17.42    $ 1.37      $ 1.86
</TABLE>
 
---------------
 
*   Barrels ("Bbl")
 
**  Million cubic feet ("Mmcf")
 
*** Calculated on the basis of six mcf of natural gas for each barrel of oil and
     natural gas liquids.
 
DRILLING RESULTS:
 
     Below is a summary of the Company's drilling activity for the three years
ended September 30, 1997.
 
<TABLE>
<CAPTION>
                                                                                              REPUBLIC OF
                                                                   UNITED STATES                 YEMEN
                                                        -----------------------------------   -----------
                                                          EXPLORATORY        DEVELOPMENT      EXPLORATORY
                                                        ----------------   ----------------   -----------
WELLS DRILLED (GROSS) FISCAL YEAR                       PRODUCTIVE   DRY   PRODUCTIVE   DRY       DRY
------------------------------------------------------  ----------   ---   ----------   ---   -----------
<S>                                                     <C>          <C>   <C>          <C>   <C>
1997..................................................       4        1         0        0         2
1996..................................................       0        3         0        1         0
1995..................................................       1        1         0        0         0
</TABLE>
 
     Subsequent to year end, the Company drilled one dry hole in the East
Meridian lands in Montana. The third well in Block 32 in Yemen was being drilled
as of December 23, 1997.
 
UNITED STATES
 
EAST MERIDIAN, MONTANA
 
     The East Meridian lands comprise an exploration program focused in the
western portion of the Williston Basin in Richland County, Montana. This
prospect consists of 107,820 acres of leases (24,833 net acres) that cover an
area that measures approximately 12 miles East to West and 30 miles South to
North, covering approximately 340 square miles. The area has been subdivided
into two blocks of approximately equal size (Block A and Block B). TransGlobe
has a 25% working interest (a 20% net revenue interest) in the prospect,
comprising 123,276 gross acres (28,006 net acres). TransGlobe's working interest
is subject to a royalty of 18% to the leaseholders and a gross overriding
royalty of 2% payable to John Lucken, now a director of the Company and Vice
President of Operations, TransGlobe US. The focus of the prospect was based on
600 miles of old two-dimensional seismic data that suggested the area was
under-explored for the potential of known Paleozoic producing reservoirs
existing in producing fields located on and off the block.
 
                                        6
<PAGE>   7
 
     Burlington Resources Inc., a subsidiary of Burlington Northern Inc.,
controls the lands in and around the prospect and offered some areas for oil and
natural gas exploration proposals in 1996. They encouraged seismic activity and
exploration drilling in order to evaluate their under-explored lands.
 
     In April, 1996, TransGlobe entered into a joint venture with Collins &
Ware, Inc., ("Collins & Ware") a privately owned oil and natural gas company
based in Midland, Texas. TransGlobe agreed to pay 50% of the costs involved in
the 3-D seismic survey on the east half of the prospect area ("Block B") with an
option to participate in a similar interest on the west half of the acreage
("Block A"), and to pay 50% of the lease costs to earn a 25% working interest in
the prospect. TransGlobe's share of the drilling costs will be 25%, being its
earned working interest share.
 
     The acquisition of the 3-D data on the area comprising Block B commenced in
May and was completed in August 1996 at a gross cost of $2.6 million ($1.3
million net to TransGlobe) , and as a result the Company earned a 25% working
interest in the Block B lands. Collins & Ware conducted a 3-D seismic survey on
Block A which started in May and was completed in July, 1997. The cost of the
3-D seismic survey on Block A was approximately $940,000 net to the Company. The
Company paid 50% of the lease costs on Block A and paid 50% of the cost of the
Block A seismic survey to earn a 25% working interest in Block A.
 
     The first well, targeting a Red River prospect (Prevost-1), was completed
on April 30, 1997. The cost of this well was $1,094,968 to drill, complete and
equip for production. TransGlobe paid 25% of the costs of the well ($273,742).
The Prevost-1 well encountered four oil zones, three of which recovered oil by
drill stem testing. The well was cased as an oil well and was then completed for
production from the Red River "C" formation. The well has been placed into
production at a rate of 180-185 barrels of oil per day ("BOPD").
 
     The second well (Burgess-1) targeting a Tyler sand prospect commenced
drilling on May 4, 1997. The well failed to encounter any hydrocarbons and was
plugged and abandoned on May 19, 1997.
 
     The third well (Larson-1) was drilled during June 1997. The Larson-1 well
encountered oil in the Red River "C" zone and was placed on production during
July 1997 at a rate of 101 BOPD and 41 barrels of water per day. The water
production is believed to be caused by a poor cement bond with the well casing.
The well is currently being reworked in an attempt to shut off the water
production and increase oil production.
 
     The fourth well (Oakland-1) was drilled during August 1997. The Oakland-1
well encountered oil in the Red River "C" zone and was completed and placed on
production during September 1997 at a rate of 240 barrels of oil per day.
 
     A fifth well (CWI -- BN 17-1) was drilled during September 1997. The CWI --
BN 17-1 well encountered oil in the Red River "C" zone, the Winnipegosis and in
the Dawson Bay formation. The well was completed in the Winnipegosis and the Red
River "C" and was placed on production during October 1997 at an initial rate of
120 barrels of oil per day.
 
     The reserves found in the four oil discoveries described above are
considered proven and can be found under the heading "Oil and Natural Gas
Reserves" in the "Crude Oil" column.
 
     Additional drilling locations for Red River and Tyler prospects have been
identified on the 3-D seismic. The Company and partners (Burlington Resources
Inc., Collins & Ware Inc. and Mantaur Petroleum Corporation) have approved a Red
River prospect to be drilled during December 1997/January 1998. This test well
is planned to test the Red River "C" formation with horizontal drilling
technology. The Company and partners have also approved a Tyler prospect to be
drilled immediately following the horizontal Red River.
 
MADERA GAS FIELD, LEA COUNTY, NEW MEXICO
 
     During fiscal 1997, the Madera gas field averaged net production rates of
764 mcf per day of natural gas and 28 barrels of natural gas liquids for the
Company. The comparable figures for 1996 were 998 mcf per day of natural gas and
39 barrels of natural gas liquids. The drop in production is related to natural
production declines and the Madera 30-1 well attaining two separate of pay-outs
in December 1996 and May 1997. As a consequence, the Company's net revenue
interest in Madera 30-1 was reduced from 56% to 35%. The decline
 
                                        7
<PAGE>   8
 
in net production was partially offset by improved product prices. The Company
averaged $2.67 per mcf ($1.85 per mcf in 1996) and $20.23 per barrel ($19.81 per
barrel in 1996) for natural gas and natural gas liquids respectively. Total
revenue from the Madera field was $954,302 in 1997 as compared to $1,019,483 in
1996.
 
     A workover was carried out on the 25-1 well in an attempt to re-establish
production from the Atoka limestone during the second quarter of fiscal 1997.
Following the workover the well produced intermittently and was deemed
uneconomic to continue producing from the Atoka limestone. The 25-1 well was
recompleted in the Wolfcamp zone in August. Additional perforations and a
stimulation program to attempt to increase the production rate has been approved
by the working interest owners and is planned for January 1998.
 
     The Company has a 63.75% working interest (47.175% net revenue interest) in
the 25-1 well. The Company's interest may increase depending on the distribution
of interest of non-consent working interest owners.
 
SOUTH EVETTS PROSPECT, WINKLER AND LOVING COUNTIES, TEXAS
 
     The South Evetts Prospect is comprised of 640 gross acres located in
Winkler and Loving counties in Texas. TransGlobe has a 21.875% working interest
(15.75% net revenue interest) in the University "20-12" well and 12.192% working
interest (8.778% net revenue interest) in the University "20-11" well. In the
balance of the acreage, the Company has an 11.84% working interest.
 
     The Company's net production from the above wells during 1997 was 3 mcf of
natural gas and 7 barrels of natural gas liquids per day. The net operating
income was negligible. The marginal results thus far warrant no further
exploration in this prospect.
 
EAST GRIEVE PROSPECT, NATRONA COUNTY, WYOMING
 
     The East Grieve prospect is a structural/stratigraphic prospect located in
the Southeastern Wind River Basin of central Wyoming, approximately 50 miles
west of Casper.
 
     The Company has a 97.5% working interest in 960 acres over the prospect
area. The Company drilled two wells in this prospect. The initial well "29-1" is
suspended and requires further work and evaluation. The second well, "32-3" was
tested during June 1997 and did not recover any hydrocarbons. The "32-3" well is
currently suspended. The lack of success in this well and the access
restrictions due to topography render the project unattractive at this time. The
Company intends to abandon the well during 1998.
 
REPUBLIC OF YEMEN
 
REPUBLIC OF YEMEN -- BACKGROUND
 
     The Republic of Yemen came into existence on May 22, 1990 after the
unification of Yemen Arab Republic (North Yemen) and People's Democratic
Republic of Yemen (South Yemen). Yemen is situated on the southern tip of the
Arabian peninsula bordering the Sultanate of Oman and Saudi Arabia and covers an
area of approximately 555,000 sq. km (the border with Saudi Arabia is disputed).
The population is 16.1 million (1994 census) with the capital being Sanaa
(population 972,000).
 
     The currency of Yemen is the Yemeni Riyal (YR). The value of the YR has
devalued from 33YR per US$ in 1992 to 130YR per US$ in 1997. The majority of the
contracts for services in the petroleum sector are denominated in US dollars.
However some local services are paid in YR. Some of the costs incurred by the
Company in Yemen may be affected by variations in the exchange rate.
 
OIL EXPLORATION, DEVELOPMENT AND PRODUCTION IN YEMEN
 
     After years of exploration and drilling, North Yemen and South Yemen became
commercial oil producers in 1987 and 1993 respectively. According to the
Economist Intelligence Unit's 1st quarter 1997 country report (the "Economist
Report"), current total crude oil production in Yemen is approaching 365,000
BPD. Production levels are expected to increase, as new fields come on stream.
Increases in Yemen's
 
                                        8
<PAGE>   9
 
crude oil production are dependent on an active exploration and development
program. The Economist Report notes Yemen's desire to encourage an increased
level of exploration work.
 
     In the north, Yemen Hunt Oil Company ("Yemen Hunt"), a subsidiary of Hunt
Oil Company of the US, and Exxon jointly operate the Marib field. According to
the Economist Report, output from this field is presently around 170,000 BPD of
oil. Hunt Oil and Exxon also manage the Jannah field, which came on line in
October 1996. According to the Economist Report, it is producing about 15,000
BPD of oil presently, but plans are to increase production in that field to
30,000 BPD of oil by the end of 1997 and to about 75,000 BPD by the end of 1998.
 
     Calgary-based Canadian Occidental Petroleum Ltd. ("Canadian Occidental")
followed Yemen Hunt with discoveries in its Masila block in eastern Yemen during
1991. According to the Economist Report, production from its Masila block is
about 180,000 BPD of oil.
 
BLOCK 32
 
     Block 32 is located in Howarime, Hadramaut Governate and is adjacent to
Canadian Occidental's Masila block to the south. It was awarded by the Yemeni
parliament on March 24, 1992 to a group of companies headed by Clyde as operator
pursuant to a Production Sharing Agreement (the "PSA") dated September 24, 1991
among Clyde, Oranje Nassau, Norsk Hydro Yemen a.s., Ansan Wikfs (Hadramaut)
Limited (the "Contractors") and MOMR. After the end of the first exploration
period, 2,092 sq. km. of the original contract area was relinquished. The
contract area is presently 4,838 sq. km.
 
FARM-OUT AGREEMENT
 
     On January 24, 1997, TransGlobe entered into a Farm-Out Agreement with
Clyde and Oranje-Nassau on Block 32 in Yemen. The first well, Sabieh-1, was
drilled during May/June 1997 on the Sabieh structure and resulted in a dry hole.
TransGlobe then participated in a second well, Darbah 1, which also resulted in
a dry hole. A third well, the Tasour 1 well is currently drilling ahead to the
primary objective. After the well reaches total depth it will be logged, cased
and production tested. The Company holds an 8% working interest in Block 32.
 
PRODUCTION SHARING AGREEMENT (PSA)
 
     Upon any commercial development of Block 32, the Contractors and MOMR will
share revenues and expenses in respect of Block 32 as follows:
 
     1. The Yemeni government will receive a 10% royalty ("Royalty") levied on
       total oil production.
 
     2. After payment of the Royalty, the Contractors are entitled to recover
       their costs against the lesser of
 
       A   25% of annual oil revenue; and
 
       B   the aggregate of:
 
          -- 100% annual operating expenses;
 
          -- 25% per annum of total development expenditures; and
 
          -- 25% per annum of total exploration expenditures.
 
     If the costs recoverable in any quarterly period, including costs carried
forward from previous quarters, exceed the value determined according to the
above formula, the unrecovered excess is carried forward for recovery in the
next succeeding quarter or quarters until fully recovered, but cannot be
recovered after termination of the PSA.
 
                                        9
<PAGE>   10
 
     3. The balance of revenues from oil production is shared by MOMR and the
       Contractors as follows:
 
<TABLE>
<CAPTION>
       PRODUCTION LEVEL (BPD)                                             MOMR     CONTRACTORS
       ---------------------------------------------------------------    ----     -----------
       <S>                                                                <C>      <C>
       0 to 25,000....................................................    77%          23%
       25,000 to 50,000...............................................    79%          21%
       50,000 to 75,000...............................................    81%          19%
       75,000 to 100,000..............................................    83%          17%
       100,000 to 150,000.............................................    85%          15%
       150,000 to 200,000.............................................    87%          13%
       200,000 +......................................................    90%          10%
</TABLE>
 
     In addition to the Royalty, the Yemeni government will receive a production
bonus of $2 million on a declaration of commerciality and bonuses of $4 million,
$6 million, and $6 million should the production rate exceed 50,000, 100,000,
and 200,000 BPD of oil respectively. The Yemeni government also receives the
proceeds of a 3% tax levied on exploration expenditures by the Contractors.
 
     The Contractors also pay a 2% gross overriding royalty to Highstown
International Inc., a private Panama company, based on their share of oil
revenues, for local agents' services rendered during the awarding of Block 32.
 
     The MOMR assumes and pays the Contractors' Yemeni income taxes out of
MOMR's share of revenues pursuant to the PSA.
 
BLOCK S1
 
     The Company has signed a memorandum of understanding ("MOU") with the Yemen
Ministry of Oil and Mineral Resources (the "MOMR") on Block S1 in the Republic
of Yemen in August, 1997. The MOU sets out the commercial terms of a Production
Sharing Agreement ("PSA") and allows the Company to proceed with negotiating a
PSA with the MOMR. TransGlobe has been negotiating for Block S1 since 1995.
 
     In December, 1997, the Company concluded the PSA on terms previously agreed
on the MOU. Under the PSA, TransGlobe has agreed to a work commitment consisting
of the acquisition of 150 sq. km of new 3D seismic and the drilling of three
wells. This first phase of exploration will cost approximately $11 million over
a period of two and a half years. Depending on the results of the first phase of
exploration, an optional second phase of two and a half years of exploration
will be undertaken at a cost of another $11 million.
 
     Block S1 which covers an area of 4,500 sq. km, was explored previously by
Shell Oil between 1990 and 1993 and by a Soviet oil prospecting expedition
between 1983 and 1990. Shell drilled four wells which encountered several oil
shows which were not tested. Additional prospects were identified by Shell Oil
which have not yet been drilled and tested. TransGlobe expects to drill and test
some of these prospects during the first phase of the exploration program.
 
     The Company has agreed in the PSA with the MOMR, subject to the PSA
approval by the Yemen Parliament, it will pay a "signature bonus" of $2.0
million to MOMR. The Company will also pay a finders fee of $1.0 million to De
Marino Associates, Inc., and others (the "Finders") and a local agent fee
payable to the Al Ahmar Establishment for Trading and General Agencies (the "Al
Ahmar Group") of $2.0 million dollars and 100,000 common shares of TransGlobe.
In addition the Al Ahmar Group will receive a carried interest on the profit oil
of 2.00 percent and the Finders will receive an additional fee of $1.5 million
if the Company discovers proven recoverable reserves of more than 40 million
barrels of oil on the S-1 Block. The Yemeni parliament is expected to review the
PSA during the first quarter of 1998.
 
     The Company is actively seeking partners for the S-1 block in the Republic
of Yemen. Technical information packages have been prepared and sent to several
interested parties.
 
                                       10
<PAGE>   11
 
RESERVES
 
     The Company causes to be prepared an annual estimate of its oil and gas
reserves. Other than proved reserves found by drilling in the East Meridian
field, there have been no acquisitions or sales of reserves during fiscal 1997.
Subsequent to the release of its financial statements for the year ended
September 30, 1996, management discovered an error in the calculation of proven
oil and gas reserves. This error was caused by the use of gross rather than net
revenue interests and the failure to give effect to the pay-out clauses in the
calculation of the Company's share of reserve quantities and net cash flows from
the Madera "30-1" well. The impact of this error was a write-down of oil and gas
properties of $2,600,000 which was recorded retroactively as a prior period
adjustment.
 
     In conjunction with the filing of a Canadian prospectus dated June 23,
1997, qualifying for distribution 4,400,000 common shares issued upon the
exercise of 4,400,000 previously issued special warrants, the Company filed a
reserve report with certain Canadian securities regulatory authorities. This
report was prepared by Outtrim Szabo Associates Ltd. ("Outtrim Szabo"),
independent petroleum consultants of Calgary, Alberta as at March 1, 1997. This
report estimated the net proved reserves after royalty and future net revenues
as follows:
 
<TABLE>
          <CAPTION>
                           RESERVES                               FUTURE NET REVENUE
          -------------------------------------------     ----------------------------------
          OIL AND NATURAL GAS LIQUIDS     NATURAL GAS     UNDISCOUNTED     DISCOUNTED AT 10%
          ---------------------------     -----------     ------------     -----------------
                    (Bbls)                  (Mmcf)
          <S>                             <C>             <C>              <C>
                    79,948                   2,749         $5,538,000         $ 3,930,000
</TABLE>
 
     The differences between the reports prepared on March 1, 1997 and September
30, 1997 are due to the oil discoveries in East Meridian, Montana, the changes
in product prices, production during the period from April 1, 1997 to September
30, 1997 and downward revisions to reserves in the Madera field.
 
     The reserve and recovery information contained in the Outtrim Report are
only estimates. The actual production and ultimate reserves in the Madera gas
field and Montana oil pools may be greater or less than the estimates in the
Outtrim Report.
 
     The following table set forth the proved reserves of the Company as at
September 30, 1997, 1996 and 1995. Estimated quantities for the fiscal 1995 were
prepared by Williamson Petroleum Consultants Inc., Midland, Texas. Estimated
quantities for the fiscal years 1997 and 1996 were prepared by Outtrim Szabo.
 
<TABLE>
<CAPTION>
NET PROVED RESERVES AFTER ROYALTY                                  1997       1996(1)       1995
--------------------------------------------------------------    -------     --------     ------
<S>                                                               <C>         <C>          <C>
Oil and Natural Gas Liquids (Bbls)............................    145,719      83,537      69,120
                                                                  -------      ------      ------
Natural gas (MMcf)............................................      2,213       2,855       1,926
                                                                  =======      ======      ======
</TABLE>
 
---------------
 
(1) 1996 -- reserve quantities were adjusted for the error referred to above.
 
     The discoveries in the East Meridian prospect, Montana resulted in net
proved oil reserves (after royalty) of 84,211 barrels to the Company. Total oil
and liquids production in fiscal 1997 was 17,396 barrels. The balance of the
change in oil and natural gas liquids reserves was due to the revision of the
previous estimates resulting from the error referred to above. The natural gas
reserves were revised by 3,083 Mmcf due to the same error. The balance of the
change from 1996 was production of 280 MMcf.
 
                                       11
<PAGE>   12
 
ESTIMATED FUTURE NET REVENUE AND PRESENT WORTH
 
     The estimated future net revenues from the Company's proved oil and gas
reserves at September 30, 1997 are $6,531,000 and the present value (discounted
at 10%) was $4,659,000.
 
     Estimated present worth of the Company's net oil and gas reserves is set
forth in the following tabulation:
 
<TABLE>
<CAPTION>
                                                                            PRESENT WORTH
                                                                       AS AT SEPTEMBER 30, 1997
                                                                   --------------------------------
                                                                   UNDISCOUNTED   DISCOUNTED AT 10%
                                                                   ------------   -----------------
<S>                                                                <C>            <C>
Proved developed oil and gas reserves............................   $6,531,000       $4,659,000
                                                                    ==========       ==========
</TABLE>
 
     The present value of estimated future net revenues set forth above is
computed using the estimated future net revenues and a discount factor of ten
percent (10%) over the projected life of each property. See "Disclosure about
Oil and Gas Producing Activities".
 
     Future net revenues and present worth values as at September 30, 1997 were
computed using the following average unescalated prices:
 
<TABLE>
          <S>                                                                <C>
          Crude oil (Bbl)..................................................  $17.82
          Natural gas liquids (Bbl)........................................  $18.63
          Natural gas (mcf)................................................  $ 2.70
</TABLE>
 
     Future prices to be received from such production and future production
costs may vary, perhaps significantly, from the prices and costs assumed for
purposes of these estimates. The present values shown above should not be
construed as the current market value of the estimated oil and gas reserves
attributable to the Company's properties.
 
MARKETING OF PRODUCTION:
 
     The Company does not refine any petroleum products. All of its production
from the Madera field is sold pursuant to a written agreement at prevailing
market prices. The Company is not obligated to provide a fixed and determinable
quantity of oil and gas in the future under existing contracts or agreements.
 
     The availability of a market for oil and gas produced from the properties
of the Company and the prices received are dependent upon numerous factors, most
of which are beyond the control of the Company. Such factors include the level
of domestic production, the availability of distribution and transportation
facilities and capacity thereon, the availability and price of fuels competitive
with oil and gas, demand for oil and gas and refined products and governmental
regulation and taxation. Such factors make it impracticable to predict with any
degree of certainty future demand for, or prices of, oil or gas produced by the
Company. Historically the Company has experienced high demand and prices for its
gas production during the winter months.
 
MINERAL EXPLORATION
 
     There was no change in the Company's inventory of mineral properties during
fiscal 1997. TransGlobe continues to maintain its 100% interest in the patented
claims on the Barstow silver property in California. However, prevailing silver
price renders this property uneconomic. Therefore, the Company has abandoned its
plan to develop the Barstow property and consequently has written off the
capitalized costs.
 
     During fiscal 1996, the Company also allowed the mineral leases it held in
the Osoyoos Mining Division of British Columbia to expire and wrote-off the
capitalized costs.
 
OFFICE RELOCATION
 
     In May, 1997, the Company moved its head office to Suite 1450, 505-3(rd)
Street S.W., Calgary, Alberta from Vancouver, British Columbia.
 
                                       12
<PAGE>   13
 
ITEM 3  LEGAL PROCEEDINGS
 
     Not applicable.
 
ITEM 4  SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
 
     Not applicable.
 
                                       13
<PAGE>   14
 
                                    PART II
 
ITEM 5  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
MARKET INFORMATION:
 
     The Company's Common Shares have been listed in the United Sates on the
NASDAQ Small Cap Market since March 1984. "TGLEF" is the Company's current
trading symbol. The Company's common shares have also been listed on The Alberta
and Toronto Stock Exchanges in Canada since July and November 1997 respectively
under the symbol of "TGL". Currently less than 5% of total trading occurs on The
Alberta and Toronto Stock Exchanges. The following table sets forth, for the
calendar periods indicated, the range of high and low prices in U.S. dollars for
the Company's Common Shares as reported by the NASDAQ.
 
<TABLE>
<CAPTION>
                                                                    HIGH PRICE         LOW PRICE
QUARTER                                                           QUARTER DURING     DURING QUARTER
--------------------------------------------------------------    --------------     --------------
<S>                                                               <C>                <C>
Oct 1/95 - Dec 31/95..........................................        $ 5.63             $ 2.63
Jan 1/96 - Mar 31/96..........................................        $ 4.81             $ 2.38
Apr 1/96 - Jun 30/96..........................................        $ 5.06             $ 3.38
Jul 1/96 - Sep 30/96..........................................        $ 4.25             $ 2.22
Oct 1/96 - Dec 31/96..........................................        $ 3.06             $ 0.88
Jan 1/97 - Mar 31/97..........................................        $ 2.56             $ 1.00
Apr 1/97 - Jun 30/97..........................................        $ 2.25             $ 0.97
Jul 1/97 - Sep 30/97..........................................        $ 2.38             $ 0.94
Oct 1/97 - Dec 8/97...........................................        $ 1.44             $ 0.91
</TABLE>
 
     The quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not represent actual transactions.
 
HOLDERS:
 
     According to the records maintained by the Company's registrar and transfer
agent, on September 30, 1997 there were 449 registered shareholders resident in
the United States holding among them an aggregate of 12,651,101 shares of the
Company, being approximately 69.6% of the total issued and outstanding shares of
the Company.
 
DIVIDENDS:
 
     The Company has never paid any cash dividends and presently intends to
retain any earnings to finance the growth of its business.
 
ITEM 6  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS
 
YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO YEAR ENDED SEPTEMBER 30, 1996:
 
REVENUES
 
     During 1997, the Company's oil and gas revenues were $1,121,798 compared to
$1,113,274 for 1996. The revenues were generated primarily from the Madera No.
30-1 well in New Mexico. The Prevost#1, Larson 18-1 and Oakland wells in the
East Meridian field were placed on full production in June, August and September
1997 respectively. One other discovery, the CWI BN 17-1 well, was not yet on
stream at September 30, 1997.
 
     The production from the Madera 30-1 well declined to 764 mcf per day of
natural gas and 28 barrels of natural gas liquids per day during 1997 from 998
mcf per day of natural gas and 39 barrels of natural gas liquids per day a year
ago. The decrease was the result of natural production declines and the
reduction of the
 
                                       14
<PAGE>   15
 
Company's net revenue interest from 56% to 35% as a result of the well attaining
two separate pay-outs in December 1996 and May 1997.
 
     The average price received for Madera gas increased from $1.85 during 1996
to $2.67 during 1997 and the average price received for natural gas liquids
increased from $19.81 during 1996 to $20.23 during 1997. The price increases
were largely attributable to normal than colder winter conditions in 1996/97.
The Company's total revenues from the Madera field declined to $954,302 in 1997
from $1,019,483 a year ago.
 
     The revenues from the East Meridian field during 1997 totalled $96,199 with
an average oil price of $17.90 per barrel. Two wells in the South Evetts field
added $55,860 to the Company's revenues in 1997.
 
     The Company's interest income increased to $199,897 from $33,915 in 1996.
This was directly attributable to interest earned on funds raised from the
Canadian special warrants offering.
 
     The Company sold its investment in IPC International Power Corporation for
$1,012,500, which resulted in a gain of $262,500.
 
EXPENSES
 
     Operating expenses were $180,050 compared to $200,379 in 1996. In November
1996, the Company has reduced operating expenses on the Madera field by cutting
back on non-essential services and by streamlining production accounting
procedures.
 
     General and administrative expenses increased to $1,253,223 from $833,344 a
year ago. The increase was mainly largely attributable to higher legal fees
incurred as a result of various non-recurring regulatory and legal matters
arising during the tenure of the Company's previous management (an increase of
$263,000). The balance of the difference was related to a general increase in
the level of many expense items due to increased corporate activity.
 
WRITE-DOWN OF MINERAL PROPERTIES
 
     The Company has abandoned its plan to develop the Barstow property and
consequently has written of the capitalized costs of $1,724,310 to operations.
The Company is presently considering an offer to sell this property to avoid
further advance royalty payments.
 
WRITE-DOWN OF OIL AND GAS PROPERTIES
 
     Under Canadian Generally Accepted Accounting Principles ("GAAP"), the net
book value of oil and gas properties is limited to the estimated future net
revenue (undiscounted) expected to be generated from the oil and gas properties
using constant prices and costs after deducting all expected future costs,
including general and administrative costs, financing costs and income taxes.
Only proved reserves are considered in estimating future net revenue. Costs
exceeding those amounts expected to be recovered in the future are written off.
The above calculation is commonly referred to as the ceiling test.
 
     The Company performed a ceiling test as at September 30, 1997 using the
above methodology and determined that the net book value of the oil and gas
properties exceeded the future net revenue by $3,710,000. This amount was
consequently charged to operations.
 
     Under the United States GAAP, the future net revenue as calculated for the
ceiling test excludes future general and administrative costs, financing costs
and income taxes but must be discounted at 10%. The effect of applying this
provision to the Company's financial statements would increase the ceiling test
write down and the loss from operations by $1,273,000 for the year ended
September 30, 1997.
 
LOSS FOR THE YEAR
 
     The Company reported a loss of $6,268,791 ($0.46 per share) for the year
ended September 30, 1997 as compared to a loss of $3,370,096 ($0.43 per share)
for 1996 under the Canadian Generally Accepted
 
                                       15
<PAGE>   16
 
Accounting Principles ("GAAP"). Had the Company followed the U.S. GAAP, the loss
for the year would have been $7,442,785 ($0.55 per share) for 1997 as compared
to $3,876,209 ($0.49 per share) for 1996.
 
CAPITAL EXPENDITURES
 
     During 1997, TransGlobe incurred $4,010,788 in capital expenditures in the
United States. The comparable figure in 1996 was $4,043,417. The Company spent
$1.6 million on Block A seismic and lease acquisition costs on East Meridian
lands. The drilling and completion of four oil wells and drilling of one dry
hole on East Meridian lands resulted in net costs of $1.2 million. The "3-32"
well in the East Grieve prospect cost another $500,000. The carry over costs on
the "1-29" well in East Grieve was approximately $300,000. The work-over and
recompletion of the Madera 25-1 well was another $150,000. The balance of the
expenditures were incurred on South Evetts, Monty, Black Dog and Breeze
prospects.
 
     TransGlobe spent $3,607,343 during 1997 on its activities in the Republic
of Yemen. Of these expenditures $3,329,183 were incurred on the Block 32 as
follows:
 
<TABLE>
          <S>                                                            <C>
          Drilling and abandonment of Sabieh well....................    $2,245,626
          Drilling and abandonment of Darbah well....................       348,456
          Seismic acquisition costs..................................       309,967
          Local office costs.........................................       189,127
          Taxes and bonuses to the MOMR and the Government of
            Yemen....................................................       236,007
                                                                         ----------
                                                                         $3,329,183
                                                                         ==========
</TABLE>
 
     The balance of the expenditures in Yemen were related to Block S1 ($95,678)
and capitalized overhead costs of $182,482.
 
LIQUIDITY AND CASH RESOURCES
 
     During fiscal 1997, TransGlobe was involved in two major financings. The
first one was the issuance in November 1996 of zero coupon convertible
debentures for net proceeds of $3,221,852 after issue expenses, discounts and
commissions of $771,203. In January 1997, all convertible debentures were
converted into 4,569,021 common shares.
 
     On March 26, 1997 the Company issued 4,400,000 special warrants ("Special
Warrants") at $1.30 per special warrant. The offering was conducted by private
placement outside the United States, pursuant to Rule 903 of SEC Regulation S,
and inside the United States pursuant to SEC Rule 506. The Company obtained the
final receipts for its Prospectus on or before June 26, 1997 from each of the
Securities Commissions in the provinces of British Columbia, Alberta, Ontario
and Quebec. The Prospectus qualified for distribution 4,400,000 common shares of
the Company issued upon the exercise of 4,400,000 previously issued Special
Warrants.
 
     Each Special Warrant entitled the holder thereof to acquire one common
share of the Company at no additional cost upon the issuance of the final
receipts from the Canadian securities commissions. All Special Warrants were
exercised on July 7, 1997, resulting in the issuance of 4,400,000 common shares.
This offering generated net proceeds of $5,179,127 to the Company after Agents'
commission of $371,800 and issue expenses of $169,073.
 
     In addition to the above major issues, 316,000 common shares were issued
pursuant to a private placement and on exercise of employee stock options
resulting in net proceeds of $389,221 to the Company.
 
     At September 30, 1997, the Company had cash resources of $3.5 million and
net working capital of $2.4 million, after accounts payable and accrued
liabilities relating to the capital expenditures.
 
     At September 30, 1997, accounts payable included amounts payable to the
operator in the East Meridian field of $545,261, accrued liabilities of $246,328
pertaining to the capital expenditures in the East Meridian field, accrued
payables of $337,845 to the operator of Block 32 and revenue payable of $270,461
to working
 
                                       16
<PAGE>   17
 
interest partners in the Madera field. Accounts receivable included production
revenue receivable of $231,210 from the East Meridian field.
 
     TransGlobe entered into a PSA with the MOMR in the Republic of Yemen in
December, 1997. Upon approval of the PSA by the Yemen Parliament, the Company
will pay a "signature bonus" of $2.0 million to MOMR, a finders fee of $1.0
million to the Finders and a local agent fee payable to the Al Ahmar Group of
$2.0 million dollars and 100,000 common shares of TransGlobe. The PSA commits
the Company to an exploration program consisting of the acquisition of 150 sq.
km of new 3D seismic and the drilling of three wells at a cost of approximately
$11 million over a period of two and a half years. The Company is presently
looking for partners to participate in the Block S1. If the Company fails to
find partners for this Block by the end of January 1998, it will not carry on
with its obligations under the PSA and the contract will become null and void.
 
     In addition to the commitments in Block S1, the Company is anticipating
additional seismic acquisition and drilling costs on Block 32 during fiscal
1998. The Company estimates its share of the expenditures to be approximately $1
million for 1998.
 
     In the United States, the Company expects to continue its exploration
program on East Meridian lands, Montana by drilling seven wells at a net cost to
it of approximately $2 million. The Company has also acquired an interest in the
Moline Lake prospect in North Dakota by agreeing to pay lease costs of $100,000
and committing to a 3-D seismic program for $175,000. Depending on the seismic
results, the Company may participate in a horizontal well as to 50% working
interest. The Company's net share of drilling costs in this well is estimated to
be $700,000.
 
     In order to finance the capital expenditures referred to above, the Company
will have to raise additional capital by way of equity or debt financing. There
is no assurance that the Company will be able to raise the necessary equity
and/or debt capital to undertake these projects in which case the Company may be
forced to amend its fiscal 1998 exploration program.
 
YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO YEAR ENDED SEPTEMBER 30, 1995:
 
REVENUES
 
     During fiscal 1996, the Company's oil and gas revenues, net of royalties,
were $1,022,324 compared to $758,774 for fiscal 1995. The revenues were
generated substantially from the Madera No. 30-1 well, New Mexico. The average
price received for Madera gas increased from $1.37 per mcf during 1995 to $1.85
per mcf during 1996 and the average price received for natural gas liquids
increased from $17.42 per barrel during 1995 to $19.81 per barrel during 1996.
The increased prices were enhanced by an increase in production from 1,064 mcf
per day in 1995 to 1,095 mcf per day in 1996. Natural gas liquids production
stayed the same at 42 barrels per day in 1995 and 1996.
 
EXPENSES
 
     Operating expenses were $200,379 in fiscal 1996 compared to $148,645 in
fiscal 1995. General administrative expenses increased to $833,344 in 1996 from
$785,506 in fiscal 1995 due to increased wages and management fees. The increase
in this item was somewhat offset by reduced travel, promotion and advertising
expenses.
 
WRITE-DOWN OF MINERAL PROPERTIES
 
     The Company had a number of mineral claims in the Osoyoos Mining Division
of British Columbia. In 1996, the Company allowed the leases on the claims to
expire. Consequently capitalized costs of $279,240 were written off to
operations.
 
                                       17
<PAGE>   18
 
WRITE-DOWN OF OIL AND GAS PROPERTIES
 
     Subsequent to the release of the consolidated financial statements for the
year ended September 30, 1996, the Company discovered an error in its
calculation of proved oil and gas reserves and determined that the estimated
reserves in the Madera field were overstated by $2,600,000 ($2,971,000 under
U.S. GAAP). The decrease in value has been recorded retroactively to September
30, 1996 as follows:
 
<TABLE>
<CAPTION>
                                                                    CANADIAN BASIS     U.S. BASIS
                                                                    --------------     ----------
<S>                                                                 <C>                <C>
Additional write-down of oil and gas properties.................      $2,236,000       $2,607,000
Additional depletion expense....................................         364,000          364,000
                                                                      ----------       ----------
                                                                      $2,600,000       $2,971,000
                                                                      ==========       ==========
</TABLE>
 
LOSS FOR THE YEAR
 
     The Company reported a loss of $3,370,096 ($0.43 per share) in fiscal 1996
after the retroactive adjustment of $2,600,000 as compared to a loss of $797,743
($0.12 per share) in fiscal 1995 under the Canadian Generally Accepted
Accounting Principles ("GAAP"). Had the Company followed the U.S. GAAP, the loss
for fiscal 1996 would have been $3,876,209 ($0.49 per share) as compared to
$2,292,217 ($0.34 per share) for fiscal 1995.
 
CAPITAL EXPENDITURES
 
     The Company incurred $4,043,416 in capital expenditures on oil gas
properties in the United States. A large portion of these expenditures were on
the East Meridian prospect 3-D seismic and lease acquisition.
 
     In addition, TransGlobe acquired 750,000 (15% of the issued and
outstanding) Class "A" voting shares of IPC International Power Corporation at a
cost of $750,000, which was funded from the proceeds of a share issuance.
 
LIQUIDITY AND CASH RESOURCES
 
     The Company issued 1,683,058 Common Shares at an average price of $2.79 per
share pursuant to private placements for net proceeds of $4,697,816 (after
deducting the issue expenses of $170,058) . In addition 50,000 Common Shares
were issued for an oil and natural gas property at a deemed price $2.79 per
share and 7,000 for employee bonuses at a deemed price of $2.87 per share.
 
     At September 30, 1996, the Company had cash resources of $588,664 and no
long-term debt.
 
ITEM 7  FINANCIAL STATEMENTS
 
     The financial statements called for by this item are set forth below.
 
ITEM 8  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURES
 
     Not applicable.
 
                                       18
<PAGE>   19
 
                                    PART III
 
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
 
<TABLE>
<CAPTION>
NAME, AGE                       POSITION                                     TERM
----------------------------    -------------------------------------------  --------------------
<S>                             <C>                                          <C>
Dr. George H. Laycraft, 73      Chairman of the Board                        07/19/95 to present
                                President                                    01/21/91 - 07/19/95
                                Board Member                                 03/28/71 to present
Ross G. Clarkson, 44            President and Chief Executive Officer(1)     12/04/96 to present
                                Board Member                                 10/11/95 to present
Erwin L. Noyes, 59              Vice-President, Operations (1)               11/08/96 to present
                                Corporate Secretary                          12/04/96 to present
                                Board Member                                 10/11/95 to present
John E. Lucken, 58              Board Member                                 06/13/95 to present
Robert A. Halpin, 62            Board Member                                 03/21/97 to present
Nicholas F. Kuich, 59           Board Member                                 03/21/97 to present
C.S. (Juneyt) Tirmandi, 44      Chief Financial Officer                      02/17/97 to present
</TABLE>
 
---------------
 
(1) On November 8, 1996, Mr. Noyes replaced Mr. Richard Coglon as the Company's
     acting President and was also appointed Vice-President, Operations. On
     December 4, 1996, Mr. Clarkson became the Company's President and CEO and
     Mr. Noyes was appointed Corporate Secretary in addition to his position as
     Vice-President, Operations.
 
     Directors serve for a term of one year, but are eligible for re-election
annually by the shareholders.
 
     Dr. Laycraft is a retired medical doctor and has served as a director and
senior officer of the Company for the past 26 years, as Vice-President until
January 21, 1991 when he was appointed President and CEO, which position he
served in until July 19, 1995 when he was appointed to his current position as
Chairman of the Company. Dr. Laycraft also serves on the Board of Directors of
Ultra Petroleum Corp., RIS Resources International Corp. and Arrowhead Minerals
Ltd., all public companies listed on the Vancouver Stock Exchange and joint
venture partners with the Company in a number of oil and gas properties. Dr.
Laycraft was also a director and shareholder of IPC International Power
Corporation until May, 1997. He is also the President and owner of Amadeus
Consultants Ltd., which provided consulting services, office facilities and
secretarial services to the Company in fiscal 1995 and 1996.
 
     Mr. Clarkson was initially retained by the Company as a technical advisor
to assist in its Yemen concession and in negotiations with the MOMR. He was
appointed as the President and Chief Executive Officer of the Company on
December 4, 1996 and has served as a director of the Company since October,
1995.
 
     Mr. Clarkson was formerly employed (1988 to 1996) as a senior geological
advisor with Petro Canada, a major Canadian oil company, and has in excess of 20
years of domestic and international oil and natural gas exploration experience,
including Resident Manager of Petro Canada (Yemen) Inc. (1989 to 1993); Senior
Project Geologist with Canadian Occidental in Yemen in 1987 and Supervisor of
International Exploration/Geologist with Ranger Oil Limited (1979 to 1986).
 
     Mr. Noyes was initially engaged by the Company as a consultant to assess
its Yemen concessions and to assist with related negotiations. He was appointed
acting President on November 8, 1996, pending Mr. Clarkson's appointment as
President, and Vice-President, Operations of the Company on a part-time basis on
November 8, 1996 and has served as a director since October, 1995. Mr. Noyes
brings to the Company in excess of 30 years of oil and natural gas exploration
and production experience in both domestic and international operations;
including as General Manager in Yemen for Canadian Occidental Petroleum (1987 to
1991), as a self-employed oil consultant (1991 to 1996) and with several
Canadian Occidental
 
                                       19
<PAGE>   20
 
affiliates, as Production Manager in Calgary (1982 to 1986) and as Gas
Operations Manager for Canada Cities Service, responsible for all natural gas
production/processing, pipeline and facilities construction and operations
(1978-1982).
 
     Mr. Lucken serves as a director of the Company since June 13, 1995 and Vice
President of Operations, TransGlobe U.S. on a part-time basis. He was the
Manager of U.S. Operations between June 13, 1995 and March 21, 1997 and was
previously a consultant to the Company. For the past 22 years he has been
consulting as an independent senior petroleum geologist in the oil and gas
industry throughout the Rocky Mountain States and the Gulf Coast of Texas.
 
     Mr. Halpin brings to the Company 40 years of experience in the petroleum
industry worldwide; as Vice-President of International Exploration and
Production with Petro Canada Resources of Calgary, Alberta (1988 to his
retirement in October, 1993), and in similar positions with Trend International
Ltd., of Denver, Colorado; Saga Petroleum A.S. of Oslo, Norway; Amerada Hess
Corporation and American Independent Oil Company, both of New York; Chevron
Canada in Saskatchewan and Manitoba and Mobil Corporation in New York, Libya and
Alberta. Mr. Halpin is also a non-executive director of Fountain Oil Inc., a
public company listed on NASDAQ.
 
     Mr. Kuich brings to the Company over 30 years of international and domestic
experience as a geologist with Mobil Corporation (from 1964 until his retirement
in 1995), including three years as a technical consultant for the Asia/Pacific
region, where he conducted regional studies in Malaysia, the South China Sea,
Western Indonesia, the Philippines and New Zealand; and 14 years of supervisory
and management roles in geological work and evaluations, with operations in the
Gulf Coast of Texas, Morocco, Angola and surrounding countries; off-shore Alaska
in the Bering Sea; off-shore Norway and Nigeria; and geophysical studies in
Libya and Nigeria.
 
     Mr. Tirmandi has in excess of 21 years of diverse experience in financial
management. Since 1994, Mr. Tirmandi has provided financial advisory services to
companies primarily in the oil and natural gas industry. During 1990-1993, he
was employed as Vice-President Finance of Transwest Gas Systems Ltd., then a
privately owned natural gas transmission company.
 
     Mr. Tirmandi was the Secretary-Treasurer and Chief Financial Officer of Rio
Alto Exploration Ltd, a Toronto Stock Exchange ("TSE") listed oil and gas
company, from 1986 to 1990. He was the controller of Atlantis Resources Ltd., a
TSE listed oil and gas company from 1984 to 1986. Mr. Tirmandi articled with and
worked for Peat Marwick Thorne, Chartered Accountants between 1980 and 1984.
 
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
 
     On December 29, 1996, the Company filed a report on Form 12b-25 disclosing
that as of at least September 30, 1996, the Company was no longer a "foreign
private issuer" as defined in Rule 3b-4. Present management has subsequently
determined that as of the month ending June 30, 1993 the Company was no longer a
"foreign private issuer", as of which time the Company's officers, directors and
any 10% shareholders became subject to the reporting requirements of Section
16(a) of the U.S. Securities Exchange Act of 1934 ("Exchange Act"). During 1997
the Company's present officers and directors first effected filings pursuant to
the provisions of Section 16(a). However, the Company's officers and directors
have been filing substantially similar information with the British Columbia
Securities Commission since 1987 or earlier.
 
     The Company has never received any Section 16(a) reports from Mr. Richard
Coglon, whose tenure as an officer ended on or about November 8, 1996, and whose
tenure as a director ended on or about March 21, 1997.
 
     Simultaneously with the filing of this report on Form 10-KSB, Mr. C. S.
Tirmandi, the Company's Chief Financial Officer first employed by the Company on
February 17, 1997, is filing Form 3. Mr. Tirmandi's only ownership of interests
in the Company's securities has been in the form of options, granted pursuant to
the Company's Stock Option Plan, to acquire up to 80,000 of its common shares.
 
                                       20
<PAGE>   21
 
     According to the Forms 3 and 4 filed pursuant to Section 16(a) by the
Company's officers and directors, the following facts appear:
 
     George W. Laycraft (Chairman). Dr. Laycraft engaged in three hundred
twenty-seven (327) transactions in prior fiscal years and four (4) transactions
in the fiscal year ending September 30, 1997 that were not reported to the SEC
on a timely basis. He tendered one (1) late Form 3 and twenty-four (24) late
Form 4's in 1997. For the purpose of this disclosure, the Company is treating as
a single Form 4 a Form 4 filing for a particular month, although the filing may
have used multiple Form 4's denominated as page 1, 2, etc. due to the number of
transactions. The only known failure by Dr. Laycraft to file a form required by
Section 16(a) was the tender of the late forms set forth above.
 
     Ross G. Clarkson (President and Chief Executive Officer). Mr. Clarkson
engaged in nine (9) transactions in prior fiscal years and three (3)
transactions in the fiscal year ending September 30, 1997 which were not
reported on a timely basis to the SEC. He tendered one (1) late Form 3 and five
(5) late Form 4's in 1997. The only known failure by Mr. Clarkson to file a form
required by Section 16(a) was the tender of the late forms set forth above.
 
     Erwin L. Noyes (Director, Secretary and Vice President, Operations). Mr.
Noyes engaged in eleven (11) transactions in prior fiscal years and three (3)
transactions in this fiscal year ending September 30, 1997 that were not
reported on a timely basis. He tendered one (1) late Form 3 and seven (7) late
Form 4's in 1997. The only known failure by Mr. Noyes to file a form required by
Section 16(a) was the tender of the late forms set forth above.
 
     John E. Lucken (Director). Mr. Lucken engaged in three (3) transactions in
the fiscal year ending September 30, 1997 which were not reported on a timely
basis to the SEC. He tendered one (1) late Form 3 and two (2) late Form 4's in
1997. The only known failure by Mr. Lucken to file a form required by Section
16(a) was the tender of the late forms set forth above.
 
     Nicholas F. Kuich (Director). Mr. Kuich engaged in one (1) transaction in
the fiscal year ending September 30, 1997 which was not reported on a timely
basis to the SEC. He tendered one (1) late Form 4 and one (1) late Form 3 in
1997. The only known failure by Mr. Kuich to file a form a form required by
Section 16(a) was the tender of the late forms set forth above. Due to an error
this filing was made one day late.
 
     Robert Arthur Halpin (Director). Mr. Halpin engaged in one (1) transaction
in the fiscal year ending September 30, 1997 which was not reported on a timely
basis to the SEC. He tendered one (1) late Form 4 and one (1) late Form 3 in
1997. The only known failure to file a form was the tender of the late forms set
forth above. Due to an error this filing was made one day late.
 
     C.S. Tirmandi (Chief Financial Officer). Mr. Tirmandi filed one (1) late
Form 3 in the fiscal year ending September 30, 1997. The only known failure by
Mr. Tirmandi to file a form required by Section 16(a) was the tender of the late
form set forth above.
 
     Under Section 16(b) of the Exchange Act, a corporation (such as the
Company) with a class of equity securities registered under that Act may require
payment to it of any "profit" resulting from any sale and purchase, or purchase
and sale, of such securities during a six-month period by any officer, director
or 10% shareholder. Liability is strict, without reference to any wrongful
intent or knowledge, and "profit" is calculated by matching of transactions so
as to result in the highest theoretical "profit," even if the transactions were
not sequential and an economic loss in fact resulted. Section 16(b) is unique to
U.S. law, and has no counterpart in the law of Canada or other industrialized
nations.
 
     On April 16, 1997, the Company received demand letters from two attorneys
seeking to require payment to the Company of alleged "short swing profits"
resulting from certain of the transactions described above and transactions
involving Richard Coglon. The Company unilaterally obtained agreement by Messrs.
Clarkson and Noyes to repay their alleged short swing profits of CDN $10,815 and
CDN $14,780, respectively. Such payments have been made in full.
 
                                       21
<PAGE>   22
 
     By letter dated August 8, 1997 the Company notified the aforementioned two
attorneys that it was cost-ineffective for the Company to further pursue
recovery of short swing profits unilaterally. Thereafter, John E. Lucken agreed
to pay the Company US $61,466 in alleged short swing profits pursuant to a Debt
Repayment Agreement dated September 19, 1997, with payments of $1,500 per month
at an interest rate equal to the Canadian Prime Rate. Mr. Lucken is current in
his payments.
 
ITEM 10.  EXECUTIVE COMPENSATION
 
     The following table sets out all compensation awarded to, earned by or paid
by the Company for each of its three most recently completed financial years to
the executive officers and directors of the Company who were in such positions
during the last completed financial year ("Named Executive Officers").
 
<TABLE>
<CAPTION>
NAME                                                                     LONG TERM COMPENSATION(7)
POSITION WITH COMPANY                  YEAR    SALARY      OTHER          SECURITIES UNDER OPTION
-------------------------------------  ----    -------    -------       ---------------------------
<S>                                    <C>     <C>        <C>           <C>
George H. Laycraft
Chairman, Director...................  1997    $21,655    $   Nil       155,000(8)
Chairman, Director...................  1996    $26,375    $ 4,762(4)     75,000(8)
President, Director..................  1995    $19,631    $35,990(4)    150,000(8)
Ross G. Clarkson
President, Director(1)...............  1997    $72,993    $ 8,336(6)    300,000(8)(9)
Director, Consultant.................  1996    $   Nil    $11,726(6)     50,000(8)
Consultant...........................  1995    $   Nil    $12,771(6)     19,000 (cancelled)
Richard Coglon
President & CEO, Director(1).........  1997    $10,000    $ 5,000(2)     13,100
President & CEO, Director............  1996    $87,915    $23,261(2)    300,000
                                                          $ 2,788(5)
President from Aug. 1/95.............  1995    $14,541    $ 2,181(2)    150,000
                                                          $88,808(3)    205,000 (168,600 cancelled)
                                                                        150,000 (cancelled)
Erwin Noyes
Vice-President, Operations,            1997    $60,688    $ 9,854(6)
  Secretary, Director(1).............                                   235,000(8)(9)
Director, Consultant.................  1996    $   Nil    $43,632(6)     50,000(8)
Consultant...........................  1995    $   Nil    $12,270(6)     23,000 (cancelled)
John E. Lucken
Director, Consultant.................  1997    $   Nil    $48,000(6)    120,000(8)(9)
Director, Consultant.................  1996    $   Nil    $32,000(6)    Nil
Director, Consultant.................  1995    $   Nil    $18,000(6)     40,000
Robert A. Halpin
Director.............................  1997    $   Nil    $   Nil       120,000(8)
Nicholas F. Kuich
Director.............................  1997    $   Nil    $   Nil       120,000(8)
C.S. Tirmandi
Chief Financial Officer..............  1997    $   Nil    $22,738(6)     80,000(8)
</TABLE>
 
---------------
(1) Refer to note 1 to the Table under Item 9 hereof.
 
(2) Rent and secretarial services to a company controlled by Mr. Coglon.
 
(3) Legal fees to Richard L. Coglon Law Corporation, a law firm controlled by
    Mr. Coglon.
 
(4) Consulting fees, rent and secretarial services paid to a company controlled
    by Dr. Laycraft.
 
(5) Parking and club membership fees.
 
(6) Consulting fees.
 
                                       22
<PAGE>   23
 
(7) There are no outstanding restricted shares or units and the Company does not
    have a long-term incentive plan, pension plan or other compensatory plan
    for its executive officers.
 
(8) Refer to Incentive Stock Options and SARs.
 
(9) Refer to Note (2) to the table "Option Grants During the Most Recently
    Completed Financial Year.
 
INCENTIVE STOCK OPTIONS AND SARS
 
SARS
 
     The Company has not granted and does not intend to grant, stock
appreciation rights (SARs) representing rights to receive a payment in cash or
an issue or transfer of securities of the Company based wholly or in part on
changes in the trading prices thereon.
 
STOCK OPTION PLAN
 
     During the fiscal year ended September 30, 1997, the Company granted stock
options to certain of its directors, senior officers, employees and others,
pursuant to applicable securities laws and policies of The Alberta and Toronto
Stock Exchanges.
 
     On April 16, 1997 the Board of Directors of the Company adopted a stock
option plan, subject to shareholder approval. Such approval will be sought at
the upcoming Annual General and Special Meeting of Shareholders of the Company
to be held on or about March, 1998.
 
     The Plan, once approved will be administered by the Board of Directors of
TransGlobe (the "Board"). Transactions under the Plan are intended to comply
with all relevant provisions of law, including, without limitation, the United
States Securities Act of 1933 and the regulations thereunder, all applicable
conditions of Rule 16b-3 or its successors under Section 16 of the United States
Securities Exchange Act of 1934, the Securities Act and the regulations
thereunder of the province in which TransGlobe is resident and in the provinces
in which optionees may reside, and the requirements of the NASDAQ Stock Market,
Inc. ("NASDAQ"), The Alberta Stock Exchange (the "ASE"), The Toronto Stock
Exchange (the "TSE"), and any other stock exchange or market upon which the
Company's common shares may listed or quoted.
 
     The material provisions of the Plan are explained below:
 
1 -- Eligibility
 
     The Board may from time to time authorize the grant of options to a senior
officer or key employee of the Company or any subsidiary of the Company; subject
to applicable laws, a person providing on-going consulting services to the
Company or a subsidiary of the Company; or a member of the Board of Directors of
the Company or of a subsidiary of the Company.
 
2 -- Shares subject to the Plan
 
     - the aggregate number of common shares to be issued from time to time
       upon the exercise of options granted under the Plan will not exceed
       1,117,037 common shares;
 
     - no single officer, employee, or director of the Company will hold
       options for more than 5% of the issued and outstanding common shares;
 
     - the aggregate number of common shares to be issued upon the exercise of
       options granted under the Plan to consultants from time to time will not
       exceed 2% of the issued and outstanding common shares; and
 
     - no single consultant will be granted options for more than 1% per year
       of the issued and outstanding common shares.
 
                                       23
<PAGE>   24
 
3 -- Terms and conditions of options
 
     - The per-share exercise price of each option granted will not be less
       than the market value (the "Market Value") of a common share on the date
       an option is granted, which Market Value will be determined as follows:
 
     - if the common shares are listed or quoted on any established stock
       exchange or market, including without limitation the TSE or the ASE, the
       NASDAQ National Market System or the NASDAQ Small Cap Market, the Market
       Value will be no less than the higher of the last sale prices of a common
       share at the close of business on the last trading day preceding the date
       on which such option is granted; and
 
     - in the absence of an established market for the common shares, the
       Market Value will be determined in good faith by the Board.
 
     - The latest date on which an option may be exercised will be the fifth
       anniversary of the date the option was granted.
 
     - 50% of the options granted to each optionee under the Plan will become
       vested and exercisable on the six-month anniversary of the grant date, or
       at such other time as may be established by the Board at the time of
       grant, and the balance on the first anniversary of the grant date.
 
     - No option or any interest therein will be transferable or assignable
       otherwise than by will or pursuant to the laws of succession;
 
     - If any optionee ceases to be eligible for a grant of options under the
       Plan for any reason (a "Termination"), except the death of an optionee or
       by reason of retirement pursuant to an established retirement policy of
       the Board, all options granted to the optionee under the Plan and then
       held by the optionee will, to the extent such options were exercisable
       immediately prior to Termination, continue to be exercisable by the
       optionee for a period of 30 days following Termination or until the
       expiration date of the option if earlier.
 
     - If termination is by reason of retirement pursuant to an established
       retirement policy of the Board, all options held by the retiring optionee
       will become vested and exercisable, to the extent not already vested and
       exercisable, immediately prior to retirement, and they continue to be
       exercisable until their original expiration date.
 
     - In the event of the death of an optionee all options granted to the
       optionee under the Plan and held by the optionee immediately before death
       will, to the extent such options were exercisable at that time, continue
       to be exercisable by the legal representative of the optionee for a
       period of 6 months following the death of the optionee or until the
       expiration date of the option if earlier.
 
4 -- Term of Plan
 
     The Plan will terminate on April 16, 2007.
 
5 -- Amendments to Plan
 
     Amendments to the Plan, from time to time, will become effective on the
date of the approval of such amendments by the Board, subject to approval of
such amendments by securities regulators under applicable laws, or ratification
by the shareholders of the Company at a general meeting, as may be required.
 
                                       24
<PAGE>   25
 
     The following table sets out particulars concerning incentive stock option
grants to Directors and Executive Officers during the last completed financial
year and the fiscal year-end value of unexercised options.
 
<TABLE>
<CAPTION>
                                                                                     % OF TOTAL
                                                                                      OPTIONS
                                                                                     GRANTED TO       EXERCISE
                                                               SHARES UNDER          EMPLOYEES         PRICE
NAME                                                         OPTIONS GRANTED       IN FISCAL YEAR    ($/SECURITY)
-------------------------------------                      --------------------    --------------    ----------
<S>                                     <C>                <C>                     <C>               <C>
George Laycraft......................       150,000(1)              11.2%          Cdn. $2.25          11-27-98
                                              5,000(2)               0.4%          U.S. $1.56          04-23-02
Ross Clarkson........................       200,000(1)              14.9%          Cdn. $2.25          11-27-98
                                            100,000(2)               7.5%          U.S. $1.56          04-23-02
Erwin Noyes..........................       135,000(1)              10.1%          Cdn. $2.25          11-27-98
                                            100,000(2)               7.5%          U.S. $1.56          04-23-02
John Lucken..........................        55,000(1)               4.1%          Cdn. $2.25          11-27-98
                                             65,000(2)               4.9%          U.S. $1.56          04-23-02
Robert A. Halpin.....................       120,000(2)               9.0%          U.S. $1.56          04-23-02
Nicholas Kuich.......................       120,000(2)               9.0%          U.S. $1.56          04-23-02
C.S. Tirmandi........................        80,000(2)               6.9%          U.S. $1.56          04-23-02
</TABLE>
 
---------------
 
(1) Part of 540,000 options granted prior to adoption the Plan on November 27,
    1996.
 
(2) Part of 670,000 options granted under the Plan.
 
     During the year, the Executive Officers did not acquire any common shares
on exercise of stock options.
 
     Based on the closing price of the Company's shares as traded on NASDAQ on
September 30, 1997 ($1.25 per share), the value of unexercised options held by
the Executive Officers was nil.
 
COMPENSATION OF DIRECTORS
 
     The directors, in their capacity as directors of the Company, receive no
fees on an annual or per meeting basis, but the Company has periodically granted
to its directors incentive stock options to purchase common shares (see prior
tables).
 
     Messrs. Ross Clarkson and Erwin Noyes, both directors, prior to their
appointment as President and Vice-President, Operations respectively, have
provided geological consulting services to the Company, when required, at a rate
of Cdn. $500 per day. Mr. John Lucken, also a director of the Company, in his
capacity as Vice-President, Operations of TransGlobe U.S., received a monthly
retainer of $4,000 ($3,000 prior to January, 1997) pursuant to a consulting
contract. (Refer to the "Summary Compensation Table" for consulting fees paid to
the directors during the three most recently completed fiscal years).
 
EMPLOYMENT CONTRACTS
 
     Mr. Clarkson was appointed President and Chief Executive Officer of the
Company on December 4, 1996, which appointment will continue until November 30,
1998 unless sooner terminated by the Company. Mr. Clarkson has entered into an
employment contract with the Company, which provides for a monthly salary of
Cdn. $10,000 (approx. U.S. $7,200) in return for a full-time commitment to the
Company. The Company also paid to Mr. Clarkson an amount of $15,000 for agreeing
to become the President of the Company. Mr. Clarkson is also entitled to a
performance bonus payable in fully paid shares, upon the Company's cash flow
reaching specified amounts.
 
     The employment contract may be terminated by Mr. Clarkson on 30 days'
written notice. In addition, if the Board of Directors does not have a majority
of its members comprised of Dr. Laycraft, Mr. Noyes and others whose nomination
was proposed by them, Mr. Clarkson may, within six months after that event,
elect to terminate the contract and his employment, and the Company will pay to
him a retirement allowance in an
 
                                       25
<PAGE>   26
 
amount equal to 24 months of his then current salary. If Mr. Clarkson should die
during the term of the contract, the Company is required to pay his estate an
amount equal to six months of his then current salary.
 
     Mr. Erwin Noyes was appointed Vice-President, Operations of the Company on
November 8, 1996. Mr. Noyes entered into an employment contract with the Company
which provides for a monthly salary of Cdn. $5,000 (approx. U.S. $3,600) in
return for a part-time commitment to the Company.
 
     The employment contract may be terminated by Mr. Noyes on 30 days' written
notice. In addition, if the Board of Directors does not have a majority of its
members comprised of Dr. Laycraft, Mr. Noyes and others whose nomination was
proposed by them, Mr. Noyes may, within six months after that event, elect to
terminate the contract and his employment, and the Company will pay to him a
retirement allowance in an amount equal to six months of his then current
salary. If Mr. Noyes should die during the term of the contract, the Company is
required to pay his estate an amount equal to six months of his then current
salary.
 
ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     The following table sets forth the number of common shares beneficially
owned by each director and officer and by all directors and officers as a group
as of December 9, 1997. To the knowledge of the Company, there are no known
persons or companies who beneficially own, directly or indirectly, or exercise
control or direction over, more than five percent of its shares.
 
<TABLE>
<CAPTION>
 TITLE
  OF                                                            AMOUNT AND NATURE OF     PERCENT OF
 CLASS             NAME AND ADDRESS OF BENEFICIAL OWNER           BENEFICIAL OWNER         CLASS
-------    ---------------------------------------------------- --------------------     ----------
<S>        <C>                                                  <C>                      <C>
Common     G.H. Laycraft.......................................        536,205(1)        2.9%
           1403-2075 Comox Street,Vancouver, BC V6G 1S2
Common     R.G. Clarkson.......................................          3,170(2)        0.02%
           2226-246 Stewart Green, S.W., Calgary, AB, T3H 3C8
Common     E.L. Noyes..........................................              0(3)        0%
           1911 Meadowbank Road, Saanichton, BC, V8M 1X9
Common     J.E. Lucken.........................................         18,000(4)        0.1%
           12404 East Vassar Drive, Aurora, CO, 80414
Common     R.A. Halpin.........................................              0(5)        0%
           8907 Baylor Crescent S.W., Calgary, AB, T2V 3N5
Common     N.F. Kuich..........................................              0(5)        0%
           P.O. Box 1492, 0225 Alguezar Dr., Edwards, CO, 81632
Common     C.S. Tirmandi.......................................              0(6)        0%
           6947, Christie Estate Blvd. S.W., Calgary, AB, T3H
           3S1
           All Directors and Officers as a Group...............        557,375           3.1%
</TABLE>
 
---------------
 
Notes:
 
(1) G.H. Laycraft also holds warrants to purchase 152,687 common shares at a
    price of Cdn. $4.15 expiring January 25, 1998 and options to purchase
    150,000 common shares at Cdn. $2.25 per share, expiring November 27, 1998
    and 5,000 common shares at U.S. $1.56 per share, expiring April 23, 2002.
 
(2) R.G. Clarkson also holds options to purchase 200,000 common shares at Cdn.
    $2.25 per share, expiring November 27, 1998 and 100,000 common shares at
    U.S. $1.56 per share expiring April 23, 2002.
 
(3) E.L. Noyes holds options to purchase 135,000 common shares at Cdn. $2.25 per
    share, expiring November 27, 1998 and 100,000 common shares at U.S. $1.56
    per share expiring April 23, 2002.
 
(4) J.E. Lucken also holds options to purchase 55,000 common shares at Cdn.
    $2.25 per share, expiring November 27, 1998 and 65,000 common shares at
    U.S. $1.56 per share expiring April 23, 2002.
 
(5) Messrs. Halpin and Kuich hold options to purchase 120,000 common shares each
    at U.S. $1.56 each expiring April 23, 2002.
 
                                       26
<PAGE>   27
 
(6) C.S. Tirmandi holds options to purchase 80,000 common shares at U.S. $1.56
    per share expiring April 23, 2002.
 
ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     Amadeus Consultants Ltd., is a company controlled by G.H. Laycraft. In
fiscal 1996, the Company paid $4,762 to Amadeus Consultants Ltd., for consulting
fees, rent and secretarial services. No fees were paid to Amadeus Consultants
Ltd. during fiscal 1997 and Amadeus no longer provides services to the Company.
 
     G.H. Laycraft is also a director of Ultra Petroleum Corp. ("Ultra") and
Arrowhead Minerals Ltd., public companies which are joint venture partners with
the Company in a number of oil and gas properties. As at September 30, 1997,
Ultra owed $51,346 (1996 - $122,680) to the Company in respect of its joint
venture with the Company.
 
     Geosphere Resources Ltd., is a company controlled by R.G. Clarkson. In
fiscal 1996 and 1997, the Company paid $20,062 to Geosphere Resources Ltd., for
consulting fees. After Mr. Clarkson's appointment as the President and Chief
Executive Officer of the Company on December 4, 1996, the payments to Geosphere
Resources Ltd. ceased.
 
     Richard L. Coglon Law Corporation is a law firm controlled by R.L. Coglon,
a former director and officer of the Company. In fiscal 1996 and 1997, the
Company paid $34,211 to a company controlled by R.L. Coglon for rent and
secretarial services. In 1997, the Company purchased Mr. Coglon's 3.75% working
interest in the East Grieve prospect, for $59,545.
 
     CST Financial Services Inc., is a company controlled by C.S. Tirmandi. In
fiscal 1997, the Company paid $22,738 to CST Financial Services Inc., for
consulting services.
 
     John E. Lucken, the Vice-President of TransGlobe US and a director of the
Company, has a 2% gross overriding royalty interest on TransGlobe's working
interest in the East Meridian prospect, Montana. During 1997, the Company paid
to Mr. Lucken $926 for his royalty interest payments. Mr. Lucken is indebted to
the Company in the amount of $60,628 as at September 30, 1997. This amount is
related to the short swing profits discussed in Item 9 above.
 
     During 1996, the Company completed a private placement of units, comprising
shares of the Company and warrants to purchase additional shares of the Company,
at a 15% discount from the closing market price of the Company's shares as
traded on the Vancouver Stock Exchange on the day before the transaction. The
following directors of the Company participated in this private placement as
follows:
 
<TABLE>
<CAPTION>
                                                                     NAME OF                           NO. OF
                                              PRICE PER UNIT       INTERESTED        NO. OF UNITS     WARRANTS
DATE                         NO. OF UNITS        (CDN. $)           DIRECTOR          PURCHASED       EXERCISED
---------------------------  ------------     --------------     ---------------     ------------     ---------
<S>                          <C>              <C>                <C>                 <C>              <C>
01-25-96...................     158,227(1)        $ 3.61         George Laycraft        152,687          Nil
                                                                 Ross Clarkson            2,770          Nil
</TABLE>
 
---------------
 
Notes:
 
(1) Each unit consisted of one share and one warrant to purchase an additional
    share at Cdn $3.61 during the first year and Cdn. $4.15 during the second
    year, expiring January 25, 1998.
 
     In January, 1996, the Company acquired a 15% equity interest for $750,000
in IPC International Power Corporation ("IPC") which owned a 60% equity interest
in British Columbia Hydro International Power Development Corporation. Dr.
Laycraft, the Chairman and a director of the Company and a former director of
IPC, and associates of Richard Coglon, a former director and president of the
Company, owned equity interests in IPC. The Company sold its interest in IPC in
April 1997 for proceeds of $1,012,500, resulting in a gain of $262,500.
 
     During fiscal 1997 Mrs. Julie Clarkson (the spouse of Mr. Ross Clarkson, a
director and the President and Chief Executive Officer of the Company), Mr.
Allan Bruce Clarkson (the brother of Mr. Clarkson),
 
                                       27
<PAGE>   28
 
Mr. Leslie Trevor Clarkson (the father of Mr. Clarkson), and Mrs. Margaret
Bonita Clarkson (the mother of Mr. Clarkson), each purchased 55,000 Special
Warrants at $1.30 per Special Warrant. The Special Warrants were converted to
Common shares pursuant to the filing of a Prospectus with the Commissions in the
provinces of British Columbia, Alberta, Ontario and Quebec. (Note 6(d) in the
Consolidated Financial Statements).
 
ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K
 
A) EXHIBITS
 
     Exhibits marked with an asterisk have been previously filed with the
Securities and Exchange Commission by the Company, and are incorporated by
reference, as indicated. Other exhibits, if not so designated, are filed with
this Form 10-KSB.
 
     Exhibit 3* -- Certificate of Incorporation as amended and by-laws.
 
     Exhibit 10.1 -- Employment agreement of Ross G. Clarkson dated December 4,
        1996.
 
     Exhibit 10.2 -- Employment agreement of Erwin L. Noyes dated November 8,
        1996.
 
     Exhibit 10.3 -- Stock Option Plan dated April 16, 1997.
 
     Exhibit 21 -- List of subsidiaries of the Registrant.
 
                                       28
<PAGE>   29
 
                                AUDITORS' REPORT
 
To the Shareholders of
  TransGlobe Energy Corporation
 
     We have audited the consolidated balance sheets of TransGlobe Energy
Corporation as at September 30, 1997 and 1996 and the consolidated statements of
operations and cash flows for each of the years in the two year period then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
 
     In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Company as at September 30, 1997 and
1996 and the results of its operations and the changes in its financial position
for each of the years in the two year period then ended in accordance with
generally accepted accounting principles in Canada. As required by the Company
Act (British Columbia), we report that, in our opinion, these principles have
been applied on a consistent basis.
 
Chartered Accountants
 
Calgary, Canada
November 21, 1997
 
                                       29
<PAGE>   30
 
                         TRANSGLOBE ENERGY CORPORATION
 
                           CONSOLIDATED BALANCE SHEET
                               AS AT SEPTEMBER 30
                          (EXPRESSED IN U.S. DOLLARS)
 
<TABLE>
<CAPTION>
                                                                      1997             1996
                                                                  ------------     ------------
<S>                                                               <C>              <C>
                                            ASSETS
CURRENT ASSETS
Cash and term deposits (Note 1(f))............................    $  3,489,373     $    588,664
Accounts receivable...........................................         271,671          206,992
Due from related parties (Note 8).............................         137,561          187,784
Prepaid expenses..............................................          38,341            5,396
                                                                  ------------     ------------
                                                                     3,936,946          988,836
                                                                  ------------     ------------
CAPITAL ASSETS
Mineral properties (Note 2)...................................         --             1,704,226
Oil and gas properties
-- United States (Note 3).....................................       7,588,269        8,171,483
-- Republic of Yemen (Note 4).................................       3,803,611          196,268
Furniture and fixtures........................................          54,164           12,847
                                                                  ------------     ------------
                                                                    11,446,044       10,084,824
                                                                  ------------     ------------
INVESTMENT IN IPC INTERNATIONAL POWER CORPORATION (NOTE 5)....         --               750,000
                                                                  ------------     ------------
                                                                  $ 15,382,990     $ 11,823,660
                                                                  ============     ============
                                          LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities......................    $  1,515,833     $    477,912
                                                                  ------------     ------------
SHAREHOLDERS' EQUITY
SHARE CAPITAL (NOTE 6)........................................      27,371,846       18,581,646
Deficit.......................................................     (13,504,689)      (7,235,898)
                                                                  ------------     ------------
                                                                    13,867,157       11,345,748
                                                                  ------------     ------------
                                                                  $ 15,382,990     $ 11,823,660
                                                                  ============     ============
</TABLE>
 
     Approved by the Directors:
 
<TABLE>
<CAPTION>
<S>                                              <C>
             "ROSS G. CLARKSON"                                "ERWIN L. NOYES"
--------------------------------------------     --------------------------------------------
              Ross G. Clarkson                                  Erwin L. Noyes
           President and Director                  Vice-President, Operations and Director
</TABLE>
 
                                       30
<PAGE>   31
 
                         TRANSGLOBE ENERGY CORPORATION
 
                      CONSOLIDATED STATEMENT OF OPERATIONS
                            YEARS ENDED SEPTEMBER 30
                          (EXPRESSED IN U.S. DOLLARS)
 
<TABLE>
<CAPTION>
                                                                      1997             1996
                                                                  ------------     ------------
<S>                                                               <C>              <C>
REVENUE
Oil and gas sales net of royalties............................    $  1,039,998     $  1,022,324
Interest income...............................................         199,897           33,915
Gain on disposal of investment (Note 5).......................         262,500               --
                                                                  ------------     ------------
                                                                     1,502,395        1,056,239
                                                                  ------------     ------------
EXPENSES
Operating.....................................................         180,050          200,379
General and administrative....................................       1,253,223          833,344
Depletion and depreciation....................................         903,603          877,372
Write-down of oil and gas properties (Note 3).................       3,710,000        2,236,000
Write-down of mineral properties (Note 2).....................       1,724,310          279,240
                                                                  ------------     ------------
                                                                     7,771,186        4,426,335
                                                                  ------------     ------------
LOSS FOR THE YEAR.............................................      (6,268,791)      (3,370,096)
Deficit, beginning of year as previously reported.............      (4,635,898)      (3,865,802)
Prior period adjustment (Note 3b).............................      (2,600,000)              --
                                                                  ------------     ------------
Deficit, beginning of year as restated........................      (7,235,898)      (3,865,802)
                                                                  ------------     ------------
DEFICIT, END OF YEAR..........................................    $(13,504,689)    $ (7,235,898)
                                                                  ============     ============
LOSS PER SHARE................................................    $      (0.46)    $      (0.43)
                                                                  ============     ============
</TABLE>
 
                                       31
<PAGE>   32
 
                         TRANSGLOBE ENERGY CORPORATION
 
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                            YEARS ENDED SEPTEMBER 30
                          (EXPRESSED IN U.S. DOLLARS)
 
<TABLE>
<CAPTION>
                                                                      1997             1996
                                                                  ------------     ------------
<S>                                                               <C>              <C>
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Loss for the year.............................................    $ (6,268,791)    $ (3,370,096)
Items not involving cash
Write-down of oil and gas properties (Note 3).................       3,710,000        2,236,000
Write-down of mineral properties (Note 2).....................       1,724,310          279,240
Gain on disposal of investment (Note 5).......................        (262,500)              --
Depletion and depreciation....................................         903,603          877,372
                                                                  ------------     ------------
                                                                      (193,378)          22,516
Change in non-cash working capital (Note 10)..................         (77,954)         (96,620)
                                                                  ------------     ------------
                                                                      (271,332)         (74,104)
                                                                  ------------     ------------
INVESTING ACTIVITIES
Mineral property expenditures.................................         (20,084)         (23,070)
Oil and gas property expenditures -- United States............      (4,010,788)      (4,043,417)
                                    -- Yemen..................      (3,607,343)         (17,058)
Additions to furniture and fixtures...........................         (60,918)          (7,751)
Investment in IPC International Power Corporation (Note 5)....              --         (750,000)
Proceeds on disposal of investment (Note 5)...................       1,012,500               --
Change in non-cash working capital (Note 10)..................       1,068,474               --
                                                                  ------------     ------------
                                                                    (5,618,159)      (4,841,296)
                                                                  ------------     ------------
FINANCING ACTIVITIES
Issue of convertible debentures...............................       3,221,852               --
Issue of share capital (Note 6)...............................       5,568,348        4,857,372
                                                                  ------------     ------------
                                                                     8,790,200        4,857,372
                                                                  ------------     ------------
INCREASE (DECREASE) IN CASH...................................       2,900,709          (58,028)
Cash, beginning of year.......................................         588,664          646,692
                                                                  ------------     ------------
CASH, END OF YEAR.............................................    $  3,489,373     $    588,664
                                                                  ============     ============
</TABLE>
 
                                       32
<PAGE>   33
 
                         TRANSGLOBE ENERGY CORPORATION
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               (EXPRESSED IN U.S. DOLLARS UNLESS OTHERWISE NOTED)
                  TWO YEARS ENDED SEPTEMBER 30, 1997 AND 1996
 
1.   SIGNIFICANT ACCOUNTING POLICIES
 
(A) BASIS OF CONSOLIDATION
 
     These financial statements include the accounts of the Company and its
wholly-owned United States subsidiary TransGlobe Oil and Gas Corporation and its
wholly owned Turks and Caicos Islands subsidiaries, TransGlobe International
(Holdings) Inc., and TG Holdings Yemen Inc.
 
(B) ACCOUNTING PRINCIPLES
 
     The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in Canada which conform in all material
respects with accounting principles generally accepted in the United States,
except as disclosed in Note 10.
 
(C) MINERAL PROPERTIES
 
     The Company records its interest in mineral properties at cost and has
capitalized development costs specifically identifiable to the properties. When
commercial production is achieved for a specific property, the costs capitalized
will be amortized against revenue realized on production from the property. In
the event of the abandonment of a property, the costs capitalized for that
property are written off to operations. The amounts shown for mineral properties
represent costs for the acquisition and development of the properties and do not
necessarily reflect present or future values.
 
(D) OIL AND GAS PROPERTIES
 
     The Company follows the full cost method of accounting for oil and gas
operations whereby all costs associated with the exploration for and development
of oil and gas reserves are capitalized. Such costs include land acquisition
costs, geological and geophysical expenses, carrying charges on non-producing
properties, costs of drilling both productive and non-productive wells and
overhead charges directly related to acquisition, exploration and development
activities.
 
     The capitalized costs, together with the costs of production equipment, are
depleted and depreciated on the unit-of-production method based on the estimated
gross proven reserves as determined by independent petroleum engineers. Oil and
gas reserves and production are converted into equivalent units based upon
relative energy content.
 
     Costs of acquiring and evaluating unproved properties are initially
excluded from depletion calculation. These unproved properties are assessed
periodically to ascertain whether impairment has occurred. When proven reserves
are assigned or the property is considered to be impaired, the cost of the
property or the amount of the impairment is added to costs subject to depletion
and depreciation.
 
     The capitalized costs less accumulated depletion and depreciation, deferred
income taxes and the provision for future site restoration costs in each cost
centre are limited to an amount equal to the estimated future net revenue from
proven reserves plus the cost (net of impairment) of unproven properties.
 
     The total capitalized costs less accumulated depletion and depreciation,
deferred income taxes and the provision for future site restoration costs of all
cost centres is further limited to an amount equal to the estimated future net
revenue from proven reserves plus the cost (net of impairment) of unproven
properties of all cost centres less estimated future site restoration costs,
general and administrative expenses, financing costs and income taxes.
 
                                       33
<PAGE>   34
 
                         TRANSGLOBE ENERGY CORPORATION
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
               (EXPRESSED IN U.S. DOLLARS UNLESS OTHERWISE NOTED)
                  TWO YEARS ENDED SEPTEMBER 30, 1997 AND 1996
 
     Proceeds from the sale of oil and gas properties are applied against
capitalized costs, with no gain or loss recognized, unless such a sale would
significantly alter the rate of depletion and depreciation.
 
     Substantially all of the Company's exploration, development and production
activities are conducted jointly with others and accordingly these financial
statements reflect only the Company's proportionate interest in such activities.
 
     Estimated future site restoration costs are provided for using the
unit-of-production method and remaining proven reserves. Costs are estimated by
the Company based on current regulations, costs, technology and industry
standards. The annual charge is included in the provision for depletion and
depreciation. Actual site restoration expenditures are charged to the
accumulated provision account as incurred.
 
(E) SHARE CAPITAL
 
     The common shares issued for services and oil and gas properties are
ascribed values equal to the fair market value of the services rendered or
properties received. The number of common shares are determined by dividing the
fair market value of the services or oil and gas properties by the average
closing market value of the Company's common shares.
 
(F) FOREIGN CURRENCY
 
     The Company has adopted United States dollar as its reporting currency
since the majority of the Company's business is transacted in United States
dollars. The Company and its subsidiary are considered to be integrated
operations and the accounts are translated using the temporal method. Under this
method, monetary assets and liabilities are translated at the rates of exchange
in effect at the balance sheet date; non-monetary assets at historical rates and
revenue and expense items at the average rates for the period, other than
depletion and depreciation which are translated at the same rates of exchange as
the related assets. The net effect of the foreign currency translation is
included in current operations.
 
     Cash and term deposits are Canadian funds converted to U.S. dollars at the
year end rate of exchange. All other balance sheet accounts were denominated in
U.S. dollars.
 
2.   MINERAL PROPERTIES
 
<TABLE>
<CAPTION>
                                                        BARSTOW        OKANAGAN
                                                       PROPERTY          FALLS           TOTAL
                                                      -----------     -----------     -----------
<S>                                                   <C>             <C>             <C>
Balance, September 30, 1995.......................      1,681,451         278,945
Advance royalty payments..........................         20,000         --               20,000
Exploration costs.................................          2,775             295           3,070
Write-down of mineral properties..................        --             (279,240)       (279,240)
                                                      -----------     -----------     -----------
Balance, September 30, 1996.......................      1,704,226         --            1,704,226
Advance royalty payments..........................         20,084         --               20,084
Write-down of mineral properties..................     (1,724,310)        --           (1,724,310)
                                                      -----------     -----------     -----------
Balance, September 30, 1997.......................    $   --          $   --          $   --
                                                      ===========     ===========     ===========
</TABLE>
 
                                       34
<PAGE>   35
 
                         TRANSGLOBE ENERGY CORPORATION
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
               (EXPRESSED IN U.S. DOLLARS UNLESS OTHERWISE NOTED)
                  TWO YEARS ENDED SEPTEMBER 30, 1997 AND 1996
 
BARSTOW PROPERTY
 
     The Company acquired a group of mining claims in San Bernadino County,
California, U.S.A. The Company is making annual advance royalty payments of
$20,000 per year. The Company has abandoned its plan to develop the Barstow
property and consequently has written off the capitalized costs to operations.
 
OKANAGAN FALLS PROPERTY
 
     The Company had a number of mineral claims in the Osoyoos Mining Division
of British Columbia. In 1996, the Company allowed the lease on the claims to
expire. The costs capitalized were written off to operations.
 
3.   OIL AND GAS PROPERTIES -- UNITED STATES
 
<TABLE>
<CAPTION>
                                                                           SEPTEMBER 30
                                                                    ---------------------------
                                                                       1997            1996
                                                                    -----------     -----------
<S>                                                                 <C>             <C>
Oil and gas properties..........................................    $16,273,792     $12,270,006
Accumulated depletion, depreciation and write-downs.............      8,685,523       4,098,523
                                                                    -----------     -----------
                                                                    $ 7,588,269     $ 8,171,483
                                                                    ===========     ===========
</TABLE>
 
     a) Costs of $1,656,000 (1996 -- $2,950,000) related to unproven properties
were excluded from the depletion and depreciation calculation.
 
     b) Subsequent to the release of the consolidated financial statements for
the year ended September 30, 1996, the Company discovered an error in its
calculation of proven oil and gas reserves. As a result, the Company's oil and
gas properties were overstated by $2,600,000 ($2,971,000 under U.S. GAAP). The
decrease in value has been recorded retroactively to September 30, 1996 as
follows:
 
<TABLE>
<CAPTION>
                                                                   CANADIAN BASIS     U.S. BASIS
                                                                   --------------     -----------
<S>                                                                <C>                <C>
Additional write-down of oil and gas properties................      $ 2,236,000      $ 2,607,000
Additional depletion expense...................................          364,000          364,000
                                                                     -----------      -----------
                                                                     $ 2,600,000      $ 2,971,000
                                                                     ===========      ===========
</TABLE>
 
4.   OIL AND GAS PROPERTIES -- REPUBLIC OF YEMEN
 
(A) CAPITALIZED COSTS
 
     The Company has recorded its investment in the Yemen projects at cost and
has capitalized costs specifically identifiable to the projects. In the event of
the abandonment of the projects, the costs capitalized will be written off to
operations. The amounts shown represent costs incurred to date, and do not
necessarily reflect present or future values.
 
(B) BLOCK 32
 
     The Company has an 8% working interest in Block 32. During the year, the
Company participated in seismic acquisition and agreed to participate in a three
well drilling program. Two dry holes were drilled during fiscal 1997 at a net
cost to the Company of $3,329,183. Subsequent to September 30, 1997, the Company
is
 
                                       35
<PAGE>   36
 
                         TRANSGLOBE ENERGY CORPORATION
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
               (EXPRESSED IN U.S. DOLLARS UNLESS OTHERWISE NOTED)
                  TWO YEARS ENDED SEPTEMBER 30, 1997 AND 1996
 
participating in the drilling of a third well. This well has encountered
hydrocarbons and is currently being evaluated to determine whether it is
commercially viable.
 
(C) BLOCK S1
 
     The Company has entered into a memorandum of understanding (the "MOU") with
the Ministry of Oil and Mineral Resources (the "MOMR") in the Republic of Yemen
regarding Block S1. The MOU establishes all the major financial terms of a
production sharing agreement which the Company is presently negotiating with the
MOMR. During the year, direct expenses of $95,678 (1996 -- $17,058) were
incurred in relation to this block.
 
(D) CAPITALIZED OVERHEAD
 
     The Company capitalized $182,482 (1996 -- $ Nil) of overhead directly
related to its activities in Yemen.
 
5.   INVESTMENT IN IPC INTERNATIONAL POWER CORPORATION
 
     The Company acquired a 15% equity interest in IPC International Power
Corporation, a private British Columbia corporation having a 60% equity interest
in British Columbia Hydro International Power Development Corporation, for
$750,000. In April, 1997, the Company sold this investment for $1,012,500
resulting in a gain of $262,500.
 
6.   SHARE CAPITAL
 
(A) AUTHORIZED
 
     The authorized capital is 100,000,000 shares with no par value.
 
(B) ISSUED
 
<TABLE>
<CAPTION>
                                                                       NUMBER
                                                                     OF SHARES      CONSIDERATION
                                                                     ----------     -------------
    <S>                                                              <C>            <C>
    Balance, September 30, 1995..................................     7,156,298      $ 13,724,274
    Issued for cash net of issue expenses of $170,058............     1,683,058         4,697,816
    Issued for oil and gas property..............................        50,000           139,500
    Issued for services..........................................         7,000            20,056
                                                                     ----------       -----------
    Balance, September 30, 1996..................................     8,896,356        18,581,646
    Issued for cash net of issue expenses of $33,395.............       316,000           389,221
    Issued on conversion of convertible debentures...............     4,569,021         3,221,852
    Issued on exercise of special warrants net of issue expenses
      of $169,073................................................     4,400,000         5,179,127
                                                                     ----------       -----------
    Balance, September 30, 1997..................................    18,181,377      $ 27,371,846
                                                                     ==========       ===========
</TABLE>
 
(C) SHARES ISSUED FOR CONVERTIBLE DEBENTURES
 
     In November 1996, the Company issued convertible debentures for net
proceeds of $3,221,852. In January 1997, all convertible debentures were
converted into 4,569,021 common shares.
 
                                       36
<PAGE>   37
 
                         TRANSGLOBE ENERGY CORPORATION
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
               (EXPRESSED IN U.S. DOLLARS UNLESS OTHERWISE NOTED)
                  TWO YEARS ENDED SEPTEMBER 30, 1997 AND 1996
 
(D) SHARES ISSUED FOR SPECIAL WARRANTS
 
     On March 26, 1997, the Company issued 4,400,000 special warrants at $1.30
per special warrant pursuant to a private placement. Each special warrant
entitled the holder thereof to acquire one common share of the Company at no
additional cost until March 26, 1998. All special warrants were exercised on
July 7, 1997 resulting in the issuance of 4,400,000 common shares for net
proceeds of $5,179,127 after the issue expenses of $169,073.
 
(E) SHARE PURCHASE OPTIONS
 
     The changes in the share purchase options for the years ended September 30,
1996 and 1997 were as follows:
 
<TABLE>
<CAPTION>
                                                             NUMBER            PRICE RANGE
                                                            ---------     ----------------------
<S>                                                         <C>           <C>
Outstanding at September 30, 1995.......................      575,000     Cdn.$2.70 to $6.11
Granted.................................................      643,000     Cdn.$3.75
Exercised...............................................     (523,300)    Cdn.$2.70 to $5.71
Cancelled...............................................     (373,600)    Cdn.$5.71 to $6.11
                                                            ---------
Outstanding at September 30, 1996.......................      321,100     Cdn.$2.70 to $3.75
Granted.................................................    1,340,000     U.S.$1.33 to Cdn.$2.25
Exercised...............................................      (14,000)    Cdn.$3.75
Cancelled...............................................     (256,000)    Cdn.$2.70 to $3.75
                                                            ---------
Outstanding at September 30, 1997.......................    1,391,100     U.S.$1.33 to Cdn.$3.75
                                                            =========
</TABLE>
 
     The following share purchase options were outstanding at September 30,
1997:
 
<TABLE>
<CAPTION>
 NUMBER
OF SHARES     OPTION PRICE         EXPIRY DATE
---------     ------------     -------------------
<C>           <C>              <S>
   13,100       Cdn.$3.75      January 16, 1999
   20,000       Cdn.$2.25      January 16, 1999
   38,000       Cdn.$3.75      January 16, 1998
  540,000       Cdn.$2.25      November 27, 1998
  670,000       U.S.$1.56      April 23, 2002
  110,000       U.S.$1.33      September 19, 2002
---------
1,391,100
=========
</TABLE>
 
     The Company established a stock option plan in April, 1997, and amended it
on October 17, 1997 (the "Plan"). The maximum number of common shares to be
issued upon the exercise of options granted under the Plan is 1,117,037 common
shares. All options granted under the Plan will have a per-share exercise price
not less than the trading market value of the common shares at the date of grant
and will vest as to 50% of the options, six months after the grant date, and as
to the remaining 50%, one year from the grant date. 670,000 stock options have
been granted under the Plan at an exercise price of US $1.56 on April 23, 1997
of which 335,000 will vest on October 23, 1997 and the balance on April 23,
1998. On September 19, 1997, the Company granted 110,000 stock options under the
Plan at an exercise price of US $1.33. These options will vest as to 50% on
March 19, 1998 and as to 100% on September 19, 1998. All other options are
vested.
 
                                       37
<PAGE>   38
 
                         TRANSGLOBE ENERGY CORPORATION
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
               (EXPRESSED IN U.S. DOLLARS UNLESS OTHERWISE NOTED)
                  TWO YEARS ENDED SEPTEMBER 30, 1997 AND 1996
 
(F) SHARE PURCHASE WARRANTS
 
     The following share purchase warrants were outstanding at September 30,
1997:
 
<TABLE>
<CAPTION>
 NUMBER
OF SHARES     WARRANT PRICE        EXPIRY DATE
---------     -------------     -----------------
<C>           <C>               <S>
 158,227        Cdn.$4.15       January 25, 1998
 100,000        Cdn.$3.69       January 31, 1998
 -------
 258,227
 =======
</TABLE>
 
(G) SHORT SWING PROFITS
 
     In April, 1997, the Company received letters from US lawyers on behalf of
two Company shareholders, asking that the Company make claims against certain
directors of the Company to recoup "short swing profits" under the provisions of
Section 16(b) of the US Securities Exchange Act of 1934. Under that statute, the
Company is entitled to receive any profit made by its executive officers,
directors and shareholders (individually holding in excess of 10% of the
outstanding common shares) as a result of their purchases and sales of the
Company's common shares, where both the purchase and sale occur within six month
of one another. Three directors of the Company paid or agreed to pay an
aggregate of $79,950 to the Company for short swing profits which were recorded
as an increase in share capital. The Company has determined that certain other
directors and officers of the Company may also have made short swing profits
pursuant to Section 16(b). The extent of this amount is not estimable at this
time due to insufficient information.
 
7.   INCOME TAXES
 
     The Company has available approximately $4,300,000 in loss carry forwards
and approximately $8,300,000 in Canadian and foreign exploration and development
expenses for income tax purposes to reduce future years' taxable income in
Canada. The losses expire between 2000 and 2005. The Company also has income tax
losses of approximately $3,800,000 available to reduce future income taxes
payable in the United States expiring between 2007 and 2012. These balances are
subject to confirmation by income tax authorities. Potential tax benefits of
loss carry forwards have not been recorded in the accounts.
 
8.   RELATED PARTY TRANSACTIONS
 
     The following fees were paid or accrued to directors and officers of the
Company.
 
<TABLE>
<CAPTION>
                                                                             1997       1996
                                                                            ------     -------
<S>                                                                         <C>        <C>
Consulting fees, rent, and secretarial fees to companies controlled by
  directors.............................................................    $5,000     $28,723
</TABLE>
 
     Amounts due from related parties are as follows:
 
          (a) $76,933 (1996 -- $122,680) due from companies whose directors
     include a director of the Company. The Company and these companies are
     co-venturers in a number of oil and gas properties in the United States.
 
          (b) In 1996, $65,104 was due from a director of the Company. The
     Company and this director are co-venturers in an oil and gas property.
 
          (c) In 1997, $60,628 is due from a director. This receivable bears an
     interest rate of 4.75% per annum and is payable in equal installments of
     $1,500 per month.
 
                                       38
<PAGE>   39
 
                         TRANSGLOBE ENERGY CORPORATION
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
               (EXPRESSED IN U.S. DOLLARS UNLESS OTHERWISE NOTED)
                  TWO YEARS ENDED SEPTEMBER 30, 1997 AND 1996
 
9. DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND
   THE UNITED STATES
 
     The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in Canada (Canadian basis) which differ
in certain respects from those principles and practices that the Company would
have followed had its consolidated financial statements been prepared in
accordance with accounting principles and practices generally accepted in the
United States (U.S. basis).
 
     Had the Company followed the U.S. basis, the oil and gas properties section
of the balance sheet would have been reported as follows:
 
<TABLE>
<CAPTION>
                                                                 SEPTEMBER 30
                                        ---------------------------------------------------------------
                                                    1997                              1996
                                        -----------------------------     -----------------------------
                                        CANADIAN BASIS     U.S. BASIS     CANADIAN BASIS     U.S. BASIS
                                        --------------     ----------     --------------     ----------
                                                                            (as restated -- note 3b)
<S>                                     <C>                <C>            <C>                <C>
Oil and gas properties --
  United States.....................      $7,588,269       $6,315,269       $8,171,483       $6,707,149
  Republic of Yemen.................       3,803,611        3,803,611          196,268          196,268
</TABLE>
 
     Had the Company followed the U.S. basis, the shareholders' equity section
of the balance sheet would have been reported as follows:
 
<TABLE>
<CAPTION>
                                                                SEPTEMBER 30
                                      -----------------------------------------------------------------
                                                   1997                               1996
                                      ------------------------------     ------------------------------
                                      CANADIAN BASIS     U.S. BASIS      CANADIAN BASIS     U.S. BASIS
                                      --------------     -----------     --------------     -----------
                                                                         (as restated -- note 3b)
<S>                                   <C>                <C>             <C>                <C>
Share Capital.....................      $27,371,846      $28,205,179       $18,581,646      $19,414,979
Exchange gain (loss) (Note
  10(c)...........................               --           51,611                --           (3,939)
Deficit...........................      (13,504,689)     (16,972,411)       (7,235,898)      (9,529,626)
                                        -----------      -----------       -----------      -----------
                                        $13,867,157      $11,284,379       $11,345,748      $ 9,881,414
                                        ===========      ===========       ===========      ===========
</TABLE>
 
     Had the Company followed the U.S. basis, the statement of operations would
have been reported as follows:
 
<TABLE>
<CAPTION>
                                                                      YEAR ENDED SEPTEMBER 30
                                                                   ------------------------------
                                                                      1997              1996
                                                                   -----------     --------------
                                                                                  (as restated --
                                                                                      note 3b)
<S>                                                                <C>             <C>
Loss for the year under Canadian Basis.........................    $(6,268,791)      $(3,370,096)
Effect of ceiling test differences (Note 10b)..................     (1,273,000)         (519,000)
Effect of elimination of foreign exchange (gain) loss (Note
  10c).........................................................         99,006            12,887
                                                                   -----------       -----------
Loss for the year under U.S. Basis.............................    $(7,442,785)      $(3,876,209)
                                                                   ===========       ===========
Loss per share under Canadian Basis............................    $     (0.46)      $     (0.43)
                                                                   ===========       ===========
Loss per share under U.S. Basis................................    $     (0.57)      $     (0.49)
                                                                   ===========       ===========
</TABLE>
 
(A) ACCOUNTING FOR INCOME TAXES
 
     Under the liability method of Statement of Financial Standards No. 109
("SFAS 109"), deferred income tax assets and liabilities are measured using
enacted tax rates for the future income tax consequences
 
                                       39
<PAGE>   40
 
                         TRANSGLOBE ENERGY CORPORATION
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
               (EXPRESSED IN U.S. DOLLARS UNLESS OTHERWISE NOTED)
                  TWO YEARS ENDED SEPTEMBER 30, 1997 AND 1996
 
attributable to differences between the financial statement carrying amount of
existing assets and liabilities and their respective tax bases. There is no
effect of applying the provision of SFAS 109 on the Company's financial
statements as the recognition criteria for deferred tax assets has not been met.
 
(B) OIL AND GAS PROPERTIES
 
     Under SEC regulations, the future net revenue as calculated for the ceiling
test excludes future overhead costs and must be discounted at 10%. This is not
required under Canadian generally accepted accounting principles ("GAAP"). The
effect of applying this provision to the Company's financial statements would
increase the loss from operations for the years ended September 30, 1997 and
1996 $1,273,000 and $519,000 respectively, and decrease oil and gas properties
by the same amount.
 
(C) TRANSLATION OF FOREIGN CURRENCY
 
     U.S. GAAP requires all balance sheet items to be translated at current
exchange rates and revenue and expense transactions translated at the weighted
average exchange rates for the period. For U.S. GAAP purposes, foreign currency
adjustments resulting from the translation of assets and liabilities of
subsidiaries with a functional currency other than the U.S. dollar are excluded
from net income and reported as a separate component of shareholders' equity.
 
     The Company has included exchange gains (losses) arising from using the
temporal method as described in Note 1 in operations for the years ended
September 30, 1997 and 1996. If the consolidated statements of loss and deficit
and balance sheet had been prepared in accordance with U.S. GAAP, the exchange
gains (losses) for the years ended September 30, 1997 and 1996 of $51,611 and
$(3,939) respectively, would have not been reflected in operations, but reported
as a separate component of shareholders' equity.
 
(D) EARNINGS PER SHARE
 
     Under U.S. GAAP, primary loss per share would be computed as if common
share purchase options and warrants were exercised at the beginning of the year,
and as if funds obtained thereby were used to purchase common shares of the
Company at the average market price during the year. Thus, only the net increase
in shares is added to the weighted average number of common shares outstanding.
The effect of potential conversions is ignored when the effect of increasing
earnings per share or decreasing a loss per share. The calculation of loss per
share under U.S. GAAP would not have generated results materially different than
those disclosed in the consolidated statement of operations.
 
(E) SHARE PURCHASE OPTIONS
 
     The Company applies APB Opinion 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
for stock options issued prior to the adoption of the Plan and under the Plan.
 
                                       40
<PAGE>   41
 
                         TRANSGLOBE ENERGY CORPORATION
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
               (EXPRESSED IN U.S. DOLLARS UNLESS OTHERWISE NOTED)
                  TWO YEARS ENDED SEPTEMBER 30, 1997 AND 1996
 
     Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of FASB Statement 123, the Company's loss for
the year and loss per share would have been increased to the pro forma amounts
indicated below for the years ended September 30, 1997 and 1996:
 
<TABLE>
<CAPTION>
                                                                       1997            1996
                                                                    -----------     -----------
<S>                                                                 <C>             <C>
Loss for the year
  As reported...................................................    $(7,442,785)    $(3,878,209)
                                                                    ============    ============
  Pro forma.....................................................    $(7,913,744)    $(4,482,710)
                                                                    ============    ============
  Primary and fully diluted loss per share
  As reported...................................................    $     (0.57)    $     (0.49)
                                                                    ============    ============
  Pro forma.....................................................    $     (0.60)    $     (0.57)
                                                                    ============    ============
</TABLE>
 
     The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumption used for grants in fiscal years ended September 30, 1997 and 1996: no
dividend yield; expected volatility of 72%; the weighted average risk-free
interest rate of 6.75%, and expected lives of 2 years.
 
     A summary of the status of the Company's fixed stock options as of
September 30, 1997 and 1996, and changes during the years ended on those dates
is presented below:
 
<TABLE>
<CAPTION>
                                                              1997                     1996
                                                     ----------------------   ----------------------
                                                                   WEIGHTED                 WEIGHTED
                                                                   AVERAGE                  AVERAGE
                                                                   EXERCISE                 EXERCISE
FIXED OPTIONS                                         SHARES        PRICE      SHARES        PRICE
-------------------------------------------------    ---------     --------   ---------     --------
<S>                                                  <C>           <C>        <C>           <C>
Outstanding at beginning of year.................      321,100      $ 2.57      575,000      $ 3.60
Granted..........................................    1,340,000        1.57      643,000        2.74
Exercised........................................      (14,000)       2.74     (523,300)       2.70
Cancelled........................................     (256,000)       2.53     (373,600)       4.28
                                                     ---------                ---------
Outstanding at end of year.......................    1,391,100        1.61      321,100        2.57
                                                     =========                =========
Options exercisable at year end..................      611,100                  321,100
                                                     =========                =========
Weighted-average fair value of options granted
  during the year................................    $    0.53                $    0.96
                                                     =========                =========
</TABLE>
 
                                       41
<PAGE>   42
 
                         TRANSGLOBE ENERGY CORPORATION
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
               (EXPRESSED IN U.S. DOLLARS UNLESS OTHERWISE NOTED)
                  TWO YEARS ENDED SEPTEMBER 30, 1997 AND 1996
 
     The following table summarizes information about fixed stock options
outstanding at September 30, 1997:
 
<TABLE>
<CAPTION>
                                 OPTIONS OUTSTANDING
                       ----------------------------------------        OPTIONS EXERCISABLE
                                        WEIGHTED-                   -------------------------
                                         AVERAGE       WEIGHTED-                    WEIGHTED-
                                        REMAINING      AVERAGE                       AVERAGE
       RANGE OF          NUMBER        CONTRACTUAL     EXERCISE       NUMBER        EXERCISE
    EXERCISE PRICE     OUTSTANDING        LIFE          PRICE       EXERCISABLE       PRICE
    --------------     -----------     -----------     --------     -----------     ---------
    <S>                <C>             <C>             <C>          <C>             <C>
             $1.33        110,000       5.0 years       $ 1.33         --             --
              1.56        670,000       4.4 years         1.56         --             --
              1.63        540,000       1.2 years         1.63        540,000          1.63
              2.74         71,100       0.6 years         2.74         71,100          2.74
    $1.33 to $2.74      1,391,100       3.0 years         1.61        611,100          1.72
</TABLE>
 
10. SUPPLEMENTAL CASH FLOW INFORMATION
 
     The net change in non-cash working capital is as follows:
 
<TABLE>
<CAPTION>
                                                                         1997           1996
                                                                      ----------     ----------
<S>                                                                   <C>            <C>
OPERATING ACTIVITIES
Decrease (increase) in current assets
Accounts receivable...............................................    $  (14,456)    $ (172,855)
Prepaid expenses..................................................       (32,945)       104,923
Increase (decrease) in current liabilities
Accounts payable..................................................         9,698         31,457
                                                                      ----------     ----------
                                                                      $  (37,703)    $  (36,475)
                                                                      ==========     ==========
INVESTING ACTIVITIES
Increase (decrease) in current liabilities
Accounts payable..................................................    $1,068,474         --
                                                                      ==========     ==========
</TABLE>
 
                                       42
<PAGE>   43
 
         DISCLOSURE ABOUT OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
 
     The following information about the Company's oil and gas producing
activities is presented in accordance with United States Statement of Financial
Accounting Standards No. 69: Disclosures About Oil and Gas Producing Activities.
 
OIL AND GAS RESERVES
 
     All the reserves of the Company are located in the United States which were
estimated by Outtrim Szabo Associates Ltd., independent petroleum engineers for
1997 and 1996 and by Williamson Petroleum Consultants Inc., independent
petroleum engineers for 1995. All proved reserves provided in this section are
net of royalties.
 
     Proved oil and gas reserves are the estimated quantities of crude oil,
natural gas and natural gas liquids which geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operating conditions, including
constant prices, fiscal policies and production and development costs.
 
     Proved developed oil and gas reserves are reserves that can be expected to
be recovered from existing wells with existing equipment and operating methods.
Estimates of oil and gas reserves are subject to uncertainty and will change as
additional information regarding producing fields and technology becomes
available and as future economic and operating conditions change.
 
     The Company does not have any proved undeveloped properties. The Company's
proved developed oil and gas reserves as at September 30, 1997 and 1996 and
changes therein for the years then ended were as follows:
 
<TABLE>
<CAPTION>
                                                                         NATURAL GAS
                                                               OIL         LIQUIDS       NATURAL GAS
                                                              (BBLS)       (BBLS)          (MMCF)
                                                              ------     -----------     -----------
<S>                                                           <C>        <C>             <C>
Proved developed reserves, September 30, 1995.............      --          69,120           1,926
Revisions of previous estimates...........................      --          29,747           1,329
Production................................................      --         (15,330)           (400)
                                                              -------      -------         -------
Proved developed reserves, September 30, 1996(1)..........      --          83,537           2,855
Revisions of previous estimates...........................      --          (4,633)           (362)
Extensions and discoveries................................    84,211        --              --
Production................................................    (4,512)      (12,884)           (280)
                                                              -------      -------         -------
Proved developed reserves, September 30, 1997.............    79,699        66,020           2,213
                                                              =======      =======         =======
</TABLE>
 
---------------
 
(1) Subsequent to the release of the consolidated financial statements for the
     year ended September 30, 1996, the Company discovered an error in its
     calculation of proven oil and gas reserves. The figures for 1996 were
     restated to give effect to the correction of this error.
 
                                       43
<PAGE>   44
 
  STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS AND CHANGES THEREIN
                    RELATING TO PROVED OIL AND GAS RESERVES
 
     The following standardized measure of discounted future net cash flows from
proved oil and gas reserves have been computed using year-end prices and costs
and year-end statutory tax rates. A discount rate of 10% has been applied in
determining the standardized measure of discounted future net cash flows.
 
     The Company does not believe that the standardized measure of discounted
future net cash flows will be representative of actual future net cash flows and
should not be considered to represent the fair market value of the oil and gas
properties. Actual future net cash flows will differ from the presented
estimated future net cash flows in that:
 
     -  future production will include production not only from proved
        properties, but may also include production from probable and potential
        reserves;
 
     -  future production of oil and gas from proved properties will differ from
        reserves estimated;
 
     -  future production rates will vary from those estimated;
 
     -  future rather than year-end prices and costs will apply;
 
     -  economic factors including exchange rates, regulatory and fiscal
        environments and operating conditions will change; and
 
     -  future estimated income taxes do not take into account the effects of
        future exploration expenditures.
 
     Future net revenues, development, restoration and production costs have
been based upon the estimates referred to above.
 
     The standardized measure of discounted future net cash flows as at
September 30, 1997 and 1996 were as follows:
 
<TABLE>
<CAPTION>
                                                                              1997       1996
                                                                             ------     ------
                                                                                (U.S. $000)
<S>                                                                          <C>        <C>
Future cash inflows......................................................    11,637     10,995
Future production, development and restoration costs.....................    (1,479)    (1,653)
Future taxes and royalties...............................................    (3,627)    (3,350)
                                                                             ------     ------
Future net cash flows....................................................     6,531      5,992
10% annual discount for timing of cash flows.............................    (1,872)    (1,736)
                                                                             ------     ------
Standardized Measure of Discounted Future Net Cash Flows.................     4,659      4,256
                                                                             ======     ======
</TABLE>
 
     The principal sources of change in the standardized measure of discounted
future net cash flows for each of the years ended September 30, 1997 and 1996
were as follows:
 
<TABLE>
<CAPTION>
                                                                              1997       1996
                                                                             ------     ------
                                                                                (U.S. $000)
<S>                                                                          <C>        <C>
Sales of oil and gas net of production costs.............................      (860)      (822)
Net changes in prices and production costs...............................     1,885      1,308
Changes in estimated future development costs............................        36       (319)
Extentions, discoveries and improved recovery............................     1,059       --
Revisions of previous estimates..........................................      (410)     1,932
Change in discount effect................................................      (131)      (478)
                                                                              -----      -----
Increase.................................................................       403      1,621
Balance, beginning of year...............................................     4,256      2,635
                                                                              -----      -----
Balance, end of year.....................................................     4,659      4,256
                                                                              =====      =====
</TABLE>
 
                                       44
<PAGE>   45
 
      COSTS INCURRED IN OIL AND GAS EXPLORATION AND DEVELOPMENT ACTIVITIES
 
<TABLE>
<CAPTION>
                                                                 UNITED STATES     YEMEN     TOTAL
                                                                 -------------     -----     -----
                                                                            (U.S. $000)
<S>                                                              <C>               <C>       <C>
1997
Acquisition costs -- unproved properties.....................          837          --         837
Exploration..................................................        2,962         3,607     6,569
Development..................................................          212          --         212
                                                                     -----         -----     -----
                                                                     4,011         3,607     7,618
                                                                     =====         =====     =====
1996
Acquisition costs -- unproved properties.....................          507          --         507
Exploration..................................................        1,340           17      1,357
Development..................................................        2,196          --       2,196
                                                                     -----         -----     -----
                                                                     4,043           17      4,060
                                                                     =====         =====     =====
</TABLE>
 
           RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES
 
<TABLE>
<CAPTION>
                                                                              1997       1996
                                                                             ------     ------
                                                                                (U.S. $000)
<S>                                                                          <C>        <C>
Oil and gas revenue -- net...............................................     1,040      1,022
Operating expenses.......................................................      (180)      (200)
Depletion................................................................      (877)      (866)
Future site restoration costs............................................        (7)      --
                                                                              -----      -----
                                                                                (24)       (44)
                                                                              =====      =====
</TABLE>
 
                                       45