---

Exhibit 99.2

|CONSOLIDATED
      FINANCIAL STATEMENTS
|---------------------------------------

Consolidated Statements of Income (Loss) and Retained
Earnings

(Expressed in thousands of U.S. Dollars, except per share
amounts)

|                                                         |   | Year Ended        |   |   | Year Ended        |  
|-------------------------------------------------------- | - | ----------------- | - | - | ----------------- | -
|                                                         |   | December 31, 2010 |   |   | December 31, 2009 |  
|                                                         |   |                   |   |   |                   |  
|REVENUE                                                  |   |                   |   |   |                   |  
|Oil sales, net of royalties and
      other              | $ | 157,220           |   | $ | 102,805           |  
|Derivative
      (loss) on commodity contracts (Note 16) |   | (670              | ) |   | (4,213            | )
|Other income                                             |   | 28                |   |   | 44                |  
|                                                         |   | 156,578           |   |   | 98,636            |  
|                                                         |   |                   |   |   |                   |  
|EXPENSES                                                 |   |                   |   |   |                   |  
|Operating                                                |   | 26,850            |   |   | 24,765            |  
|General and
      administrative                         |   | 14,588            |   |   | 11,427            |  
|Foreign exchange loss (gain)                             |   | 216               |   |   | (1,032            | )
|Interest on
      long-term debt                         |   | 3,317             |   |   | 2,461             |  
|Depletion and depreciation (Note 5)                      |   | 33,933            |   |   | 47,579            |  
|                                                         |   | 78,904            |   |   | 85,200            |  
|                                                         |   |                   |   |   |                   |  
|Income before income taxes                               |   | 77,674            |   |   | 13,436            |  
|                                                         |   |                   |   |   |                   |  
|Income taxes  current (Note 11)                         |   | 39,807            |   |   | 21,853            |  
|                                                         |   |                   |   |   |                   |  
|NET INCOME (LOSS)                                        |   | 37,867            |   |   | (8,417            | )
|                                                         |   |                   |   |   |                   |  
|Retained earnings, beginning of year                     |   | 80,013            |   |   | 88,430            |  
|                                                         |   |                   |   |   |                   |  
|                                                         |   |                   |   |   |                   |  
|RETAINED
      EARNINGS, END OF YEAR                     | $ | 117,880           |   | $ | 80,013            |  
|                                                         |   |                   |   |   |                   |  
|                                                         |   |                   |   |   |                   |  
|Net income (loss) per share(Note 14)                     |   |                   |   |   |                   |  
|Basic                                                    |   | 0.57              |   |   | (0.13             | )
|Diluted                                                  |   | 0.55              |   |   | (0.13             | )

See accompanying notes to the consolidated financial
statements.

**Consolidated Statements of Comprehensive Income (Loss)**

(Expressed in thousands of U.S. Dollars)

|                                        |   | Year Ended        |  |   | Year Ended        |  
|--------------------------------------- | - | ----------------- |  | - | ----------------- | -
|                                        |   | December 31, 2010 |  |   | December 31, 2009 |  
|                                        |   |                   |  |   |                   |  
|Net income (loss)                       | $ | 37,867            |  | $ | (8,417            | )
|Other comprehensive loss:               |   |                   |  |   |                   |  
|Foreign currency translation adjustment |   | -                 |  |   | -                 |  
|                                        |   |                   |  |   |                   |  
|COMPREHENSIVE INCOME (LOSS)             | $ | 37,867            |  | $ | (8,417            | )

See accompanying notes to the consolidated financial
statements.

|23 | 2010
|-- | ----

---

|CONSOLIDATED
      FINANCIAL STATEMENTS
|---------------------------------------

Consolidated Balance Sheets

(Expressed in thousands of U.S. Dollars)

|                                                       |   | As at             |  |   | As at             | 
|------------------------------------------------------ | - | ----------------- |  | - | ----------------- | 
|                                                       |   | December 31, 2010 |  |   | December 31, 2009 | 
|                                                       |   |                   |  |   |                   | 
|ASSETS                                                 |   |                   |  |   |                   | 
|Current                                                |   |                   |  |   |                   | 
|Cash and cash equivalents                              | $ | 57,782            |  | $ | 16,177            | 
|Accounts receivable                                    |   | 69,085            |  |   | 35,319            | 
|Derivative commodity contracts
      (Note 16)         |   | 303               |  |   | -                 | 
|Prepaids and other                                     |   | 2,867             |  |   | 1,909             | 
|                                                       |   |                   |  |   |                   | 
|                                                       |   | 130,037           |  |   | 53,405            | 
|                                                       |   |                   |  |   |                   | 
|                                                       |   |                   |  |   |                   | 
|Restricted cash (Note 4)                               |   | 3,387             |  |   | -                 | 
|Goodwill (Note 6)                                      |   | 8,180             |  |   | 8,180             | 
|Property and equipment (Note 5)                        |   | 200,297           |  |   | 167,297           | 
|                                                       |   |                   |  |   |                   | 
|                                                       | $ | 341,901           |  | $ | 228,882           | 
|                                                       |   |                   |  |   |                   | 
|                                                       |   |                   |  |   |                   | 
|LIABILITIES                                            |   |                   |  |   |                   | 
|Current                                                |   |                   |  |   |                   | 
|Accounts payable and accrued liabilities               | $ | 41,772            |  | $ | 14,879            | 
|Derivative commodity contracts
      (Note 16)         |   | -                 |  |   | 514               | 
|Current portion of long-term debt (Note 7)             |   | -                 |  |   | 49,799            | 
|                                                       |   |                   |  |   |                   | 
|                                                       |   | 41,772            |  |   | 65,192            | 
|                                                       |   |                   |  |   |                   | 
|Long-term debt
      (Note 7)                          |   | 86,420            |  |   | -                 | 
|                                                       |   |                   |  |   |                   | 
|                                                       |   | 128,192           |  |   | 65,192            | 
|                                                       |   |                   |  |   |                   | 
|                                                       |   |                   |  |   |                   | 
|Commitments and contingencies (Note 17)                |   |                   |  |   |                   | 
|Subsequent event (Note 19)                             |   |                   |  |   |                   | 
|                                                       |   |                   |  |   |                   | 
|SHAREHOLDERS EQUITY                                   |   |                   |  |   |                   | 
|Share capital (Note 8)                                 |   | 80,193            |  |   | 66,106            | 
|Contributed surplus (Note 10)                          |   | 4,756             |  |   | 6,691             | 
|Accumulated other comprehensive income
      (Note 13) |   | 10,880            |  |   | 10,880            | 
|Retained earnings                                      |   | 117,880           |  |   | 80,013            | 
|                                                       |   |                   |  |   |                   | 
|                                                       |   | 213,709           |  |   | 163,690           | 
|                                                       |   |                   |  |   |                   | 
|                                                       | $ | 341,901           |  | $ | 228,882           | 

See accompanying notes to the consolidated financial
statements.

|Approved on behalf of the Board. |                         
|-------------------------------- | ------------------------
|                                 |                         
|Signed by:                       |                         
|                                 |                         
|Ross G. Clarkson               | Fred J. Dyment        
|                                 |                         
|Ross G. Clarkson, Director       | Fred J. Dyment, Director

|2010 | 24
|---- | --

---

|CONSOLIDATED
      FINANCIAL STATEMENTS
|---------------------------------------

Consolidated Statements of Cash Flows

(Expressed in thousands of U.S. Dollars)

|                                                                |   | Year Ended        |   |   | Year Ended        |  
|--------------------------------------------------------------- | - | ----------------- | - | - | ----------------- | -
|                                                                |   | December 31, 2010 |   |   | December 31, 2009 |  
|                                                                |   |                   |   |   |                   |  
|CASH FLOWS RELATED TO THE FOLLOWING
      ACTIVITIES:           |   |                   |   |   |                   |  
|                                                                |   |                   |   |   |                   |  
|OPERATING                                                       |   |                   |   |   |                   |  
|Net income (loss)                                               | $ | 37,867            |   | $ | (8,417            | )
|                                                                |   |                   |   |   |                   |  
|Adjustments for:                                                |   |                   |   |   |                   |  
|Depletion
      and depreciation                                |   | 33,933            |   |   | 47,579            |  
|Amortization of deferred
      financing costs                  |   | 836               |   |   | 569               |  
|Stock-based compensation (Note 9)                               |   | 2,749             |   |   | 2,011             |  
|Unrealized (gain) loss on
      commodity contracts             |   | (816              | ) |   | 3,322             |  
|Changes in non-cash working capital (Note 12)                   |   | (23,065           | ) |   | (8,265            | )
|                                                                |   |                   |   |   |                   |  
|                                                                |   | 51,504            |   |   | 36,799            |  
|                                                                |   |                   |   |   |                   |  
|                                                                |   |                   |   |   |                   |  
|FINANCING                                                       |   |                   |   |   |                   |  
|Increase in long-term debt
      (Note 7)                       |   | 95,916            |   |   | -                 |  
|Repayments of long-term debt (Note 7)                           |   | (55,916           | ) |   | (8,000            | )
|Deferred financing costs                                        |   | (4,216            | ) |   | -                 |  
|Options surrendered for cash payments (Note 8)                  |   | -                 |   |   | (13               | )
|Issue of common shares for
      cash (Note 8)                  |   | 9,959             |   |   | 16,578            |  
|Issue costs for common shares (Note 8)                          |   | -                 |   |   | (1,204            | )
|Changes in non-cash working capital (Note 12)                   |   | -                 |   |   | (1,515            | )
|                                                                |   |                   |   |   |                   |  
|                                                                |   | 45,743            |   |   | 5,846             |  
|                                                                |   |                   |   |   |                   |  
|                                                                |   |                   |   |   |                   |  
|INVESTING                                                       |   |                   |   |   |                   |  
|Exploration and development
      expenditures                  |   | (66,932           | ) |   | (35,546           | )
|Changes in restricted cash                                      |   | (3,387            | ) |   | -                 |  
|Changes in non-cash working capital (Note 12)                   |   | 14,677            |   |   | 1,444             |  
|                                                                |   |                   |   |   |                   |  
|                                                                |   | (55,642           | ) |   | (34,102           | )
|                                                                |   |                   |   |   |                   |  
|                                                                |   |                   |   |   |                   |  
|NET INCREASE IN CASH AND CASH                                   |   |                   |   |   |                   |  
|EQUIVALENTS                                                     |   | 41,605            |   |   | 8,543             |  
|                                                                |   |                   |   |   |                   |  
|CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                    |   | 16,177            |   |   | 7,634             |  
|                                                                |   |                   |   |   |                   |  
|CASH AND CASH EQUIVALENTS, END OF YEAR                          | $ | 57,782            |   | $ | 16,177            |  
|                                                                |   |                   |   |   |                   |  
|                                                                |   |                   |   |   |                   |  
|Supplemental Disclosure of Cash Flow Information                |   |                   |   |   |                   |  
|Cash interest paid                                              | $ | 2,481             |   | $ | 1,892             |  
|Cash taxes paid                                                 |   | 39,807            |   |   | 21,853            |  
|Cash is comprised of cash on
      hand and balances with banks |   | 27,782            |   |   | 14,274            |  
|Cash
      equivalents                                          |   | 30,000            |   |   | 1,903             |  

See accompanying notes to the consolidated financial
statements.

|25 | 2010
|-- | ----

---

|NOTES TO
      CONSOLIDATED FINANCIAL STATEMENTS
|------------------------------------------------

As at December 31, 2010 and 2009 and for the years then
ended (Expressed in U.S. Dollars)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Consolidated Financial Statements include the accounts of
TransGlobe Energy Corporation and subsidiaries (TransGlobe or the Company),
and are presented in accordance with Canadian generally accepted accounting
principles (Canadian GAAP or Cdn. GAAP). Information prepared in accordance
with generally accepted accounting principles in the United States (U.S. GAAP)
is included in Note 20. In these Consolidated Financial Statements, unless
otherwise indicated, all dollar amounts are expressed in United States (U.S.)
dollars. All references to US$ or to $ are to United States dollars and
references to C$ are to Canadian dollars.

Nature of Business and Principles of Consolidation

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

- West Gharib area, East Ghazalat area and Nuqra Block 1 within the Arab
  Republic of Egypt (Egypt); and
- Block 32, Block S-1, Block 72, and Block 75 within the Republic of Yemen
  (Yemen).

Joint Ventures

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

Foreign Currency Translation

The accounts of the integrated Canadian operations are
translated using the temporal method, whereby monetary assets and liabilities
are translated at year end exchange rates, non-monetary assets and liabilities
at the historical rates and revenues and expenses at the rates for the period,
except depreciation, depletion and accretion expense, which is translated on the
same basis as the related assets. Translation gains and losses relating to the
integrated Canadian operations are included in net income. Prior to May 1, 2008,
the Canadian operations were considered to be self-sustaining and translated
using the current rate method. Under the current rate method, assets and
liabilities are translated at the period-end exchange rates, while revenues and
expenses are translated using rates for the period and gains and losses are
included as a separate component of shareholders equity.

Revenue Recognition

Revenues associated with the sales of the Companys crude oil,
natural gas and natural gas liquids owned by the Company are recognized when
title passes from the Company to its customer. Crude oil and natural gas
produced and sold by the Company below or above its working interest share in
the related resource properties results in production underliftings or
overliftings. Underliftings are recorded as inventory and overliftings are
recorded as deferred revenue.

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

Income Taxes

The Company uses the liability method to account for income
taxes. Under this method, future income taxes are based on the difference
between assets and liabilities reported for financial accounting purposes from
those reported for income tax. Future income tax assets and liabilities are
measured using the substantively enacted tax rates expected to apply to taxable
income in the years in which the temporary differences are expected to be
recovered or settled. The Companys contractual arrangements in foreign
jurisdictions stipulate that income taxes are paid by the respective government
out of its entitlement share of production sharing oil. Such amounts are
included in income tax expense at the statutory rate in effect at the time of
production.

|2010 | 26
|---- | --

---

|NOTES TO
      CONSOLIDATED FINANCIAL STATEMENTS
|------------------------------------------------

Net Income (Loss) Per Share

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

Cash and Cash Equivalents

Cash and cash equivalents include cash on deposit with banks
and short-term investments such as treasury bills with original maturity of less
than 90 days.

Property and Equipment

The Company follows the full cost method of accounting for oil
and gas operations whereby all costs associated with the exploration for and
development of oil and gas reserves are capitalized on a country-by-country
basis. Such costs include land acquisition costs, geological and geophysical
expenses, carrying charges on non-producing properties, costs of drilling both
productive and non-productive wells, production equipment and overhead charges
directly related to acquisition, exploration and development activities.

Expenditures related to renewals or betterments that improve
the productive capacity or extend the life of an asset are capitalized.
Maintenance and repairs are expensed as incurred.

Depreciation, Depletion, Amortization and Impairment

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

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

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

An impairment loss is recognized in net income if the carrying
amount of a country (cost centre) is not recoverable and the carrying amount of
the cost centre exceeds its fair value. The carrying value is assessed to be
recoverable when the sum of the undiscounted cash flows expected from the
production of proved reserves and the cost, less impairment, of unproved
properties exceeds the carrying value. If the carrying value is assessed to not
be recoverable, the calculation compares the carrying value to the sum of the
discounted cash flows expected from the production of proved and probable
reserves and the cost, less impairment, of unproved properties. Should the
carrying value exceed this sum, an impairment loss is recognized.

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

Stock-based Compensation

The Company records compensation expense in the Consolidated
Financial Statements for stock options granted to employees and directors using
the fair value method. From 2006 onward, the fair values are determined using
the lattice-based binomial option pricing model and for years 2005 and prior,
the Black-Scholes option pricing model was used. Compensation costs are
recognized over the vesting period. The Company estimates forfeitures at the
grant date and revises the estimate as necessary if subsequent information
indicates that actual forfeitures differ significantly from the original
estimate.

Derivative Financial Instruments and Hedging
Activities

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

|27 | 2010
|-- | ----

---

|NOTES TO
      CONSOLIDATED FINANCIAL STATEMENTS
|------------------------------------------------

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

The Company has classified its derivative commodity contracts,
cash and cash equivalents and restricted cash as held-for-trading, which are
measured at fair value with changes being recognized in net income. Accounts
receivable are classified as loans and receivables; accounts payable and accrued
liabilities, and long-term debt, including interest payable, are classified as
other liabilities, all of which are measured at amortized cost. The
classification of all financial instruments has not changed since inception. The
Company has elected to classify all derivatives as held-for trading, which are
measured at fair value with changes being recognized in net income.

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

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

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

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

Goodwill

Goodwill, which represents the excess of cost of an acquired
enterprise over the net of the amounts assigned to assets acquired and
liabilities assumed, is assessed at least annually for impairment. To assess
impairment, the fair value of the reporting unit is determined and compared to
the book value of the reporting unit. If the fair value is less than the book
value, then a second test is performed to determine the amount of the
impairment. The amount of the impairment is determined by deducting the fair
value of the reporting units assets and liabilities from the fair value of the
reporting unit to determine the implied fair value of goodwill and comparing
that amount to the book value of the reporting units goodwill. Any excess of
the book value of goodwill over the implied fair value of goodwill is the
impaired amount. Goodwill is not amortized.

Measurement Uncertainty

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

Specifically, amounts recorded for depletion, depreciation,
amortization and accretion expense, asset retirement obligations, fair value
measurements, stock based compensation, employee future benefits, future income
taxes and amounts used in impairment tests for intangible assets, goodwill, and
property, plant and equipment are based on estimates. These estimates include
oil and natural gas reserves, future petroleum and natural gas prices, future
interest rates and future costs required to develop those reserves as well as
other fair value assumptions. By their nature, these estimates are subject to
measurement uncertainty and changes in such estimates in future years could
require a material change on the financial statements.

|2010 | 28
|---- | --

---

|NOTES TO
      CONSOLIDATED FINANCIAL STATEMENTS
|------------------------------------------------

2. ADOPTION OF NEW ACCOUNTING POLICY

Share Appreciation Rights

The Company adopted a share appreciation rights plan in March
2010, which is described in Note 9. Under the share appreciation rights plan,
all liabilities must be settled in cash and, consequently, are classified as
liability instruments and measured at their intrinsic value less any unvested
portion. Unvested share appreciation rights accrue evenly over the vesting
period. The intrinsic value is determined as the difference between the market
value of the Companys common shares and the exercise price of the share
appreciation rights. This obligation is revalued each reporting period and the
change in the obligation is recognized as stock-based compensation expense
(recovery).

3. FUTURE CHANGES IN ACCOUNTING POLICIES

International Financial Reporting Standards

On February 13, 2008, the Canadian Accounting Standards Board
confirmed that effective for interim and annual financial statements related to
fiscal years beginning on or after January 1, 2011, International Financial
Reporting Standards (IFRS) will replace Canadas current GAAP for all publicly
accountable profit-oriented enterprises. While the adoption of IFRS will not
change the actual cash flows of the Company, it will require the restatement,
for comparative purposes, of amounts reported by the Company for the year ended
December 31, 2010, including the opening balance sheet as at January 1,
2010.

4. RESTRICTED CASH

As at December 31, 2010, the Company had restricted cash of
$3.4 million (2009 - $nil) set aside in a debt service reserve account, as
required by the Borrowing Base Facility (Note 7). This represents the aggregate
amount of interest for six months on the loan balance outstanding based on the
five-year forward interest strip. Amounts are deposited as required to maintain
minimum reserve requirements.

5. PROPERTY AND EQUIPMENT

|Egypt                                  |   |         |   |   |         |  
|-------------------------------------- | - | ------- | - | - | ------- | -
|(000s)                                 |   | 2010    |   |   | 2009    |  
|Oil and gas properties                 | $ | 242,561 |   | $ | 184,605 |  
|Furniture and fixtures                 |   | 3,232   |   |   | 3,166   |  
|Accumulated depletion and depreciation |   | (94,289 | ) |   | (68,692 | )
|                                       |   |         |   |   |         |  
|                                       | $ | 151,504 |   | $ | 119,079 |  

TransGlobe holds a 100% working interest in the West Gharib
Concession area in Egypt. The eight approved West Gharib development leases are
valid for 20 years, if productive, expiring between 2019 and 2026.

On January 25, 2010, TransGlobe entered into a farm-out
agreement to earn a 50% interest in the East Ghazalat Concession area in the
Western Desert of Egypt. The Contractor (Joint Venture Partners) is in the
first, two-year extension period of the East Ghazalat Concession Agreement which
expires in June 2012. The Contractor has filed a Declaration of Commercial
Discovery for the Safwa field and is finalizing the initial Safwa development
lease and development plan.

The Contractor (Joint Venture Partners) is in the second,
three-year extension period of the Nuqra Concession Agreement which expires in
July 2012.

During the year, the Company capitalized general and
administrative costs relating to exploration and development activities of $2.2
million (2009 - $1.2 million). Unproven property costs in the amount of $9.8
million (2009 - $9.8 million) were excluded from costs subject to depletion and
depreciation representing costs incurred in Nuqra and undeveloped land in West
Gharib and East Ghazalat. Future development costs for Proved reserves included
in the depletion calculation for the year ended December 31, 2010 totaled $19.1
million (2009 - $4.9 million).

|Yemen                                        |   |         |   |   |         |  
|-------------------------------------------- | - | ------- | - | - | ------- | -
|(000s)                                       |   | 2010    |   |   | 2009    |  
|Oil and gas properties                       | $ | 133,836 |   | $ | 126,152 |  
|Accumulated
      depletion and depreciation |   | (86,349 | ) |   | (78,666 | )
|                                             |   |         |   |   |         |  
|                                             | $ | 47,487  |   | $ | 47,486  |  

The Company has working interests in four blocks in Yemen:
Block 32, Block S-1, Block 72, and Block 75. The Block 32 (13.81087%) Production
Sharing Agreement (PSA) continues to 2020, with provision for a five-year
extension. The Block S-1 (25%) PSA continues to 2023, with provision for a
five-year extension. The Block 72 joint venture partnership entered into a
farm-out agreement during 2010 which reduced TransGlobes working interest from
33% to 20%. At December 31, 2010, the Contractor (Joint Venture Partners) was in
the second, 30-month exploration period of the Block 72 PSA which commenced
January 2009. The Contractor (Joint Venture Partners) is in the first, 36-month
exploration period commencing March 8, 2008 of the Block 75 (25%) PSA.
Subsequent to December 31, 2010, the Company received an extension on the first
exploration period to September 9, 2011.

|29 | 2010
|-- | ----

---

|NOTES TO
      CONSOLIDATED FINANCIAL STATEMENTS
|------------------------------------------------

During the year, the Company capitalized overhead costs
relating to exploration and development activities of $0.4 million (2009 - $0.2
million). Unproven property costs in the amount of $11.6 million in 2010 (2009 -
$10.8 million) were excluded in the costs subject to depletion and depreciation
representing some of the costs incurred at Block 72 and Block 75. Future
development costs for Proved reserves included in the depletion calculation for
the year ended December 31, 2010 totaled $2.8 million (2009 - $12.3
million).

|Corporate                      |   |        |   |   |        |  
|------------------------------ | - | ------ | - | - | ------ | -
|(000s)                         |   | 2010   |   |   | 2009   |  
|Furniture and fixtures         | $ | 3,147  |   | $ | 2,333  |  
|Accumulated
      depreciation |   | (1,841 | ) |   | (1,601 | )
|                               |   |        |   |   |        |  
|                               | $ | 1,306  |   | $ | 732    |  

Ceiling Test

An impairment test calculation was performed on property and
equipment at December 31, 2010 in which the estimated undiscounted future net
cash flows based on estimated future prices associated with the proved reserves
exceed the carrying amount of oil and gas property and equipment for each cost
centre.

The following table outlines the oil prices used in the
impairment test at December 31, 2010:

|Year          |  | Egypt |  |  | Yemen | 
|------------- |  | ----- |  |  | ----- | 
|2011          |  | 82.17 |  |  | 92.00 | 
|2012          |  | 81.12 |  |  | 90.78 | 
|2013          |  | 81.92 |  |  | 91.63 | 
|2014          |  | 83.67 |  |  | 93.53 | 
|2015          |  | 86.45 |  |  | 96.50 | 
|Thereafter(1) |  | 2.0%  |  |  | 2.0%  | 

|(1) | Percentage change represents the increase in
      each year after 2015 to the end of the reserve life.
|--- | -------------------------------------------------------------------------------------------------------

6. GOODWILL

|(000s)                        |   | 2010  |  |   | 2009  | 
|----------------------------- | - | ----- |  | - | ----- | 
|Balance, beginning of year    | $ | 8,180 |  | $ | 8,180 | 
|Changes during the
      year |   | -     |  |   | -     | 
|Balance, end of year          | $ | 8,180 |  | $ | 8,180 | 

7. LONG-TERM DEBT

|                                                                          |   | 2010   |   |   | 2009   |  
|------------------------------------------------------------------------- | - | ------ | - | - | ------ | -
|Bank debt                                                                 | $ | 90,000 |   | $ | 50,000 |  
|Deferred financing
      costs                                            |   | (3,580 | ) |   | (201   | )
|                                                                          |   | 86,420 |   |   | 49,799 |  
|                                                                          |   |        |   |   |        |  
|Current portion of long-term debt (net of deferred financing
      costs) |   | -      |   |   | 49,799 |  
|                                                                          | $ | 86,420 |   | $ | -      |  

As at December 31, 2009, the Company had a $60.0 million
Revolving Credit Agreement of which $50.0 million was drawn. The Revolving
Credit Agreement was set to expire on September 25, 2010 and was secured by a
first floating charge debenture over all assets of the Company, a general
assignment of book debts, security pledge of the Companys subsidiaries and
certain covenants. The Revolving Credit Agreement bore interest at the
Eurodollar Rate plus three percent.

On July 22, 2010, the Company entered into a new five-year
$100.0 million Borrowing Base Facility and paid out the previous Revolving
Credit Agreement. The new Borrowing Base Facility is secured by a pledge over
certain bank accounts, a pledge over the Companys subsidiaries, and a fixed and
floating charge over certain assets. The new credit facility bears interest at
the LIBOR rate plus an applicable margin, which ranges from 3.75% to 4.75% and
is dependent on the amount drawn. During the year ended December 31, 2010, the
average effective interest rate was 6.4% (2009 4.3%) . As repayments on the new
Borrowing Base Facility are not expected to commence until 2012, the entire
balance has been presented as a long-term liability on the Consolidated Balance
Sheets. Repayments will be made on a semi-annual basis in order to reduce the
amount borrowed to an amount no greater than the Borrowing Base. The amount of
the Borrowing Base may fluctuate over time and is determined principally by the
net present value of the Companys Proved and Probable reserves over the term of
the facility, up to a pre-defined commitment amount which is subject to
pre-determined semi-annual reductions. Accordingly, for each balance sheet date,
the timing of repayment is estimated based on the most recent redetermination of
the Borrowing Base and repayment schedules may change in future periods.

|2010 | 30
|---- | --

---

|NOTES TO
      CONSOLIDATED FINANCIAL STATEMENTS
|------------------------------------------------

The estimated future debt payments on long-term debt, as of
December 31, 2010 are as follows:

|000s) |   |        | 
|----- | - | ------ | 
|2011  | $ | -      | 
|2012  |   | 22,255 | 
|2013  |   | 34,548 | 
|2014  |   | 24,743 | 
|2015  |   | 8,454  | 
|      |   |        | 
|      | $ | 90,000 | 

8. SHARE CAPITAL

Authorized

The Company is authorized to issue an unlimited number of
common shares with no par value.

Issued

|                                            |  | Year Ended        |  |   | Year Ended        | 
|------------------------------------------- |  | ----------------- |  | - | ----------------- | 
|                                            |  | December 31, 2010 |  |   | December 31, 2009 | 
|(000s)                                      |  | Shares            |  |   | Amount            | 
|Balance, beginning of year                  |  | 65,399            |  | $ | 66,106            | 
|Share issuance                              |  | -                 |  |   | -                 | 
|Stock options exercised                     |  | 2,177             |  |   | 9,959             | 
|Stock options surrendered for cash payments |  | -                 |  |   | -                 | 
|Stock-based compensation on exercise        |  | -                 |  |   | 4,128             | 
|Share issue costs                           |  | -                 |  |   | -                 | 
|                                            |  |                   |  |   |                   | 
|Balance, end of
      year                  |  | 67,576            |  | $ | 80,193            | 

The Company received regulatory approval to purchase, from time
to time, as it considers advisable, up to 6,116,905 common shares under a Normal
Course Issuer Bid which commenced September 7, 2009 and expired September 6,
2010. During the years ended December 31, 2010 and December 31, 2009, the
Company did not repurchase any common shares.

9. STOCK OPTION PLAN

Stock option plan

The Company adopted a stock option plan in May 2007 (the
Plan) and reapproved unallocated options issuable pursuant to the Plan in May
2010. The number of Common Shares that may be issued pursuant to the exercise of
options awarded under the Plan and all other Security Based Compensation
Arrangements of the Company is 10% of the common shares outstanding from time to
time. All incentive stock options granted under the Plan have a per-share
exercise price not less than the trading market value of the common shares at
the date of grant. Stock options vest one-third on each of the first, second and
third anniversaries of the grant date. Options granted expire five years after
the grant date.

The following table summarizes information about the stock
options outstanding and exercisable at the dates indicated:

|                                       |  | 2010    |   |  | 2009       | 
|-------------------------------------- |  | ------- | - |  | ---------- | 
|                                       |  |         |   |  | Weighted-  | 
|                                       |  | Number  |   |  | Average    | 
|                                       |  | of      |   |  | Exercise   | 
|(000s, except per
      share amounts) |  | Options |   |  | Price (C$) | 
|Options outstanding, beginning of year |  | 5,478   |   |  | 4.12       | 
|                                       |  |         |   |  |            | 
|Granted                                |  | 1,430   |   |  | 7.22       | 
|Exercised                              |  | (2,177  | ) |  | 4.67       | 
|Exercised for cash                     |  | -       |   |  | -          | 
|Forfeited                              |  | (575    | ) |  | 4.04       | 
|                                       |  |         |   |  |            | 
|Options
      outstanding, end of year |  | 4,156   |   |  | 4.89       | 
|                                       |  |         |   |  |            | 
|Options
      exercisable, end of year |  | 1,366   |   |  | 3.80       | 

|31 | 2010
|-- | ----

---

|NOTES TO
      CONSOLIDATED FINANCIAL STATEMENTS
|------------------------------------------------

|                |  | Options Outstanding |  |  | Options Exercisable | 
|--------------- |  | ------------------- |  |  | ------------------- | 
|                |  |                     |  |  | Weighted-           | 
|                |  |                     |  |  | Average             | 
|                |  | Number              |  |  | Remaining           | 
|                |  | Outstanding at      |  |  | Contractual         | 
|Exercise Prices |  | Dec. 31, 2010       |  |  | Life                | 
|(C$)            |  | (000s)              |  |  | (Years)             | 
|2.28-3.50       |  | 1,610               |  |  | 3.1                 | 
|3.51-5.00       |  | 1,191               |  |  | 2.7                 | 
|5.01-6.50       |  | 234                 |  |  | 2.6                 | 
|6.51-8.00       |  | 827                 |  |  | 4.4                 | 
|8.01-15.12      |  | 294                 |  |  | 4.6                 | 
|                |  | 4,156               |  |  | 3.3                 | 

Stockbased compensation

Compensation expense of $2.2 million has been recorded in
general and administrative expenses in the Consolidated Statements of Income
(Loss) and Retained Earnings in 2010 (2009 - $2.0 million). The fair value of
all common stock options granted is estimated on the date of grant using the
lattice-based binomial option pricing model. The weighted-average fair value of
options granted during 2010 and the assumptions used in their determination are
as follows:

|                                                         |  | 2010  |  |  | 2009  | 
|-------------------------------------------------------- |  | ----- |  |  | ----- | 
|Weighted-average fair market value per
      option (C$) |  | 2.81  |  |  | 1.25  | 
|Risk free interest rate (%)                              |  | 2.70  |  |  | 2.54  | 
|Expected life (years)                                    |  | 5     |  |  | 5     | 
|Expected volatility (%)                                  |  | 48.94 |  |  | 44.06 | 
|Dividend per share                                       |  | 0.00  |  |  | 0.00  | 
|Expected forfeiture rate (non-executive employees) (%)   |  | 12    |  |  | 12    | 
|Suboptimal exercise factor                               |  | 1.25  |  |  | 1.25  | 

Options granted vest annually over a three-year period and
expire five years after the grant date. During the year, employees exercised
2,177,000 (2009  101,000) stock options. In accordance with Canadian generally
accepted accounting principles, the fair value related to these options was $4.1
million (2009 - $0.2 million) at time of grant and has been transferred from
contributed surplus to common shares.

Share appreciation rights plan

In addition to the Companys stock option plan, the Company
also issues share appreciation rights under the share appreciation rights plan,
which was adopted in March 2010. Share appreciation rights are similar to stock
options except that the holder does not have the right to purchase the
underlying share of the Company and instead the units are settled in cash. Units
granted under the share appreciation rights plan vest one-third on each of the
first, second and third anniversaries of the grant date. Share appreciation
rights granted expire five years after the grant date.

|                                       |  | 2010   | 
|-------------------------------------- |  | ------ | 
|                                       |  |        | 
|                                       |  | Number | 
|                                       |  | of     | 
|(000s, except per
      share amounts) |  | Units  | 
|Outstanding, beginning of year         |  | -      | 
|Granted                                |  | 150    | 
|Exercised                              |  | -      | 
|Forfeited                              |  | -      | 
|                                       |  |        | 
|Outstanding, end
      of year         |  | 150    | 
|                                       |  |        | 
|Exercisable, end
      of year         |  | -      | 

The mark-to-market liability for the share appreciation rights
plan as at December 31, 2010 amounted to $0.6 million and was included in
accounts payable and accrued liabilities on the Consolidated Balance Sheets and
general and administrative expenses on the Consolidated Statements of Income
(Loss) and Retained Earnings.

10. CONTRIBUTED SURPLUS

|(000s)                                           |   | 2010   |   |   | 2009  |  
|------------------------------------------------ | - | ------ | - | - | ----- | -
|Contributed surplus, beginning of year           | $ | 6,691  |   | $ | 4,893 |  
|Stock-based compensation expense                 |   | 2,193  |   |   | 2,011 |  
|Transfer to common shares on exercise of options |   | (4,128 | ) |   | (213  | )
|Contributed
      surplus, end of year           | $ | 4,756  |   | $ | 6,691 |  

|2010 | 32
|---- | --

---

|NOTES TO
      CONSOLIDATED FINANCIAL STATEMENTS
|------------------------------------------------

11. INCOME TAXES

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

|(000s)                                                 |   | 2010   |   |   | 2009   |  
|------------------------------------------------------ | - | ------ | - | - | ------ | -
|Differences related to:                                |   |        |   |   |        |  
|Property and equipment                                 | $ | 1,148  |   | $ | (227   | )
|Non-capital losses
      carried forward               |   | 4,964  |   |   | 2,728  |  
|Share issue expenses                                   |   | 221    |   |   | 535    |  
|                                                       |   | 6,333  |   |   | 3,036  |  
|Valuation
      allowance for future income tax assets |   | (6,333 | ) |   | (3,036 | )
|                                                       |   |        |   |   |        |  
|Future income tax
      asset                          | $ | -      |   | $ | -      |  

The Company has non-capital losses of $19.9 million that expire
between 2028 and 2030.

Current income taxes represent income taxes incurred and paid
under the laws of Yemen pursuant to the PSA on Block 32 and Block S-1 and under
the laws of Egypt pursuant to the PSC on the West Gharib Concession.

Income taxes vary from the amount that would be computed by
applying the Canadian statutory income tax rate of 28.0% (2009  29.0%) to
income before taxes as follows:

|(000s)                                                        |   | 2010   |   |   | 2009   | 
|------------------------------------------------------------- | - | ------ | - | - | ------ | 
|Income taxes calculated at the Canadian
      statutory rate  | $ | 21,749 |   | $ | 3,897  | 
|Increases (decreases) in income taxes resulting from:         |   |        |   |   |        | 
|Permanent differences                                         |   | 636    |   |   | 540    | 
|Changes in valuation allowance, net of
      foreign exchange |   | 3,055  |   |   | 552    | 
|Different tax rates in
      Yemen and Egypt                  |   | 15,275 |   |   | 15,950 | 
|Changes in tax rates and other                                |   | (908   | ) |   | 914    | 
|Current income taxes                                          | $ | 39,807 |   | $ | 21,853 | 

12. SUPPLEMENTAL CASH FLOW INFORMATION

Changes in operating non-cash working capital consisted of the
following:

|(000s)                                   |   | 2010    |   |   | 2009   |  
|---------------------------------------- | - | ------- | - | - | ------ | -
|Operating activities                     |   |         |   |   |        |  
|Increase in current assets               |   |         |   |   |        |  
|Accounts
      receivable                | $ | (33,766 | ) | $ | (6,514 | )
|Prepaids and other                       |   | (921    | ) |   | (422   | )
|Increase in current
      liabilities    |   |         |   |   |        |  
|Accounts payable and accrued liabilities |   | 11,622  |   |   | (1,329 | )
|                                         | $ | (23,065 | ) | $ | (8,265 | )
|Financing activities                     |   |         |   |   |        |  
|Increase in current
      liabilities    |   |         |   |   |        |  
|Accounts payable and accrued liabilities | $ | -       |   | $ | (1,515 | )
|                                         | $ | -       |   | $ | (1,515 | )
|Investing activities                     |   |         |   |   |        |  
|Increase in current assets               |   |         |   |   |        |  
|Prepaids and other                       | $ | (36     | ) | $ | -      |  
|Increase in current
      liabilities    |   |         |   |   |        |  
|Accounts payable and accrued liabilities |   | 14,713  |   |   | 1,444  |  
|                                         | $ | 14,677  |   | $ | 1,444  |  

13. ACCUMULATED OTHER COMPREHENSIVE INCOME

The balance of accumulated other comprehensive income consists
of the following:

|(000s)                                                          |   | 2010   |  |   | 2009   | 
|--------------------------------------------------------------- | - | ------ |  | - | ------ | 
|Accumulated other comprehensive income,
      beginning of year | $ | 10,880 |  | $ | 10,880 | 
|Other
      comprehensive income                                |   | -      |  |   | -      | 
|Accumulated other comprehensive income, end of year             | $ | 10,880 |  | $ | 10,880 | 

|33 | 2010
|-- | ----

---

|NOTES TO
      CONSOLIDATED FINANCIAL STATEMENTS
|------------------------------------------------

14. PER SHARE AMOUNTS

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

|(000s)                                                |  | 2010   |  |  | 2009   | 
|----------------------------------------------------- |  | ------ |  |  | ------ | 
|Weighted-average number of shares
      outstanding   |  | 66,328 |  |  | 64,443 | 
|Dilutive effect of
      stock options                |  | 2,775  |  |  | -      | 
|Weighted-average number of diluted shares outstanding |  | 69,103 |  |  | 64,443 | 

The treasury stock method assumes that the proceeds received
from the exercise of in-the-money stock options are used to repurchase common
shares at the average market price. In calculating the weighted-average number
of diluted common shares outstanding for the year ended December 31, 2010, the
Company excluded 60,000 options as their exercise price was greater than the
average common share market price in this period. In calculating the
weighted-average number of diluted common shares outstanding for the year ended
December 31, 2009, the Company excluded all stock options outstanding because
there was a net loss in the year then ended.

15. CAPITAL DISCLOSURES

The Companys objectives when managing capital are to ensure
the Company will have the financial capacity, liquidity and flexibility to fund
the ongoing exploration and development of its oil and gas assets. The Company
relies on cash flow to fund its capital investments. However, due to long lead
cycles of some of its developments and corporate acquisitions, the Companys
capital requirements may exceed its cash flow generated in any one period. This
requires the Company to maintain financial flexibility and liquidity. The
Company sets the amount of capital in proportion to risk and manages to ensure
that the total of the long-term debt is not greater than two times the Companys
funds flow from operations for the trailing twelve months. For the purposes of
measuring the Companys ability to meet the above-stated criteria, funds flow
from operations is defined as the net income or loss before any deduction for
depletion, depreciation and accretion, amortization of deferred financing
charges, non-cash stock-based compensation, and non-cash derivative (gain) loss
on commodity contracts. Funds flow from operations is a non-GAAP measure and may
not be comparable to similar measures used by other companies.

The Company defines and computes its capital as follows:

|(000s)                                                                                     |   | 2010    |   |   | 2009    |  
|------------------------------------------------------------------------------------------ | - | ------- | - | - | ------- | -
|Shareholders equity                                                                       | $ | 213,709 |   | $ | 163,690 |  
|Long-term debt, including the current portion (net of
      unamortized transaction costs) |   | 86,420  |   |   | 49,799  |  
|Cash and cash equivalents                                                                  |   | (57,782 | ) |   | (16,177 | )
|                                                                                           |   |         |   |   |         |  
|Total capital                                                                              | $ | 242,347 |   | $ | 197,312 |  

The Companys debt-to-funds flow ratio is computed as
follows:

|                                                                                           |   | 12 Months Trailing | 
|------------------------------------------------------------------------------------------ | - | ------------------ | 
|(000s)                                                                                     |   | 2010               | 
|Long-term debt, including the current portion (net of
      unamortized transaction costs) | $ | 86,420             | 
|                                                                                           |   |                    | 
|Cash flow from operating activities                                                        | $ | 51,504             | 
|Changes in
      non-cash working capital                                                  |   | 23,065             | 
|Funds flow from operations                                                                 | $ | 74,569             | 
|                                                                                           |   |                    | 
|Ratio                                                                                      |   | 1.2                | 

The Companys financial objectives and strategy as described
above have remained substantially unchanged over the last two completed fiscal
years. These objectives and strategy are reviewed on an annual basis. The
Company believes that its ratios are within reasonable limits, in light of the
relative size of the Company and its capital management objectives.

The Company is also subject to financial covenants in the
Borrowing Base Facility that existed as at December 31, 2010. The key financial
covenants are as follows:

- Consolidated Financial Indebtedness to EBITDAX will not exceed 3.0 to 1.0.
  For the purposes of this calculation, Consolidated Financial Indebtedness
  shall mean the aggregate of all Financial Indebtedness of the Company. EBITDAX
  shall be defined as Consolidated Net Income before interest, income taxes,
  depreciation, depletion, amortization, accretion of abandonment liability,
  unrealized hedging losses and other similar non-cash charges (including
  expenses related to stock options), minus unrealized hedging gains and all
  non-cash income added to Consolidated Net Income.
- Current ratio (current assets to current liabilities, excluding the
  current portion of long-term debt) of greater than 1.0 to 1.0.

The Company is in compliance with all financial covenants at
December 31, 2010.

|2010 | 34
|---- | --

---

|NOTES TO
      CONSOLIDATED FINANCIAL STATEMENTS
|------------------------------------------------

16. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

Carrying Values and Estimated Fair Values of Financial
Assets and LiabilitiesThe Company has classified its cash and cash
equivalents and restricted cash as assets held for trading and its derivative
commodity contracts as financial assets or liabilities held for trading, which
are both measured at fair value with changes being recognized in net income.
Accounts receivable are classified as loans and receivables; accounts payable
and accrued liabilities, and long-term debt are classified as other liabilities,
all of which are measured at amortized cost.

Carrying value and fair value of financial assets and
liabilities are summarized as follows:

|                                       |   | December 31, 2010 |  |   | December 31, 2009 | 
|-------------------------------------- | - | ----------------- |  | - | ----------------- | 
|Classification
      (000s)            |   | Carrying Value    |  |   | Fair Value        | 
|Financial assets held-for-trading      | $ | 61,472            |  | $ | 61,472            | 
|Loans and receivables                  |   | 69,085            |  |   | 69,085            | 
|Financial liabilities held-for-trading |   | -                 |  |   | -                 | 
|Other liabilities                      |   | 128,192           |  |   | 131,772           | 

Assets and liabilities at December 31, 2010 that are measured
at fair value are classified into levels reflecting the method used to make the
measurements. Fair values of assets and liabilities included in Level 1 are
determined by reference to quoted prices in active markets for identical assets
and liabilities. Assets and liabilities in Level 2 include valuations using
inputs other than quoted prices for which all significant inputs are observable,
either directly or indirectly. Level 3 valuations are based on inputs that are
unobservable and significant to the overall fair value measurement.

The Companys cash and cash equivalents and derivative
commodity contracts are assessed on the fair value hierarchy described above.
TransGlobes cash and cash equivalents are classified as Level 1 and risk
management contracts as Level 2. Assessment of the significance of a particular
input to the fair value measurement requires judgment and may affect the
placement within the fair value hierarchy level.

Credit RiskCredit risk is the risk of loss if the
counter parties do not fulfill their contractual obligations. The Companys
exposure to credit risk primarily relates to accounts receivable, the majority
of which are in respect of oil operations, and derivative commodity contracts.
The Company generally extends unsecured credit to these parties and therefore
the collection of these amounts may be affected by changes in economic or other
conditions. Management believes the risk is mitigated by the size and reputation
of the companies to which they extend credit and an insurance program on a
portion of the receivable balance. The Company has not experienced any material
credit loss in the collection of accounts receivable to date.

Trade and other receivables are analyzed in the table below.
The majority of these receivables are due from the Egyptian Government, and the
recent political unrest in the country has increased the delay in payments,
which increases TransGlobes credit risk. Despite these factors, the Company
still expects to collect in full all outstanding receivables.

|(000s)                                             |  |        | 
|-------------------------------------------------- |  | ------ | 
|Trade and other receivables at December 31, 2010   |  |        | 
|Neither impaired nor past due                      |  | 25,157 | 
|Impaired (net of valuation allowance)              |  | -      | 
|Not impaired and past due in the following period: |  |        | 
|Within 30 days                                     |  | 8,985  | 
|31-60 days                                         |  | 8,395  | 
|61-90 days                                         |  | 8,350  | 
|Over 90 days                                       |  | 18,198 | 

In Egypt, the Company sold all of its 2010 and 2009 production
to one purchaser. In Yemen, the Company sold all of its 2010 and 2009 Block 32
production to one purchaser and all of its 2010 and 2009 Block S-1 production to
one purchaser. Management considers such transactions normal for the Company and
the international oil industry in which it operates.

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

a) Commodity Price RiskThe Companys operational
results and financial condition are partially dependent on the commodity prices
received for its oil production. Commodity prices have fluctuated significantly
during recent years.

Any movement in commodity prices would have an effect on the
Companys financial condition. Therefore, the Company has entered into various
financial derivative contracts to manage fluctuations in commodity prices in the
normal course of operations. The following contracts are outstanding immediately
following December 31, 2010:

|35 | 2010
|-- | ----

---

|NOTES TO
      CONSOLIDATED FINANCIAL STATEMENTS
|------------------------------------------------

|                                         |  |                  |  |  |                 |  |   | Dated Brent Pricing | 
|---------------------------------------- |  | ---------------- |  |  | --------------- |  | - | ------------------- | 
|Period                                   |  | Volume           |  |  | Type            |  |   | Put                 | 
|Crude Oil                                |  |                  |  |  |                 |  |   |                     | 
|January 1, 2011-December
      31, 2011  |  | 40,000 Bbl/month |  |  | Financial Floor |  | $ | 65.00               | 
|April 1, 2011-December 31,
      2011*   |  | 20,000 Bbl/month |  |  | Financial Floor |  | $ | 75.00               | 
|* Contract entered into in January 2011. |  |                  |  |  |                 |  |   |                     | 

The estimated fair value of unrealized commodity contracts is
reported on the Consolidated Balance Sheets, with any change in the unrealized
positions recorded to income. The Company assessed these instruments on the fair
value hierarchy and has classified the determination of fair value of these
instruments as Level 2, as the fair values of these transactions are based on an
approximation of the amounts that would have been received from counter-parties
to settle the transactions outstanding as at the Consolidated Balance Sheet date
with reference to forward prices and market values provided by independent
sources. The actual amounts realized may differ from these estimates.

When assessing the potential impact of commodity price changes
on its financial derivative commodity contracts, the Company believes 10%
volatility is a reasonable measure. The effect of a 10% increase in commodity
prices on the derivative commodity contracts would decrease net income, for the
year ended December 31, 2010, by $0.1 million. The effect of a 10% decrease in
commodity prices on the derivative commodity contracts would increase net
income, for the year ended December 31, 2010, by $0.3 million.

b) Foreign Currency Exchange RiskAs the Companys
business is conducted primarily in U.S. dollars and its financial instruments
are primarily denominated in U.S. dollars, the Companys exposure to foreign
currency exchange risk relates to certain cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities denominated in Canadian
dollars. When assessing the potential impact of foreign currency exchange risk,
the Company believes 10% volatility is a reasonable measure. The Company
estimates that a 10% increase in the value of the Canadian dollar against the
U.S. dollar would result in an increase in net income for the year ended
December 31, 2010 of approximately $0.1 million and conversely a 10% decrease in
the value of the Canadian dollar against the U.S. dollar would decrease net
income by $0.2 million for the same period. The Company does not utilize
derivative instruments to manage this risk.

c) Interest Rate RiskFluctuations in interest rates
could result in a significant change in the amount the Company pays to service
variable-interest, U.S.-dollar-denominated debt. No derivative contracts were
entered into during 2010 to mitigate this risk. When assessing interest rate
risk applicable to the Companys variable-interest, U.S.-dollar-denominated debt
the Company believes 1% volatility is a reasonable measure. The effect of
interest rates increasing by 1% would decrease the Companys net income, for the
year ended December 31, 2010, by $0.5 million. The effect of interest rates
decreasing by 1% would increase the Companys net income, for the year ended
December 31, 2010, by $0.5 million.

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

The Company actively maintains credit facilities to ensure it
has sufficient available funds to meet current and foreseeable financial
requirements at a reasonable cost. The following are the contractual maturities
of financial liabilities at December 31, 2010:

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

|1. | Payments exclude ongoing operating costs related to
      certain leases, interest on long-term debt and payments made to settle
      derivatives.       
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|2. | Payments denominated in foreign currencies have been
      translated at December 31, 2010 exchange rates.                                                
|3. | Minimum work commitments include contracts awarded for
      capital projects and those commitments related to exploration and drilling
      obligations.

The Company actively monitors its liquidity to ensure that its
cash flows, credit facilities and working capital are adequate to support these
financial liabilities, in addition to the Companys capital programs.

The existing banking arrangement at December 31, 2010 consists
of a Revolving Credit Facility of $100.0 million of which $90.0 million was
drawn.

|2010 | 36
|---- | --

---

|NOTES TO
      CONSOLIDATED FINANCIAL STATEMENTS
|------------------------------------------------

17. COMMITMENTS AND CONTINGENCIES

The Company is subject to certain office and equipment leases
(Note 16).

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

Pursuant to the PSA for Block 72 in Yemen, the Contractor
(Joint Venture Partners) has a minimum financial commitment of $2.0 million
($0.1 million to TransGlobe) to drill one exploration well during the second
exploration period. The second, 30-month exploration period commenced on January
12, 2009. The Contractor has entered into a farm-in agreement with TOTAL E&P
Yemen which has reduced TransGlobes interest in the concession to 20%. This
commitment was fully satisfied subsequent to December 31, 2010.

Pursuant to the PSA for Block 75 in Yemen, the Contractor
(Joint Venture Partners) has a remaining minimum financial commitment of $3.0
million ($0.8 million to TransGlobe) for one exploration well. The first,
36-month exploration period commenced March 8, 2008. Subsequent to December 31,
2010, the Company received an extension on the first exploration period to
September 9, 2011. The Company issued a $1.5 million letter of credit (expiring
November 15, 2011) to guarantee the Companys performance under the first
exploration period. The letter is secured by a guarantee granted by Export
Development Canada.

Pursuant to the August 18, 2008 asset purchase agreement for a
25% financial interest in eight development leases on the West Gharib Concession
in Egypt, the Company has committed to paying the vendor a success fee to a
maximum of $2.0 million if incremental reserve thresholds are reached in the
South Rahmi development lease, to be evaluated annually. As at December 31,
2010, no additional fees are due in 2011.

Pursuant to a one-year extension to the West Hoshia development
lease, which is part of the Concession agreement for West Gharib in Egypt, the
Company provided a $1.0 million production guarantee to drill one exploration
well prior to October 14, 2011.

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

|37 | 2010
|-- | ----

---

|NOTES TO
      CONSOLIDATED FINANCIAL STATEMENTS
|------------------------------------------------

18. SEGMENTED INFORMATION

|                                                 |   | Egypt   |  |   | Yemen  |   |   | Total  | 
|------------------------------------------------ | - | ------- |  | - | ------ | - | - | ------ | 
|(000s)                                           |   | 2010    |  |   | 2009   |   |   | 2010   | 
|Revenue                                          |   |         |  |   |        |   |   |        | 
|Oil sales, net of royalties and other            | $ | 114,895 |  | $ | 64,117 |   | $ | 42,325 | 
|                                                 |   |         |  |   |        |   |   |        | 
|Segmented expenses                               |   |         |  |   |        |   |   |        | 
|Operating                                        |   | 16,464  |  |   | 14,703 |   |   | 10,386 | 
|Depletion and depreciation                       |   | 26,010  |  |   | 37,942 |   |   | 7,683  | 
|Income taxes                                     |   | 29,686  |  |   | 13,980 |   |   | 10,121 | 
|                                                 |   |         |  |   |        |   |   |        | 
|Total segmented expenses                         |   | 72,160  |  |   | 66,625 |   |   | 28,190 | 
|                                                 |   |         |  |   |        |   |   |        | 
|Segmented income (loss)                          | $ | 42,735  |  | $ | (2,508 | ) | $ | 14,135 | 
|                                                 |   |         |  |   |        |   |   |        | 
|                                                 |   |         |  |   |        |   |   |        | 
|                                                 |   |         |  |   |        |   |   |        | 
|Non-segmented expenses                           |   |         |  |   |        |   |   |        | 
|Derivative loss on commodity contracts (Note 16) |   |         |  |   |        |   |   |        | 
|General and administrative                       |   |         |  |   |        |   |   |        | 
|Interest on long-term debt                       |   |         |  |   |        |   |   |        | 
|Depreciation                                     |   |         |  |   |        |   |   |        | 
|Foreign exchange loss (gain)                     |   |         |  |   |        |   |   |        | 
|Other income                                     |   |         |  |   |        |   |   |        | 
|                                                 |   |         |  |   |        |   |   |        | 
|Total non-segmented expenses                     |   |         |  |   |        |   |   |        | 
|                                                 |   |         |  |   |        |   |   |        | 
|Net income (loss)                                |   |         |  |   |        |   |   |        | 
|                                                 |   |         |  |   |        |   |   |        | 
|Capital expenditures                             |   |         |  |   |        |   |   |        | 
|Exploration and development                      | $ | 58,435  |  | $ | 28,349 |   | $ | 7,684  | 
|Corporate                                        |   |         |  |   |        |   |   |        | 
|                                                 |   |         |  |   |        |   |   |        | 
|Total capital expenditures                       |   |         |  |   |        |   |   |        | 

|                       |   | Dec.31  |  |   | Dec.31  |  |   | Dec.31 |  |   | Dec.31 |  |   | Dec.31  |  |   | Dec.31  | 
|---------------------- | - | ------- |  | - | ------- |  | - | ------ |  | - | ------ |  | - | ------- |  | - | ------- | 
|(000s)                 |   | 2010    |  |   | 2009    |  |   | 2010   |  |   | 2009   |  |   | 2010    |  |   | 2009    | 
|Property and equipment | $ | 151,504 |  | $ | 119,079 |  | $ | 47,487 |  | $ | 47,486 |  | $ | 198,991 |  | $ | 166,565 | 
|Goodwill               |   | 8,180   |  |   | 8,180   |  |   | -      |  |   | -      |  |   | 8,180   |  |   | 8,180   | 
|Other                  |   | 70,380  |  |   | 41,347  |  |   | 11,378 |  |   | 5,877  |  |   | 81,758  |  |   | 47,224  | 
|Segmented assets       | $ | 230,064 |  | $ | 168,606 |  | $ | 58,865 |  | $ | 53,363 |  |   | 288,929 |  |   | 221,969 | 
|Non-segmented assets   |   |         |  |   |         |  |   |        |  |   |        |  |   | 52,972  |  |   | 6,913   | 
|                       |   |         |  |   |         |  |   |        |  |   |        |  |   |         |  |   |         | 
|Total assets           |   |         |  |   |         |  |   |        |  |   |        |  | $ | 341,901 |  | $ | 228,882 | 

19. SUBSEQUENT EVENT

On February 1, 2011, the Company closed an equity offering of
5,000,000 common shares at C$15.00 per common share for gross proceeds of C$75.0
million (US$75.6 million).

|2010 | 38
|---- | --

---

|NOTES TO
      CONSOLIDATED FINANCIAL STATEMENTS
|------------------------------------------------

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

The Consolidated Financial Statements have been prepared in
accordance with Canadian GAAP which differ in certain material respects from
those principles that the Company would have followed had its Consolidated
Financial Statements been prepared in accordance with U.S. GAAP as described
below.

Consolidated Statements of Income (Loss) and Retained
Earnings (Deficit)

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

|(000s, except per
      share amounts)                     |   | 2010   |   |   | 2009    |  
|---------------------------------------------------------- | - | ------ | - | - | ------- | -
|Net income (loss) for the year under
      Canadian GAAP   | $ | 37,867 |   | $ | (8,417  | )
|Adjustments:                                               |   |        |   |   |         |  
|Depletion and depreciation
      (Note 20a)                |   | 13,197 |   |   | 24,514  |  
|Stock-based compensation (Note 20b)                        |   | 450    |   |   | -       |  
|Net income for the year under U.S. GAAP                    |   | 51,514 |   |   | 16,097  |  
|(Deficit),
      beginning of year - U.S. GAAP             |   | (3,663 | ) |   | (19,760 | )
|                                                           |   |        |   |   |         |  
|Retained earnings
      (deficit), end of year - U.S. GAAP | $ | 47,851 |   | $ | (3,663  | )
|                                                           |   |        |   |   |         |  
|Net income per share under U.S. GAAP                       |   |        |   |   |         |  
|- Basic                                                    |   | 0.78   |   |   | 0.25    |  
|-
      Diluted                                            |   | 0.75   |   |   | 0.24    |  

Statement of Other Comprehensive Income

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

|(000s)                                           |   | 2010   |  |   | 2009   | 
|------------------------------------------------ | - | ------ |  | - | ------ | 
|Net income  U.S. GAAP                           | $ | 51,514 |  | $ | 16,097 | 
|Currency
      translation adjustment (Note 20d) |   | -      |  |   | -      | 
|Other comprehensive income                       | $ | 51,514 |  | $ | 16,097 | 

Consolidated Balance Sheets

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

|(000s)                                          |   | 2010      |  |   | 2009      | 
|----------------------------------------------- | - | --------- |  | - | --------- | 
|                                                |   | Cdn. GAAP |  |   | U.S. GAAP | 
|Current assets                                  | $ | 130,037   |  | $ | 130,037   | 
|Restricted cash                                 |   | 3,387     |  |   | 3,387     | 
|Property and equipment (Note 20a)               |   | 200,297   |  |   | 137,793   | 
|Deferred financing costs (Note 20f)             |   | -         |  |   | 3,580     | 
|Goodwill (Note 20a)                             |   | 8,180     |  |   | -         | 
|                                                |   |           |  |   |           | 
|                                                | $ | 341,901   |  | $ | 274,797   | 
|                                                |   |           |  |   |           | 
|                                                |   |           |  |   |           | 
|Current liabilities                             | $ | 41,772    |  | $ | 41,322    | 
|Long-term debt (Note 20f)                       |   | 86,420    |  |   | 90,000    | 
|                                                |   | 128,192   |  |   | 131,322   | 
|                                                |   |           |  |   |           | 
|Share capital (Notes 20b, 20c and 20d)          |   | 80,193    |  |   | 81,896    | 
|Contributed surplus (Note 20b)                  |   | 4,756     |  |   | 2,848     | 
|Accumulated other comprehensive income          |   | 10,880    |  |   | 10,880    | 
|Retained earnings (deficit) (Notes 20b and 20c) |   | 117,880   |  |   | 47,851    | 
|                                                |   | 213,709   |  |   | 143,475   | 
|                                                |   |           |  |   |           | 
|                                                | $ | 341,901   |  | $ | 274,797   | 

|39 | 2010
|-- | ----

---

|NOTES TO
      CONSOLIDATED FINANCIAL STATEMENTS
|------------------------------------------------

The reconciling items between share capital and retained
earnings (deficit) for Canadian and U.S. GAAP are $0.8 million related to
escrowed shares, and $1.3 million related to flow through shares. The remaining
retained earnings (deficit) variance relates to the impairment losses required
for U.S. GAAP in 2008, which were not recognized for Canadian GAAP. The
aggregate of the impairment losses in Egypt and Yemen in 2008 was $94.5 million.
These impairment losses have also caused a depletion and depreciation expense
variance between U.S. GAAP and Canadian GAAP in 2010 and 2009, which has
partially offset the initial reduction in retained earnings (deficit) caused by
recognizing the losses. The reconciling items between contributed surplus and
retained earnings (deficit) for Canadian and U.S. GAAP are $0.3 million for the
adoption of stock-based compensation under Canadian GAAP and $2.0 million for
the 2005 and 2004 stock-based compensation expense under Canadian GAAP, which
was not expensed in 2005. The reconciling item between share capital and
contributed surplus is $0.4 million for the transfer of compensation expense
related to options exercised in 2005 and prior.

a) Full Cost Accounting

The full cost method of accounting for crude oil and natural
gas operations under Canadian and U.S. GAAP differ in the following respect.
Under U.S. GAAP, a ceiling test is applied to ensure the unamortized capitalized
costs in each cost centre do not exceed the sum of the present value, discounted
at 10%, of the estimated unescalated future net operating revenue using the
trailing 12-month average prices from proved reserves plus unimpaired unproved
property costs less future development costs, related production costs and
applicable taxes. Under Canadian GAAP, a similar ceiling test calculation is
performed with the exception that cash flows from proved reserves are
undiscounted and utilize forecasted pricing and before tax to determine whether
impairment exists. In Canada, the impaired amount is measured using the fair
value of reserves.

There are no impairment charges under Canadian GAAP or U.S.
GAAP for the years ended December 31, 2010 or December 31, 2009. In 2008, under
U.S. GAAP, the unamortized capitalized cost of the Companys Egypt and Yemen oil
and gas properties exceeded the full cost ceiling limitation by $79.9 million
and $14.6 million, respectively, net of taxes, which were written off for U.S.
GAAP purposes. These impairment charges also decreased the depletion and
depreciation expense for U.S. GAAP purposes by $13.2 million in 2010 and $24.5
million in 2009. Goodwill was tested for impairment by comparing the fair value
of the reporting unit to the book value of the reporting unit, which resulted in
an impairment charge to goodwill of $3.9 million in 2008 (2007 - $4.3 million
impairment charge). Because of the volatility of oil and natural gas prices, no
assurance can be given that the Company will not experience a writedown in
future periods.

b) Stock-based Compensation

The Company has a stock-based compensation plan as more fully
described in Note 9. Under Canadian GAAP, compensation costs have been
recognized in the financial statements for stock options granted to employees
and directors since January 1, 2002. For U.S. GAAP, effective January 1, 2006,
the Company has adopted an accounting standard that required compensation costs
related to share-based payment transactions to be recognized as an expense at
fair value with re-measurement to fair value each period. The compensation
expense is recognized over the period that an employee provides service in
exchange for the award, with forfeitures estimated at each period end. As
permitted, the Company has applied this change using modified prospective
application for new awards granted after January 1, 2006 and for the
compensation cost of awards that were not vested at December 31, 2005. In 2005
and prior periods, the Company used the intrinsic value method of accounting for
stock options granted to employees and directors whereby no costs were
recognized in the financial statements per U.S. GAAP.

The effect of applying the intrinsic value method in 2005 and
prior years to the Companys U.S. GAAP financial statements resulted in a
decrease to stock-based compensation in 2005 by $0.7 million (2004 - $1.3
million) and a corresponding decrease to the contributed surplus account. Also,
the deficit would decrease by $0.3 million in 2004 with a corresponding decrease
to the contributed surplus account relating to the 2004 adoption entry for
Canadian GAAP that is not required for U.S. GAAP. Also, the share capital would
decrease by $0.4 million for options exercised since the compensation expense
was transferred into common shares for Canadian GAAP. This is not required for
U.S. GAAP.

The Company has a share appreciation rights plan as more fully
described in Note 9. For Canadian GAAP, the intrinsic value method is utilized,
whereby obligations are accrued for over the vesting period and represent the
difference between the market value of the Companys common shares and the
exercise price of the rights. For U.S. GAAP, the fair value method is utilized,
whereby obligations are calculated using the lattice-based binomial option
pricing model. The fair value of each share appreciation right is estimated on
the date of grant and recognized over the vesting period using the following
assumptions:

|                                                       |  | 2010  | 
|------------------------------------------------------ |  | ----- | 
|Risk free interest rate (%)                            |  | 1.86  | 
|Expected life (years)                                  |  | 5     | 
|Expected volatility (%)                                |  | 43.14 | 
|Dividend per share                                     |  | 0.00  | 
|Expected forfeiture rate (non-executive employees) (%) |  | 0     | 

c) Future Income Taxes

The Company records the renouncement of tax deductions related
to flow-through shares by reducing share capital and recording a future tax
liability in the amount of the estimated cost of the tax deductions flowed to
the shareholders. U.S. GAAP requires that the share capital on flow through
shares be stated at the quoted market value of the shares at the date of
issuance. In addition, the temporary difference that arises as a result of the
renouncement of the deductions, less any proceeds received in excess of the quoted market value
of the shares, is recognized in the determination of income tax expense for the
period. The effect of applying this provision to the Companys consolidated
financial statements would result in an increase in income tax expense and
future tax liability by $Nil in 2010, $Nil in 2009, $Nil in 2008, $Nil in 2007,
$Nil in 2006, $Nil in 2005, $Nil in 2004, $0.9 million in 2003, $0.1 million in
2002, $Nil in 2001 and $0.3 million in 2000 representing the tax effect of the
flow through shares and a corresponding increase to share capital and decrease
to future tax liability by $Nil in 2009, $Nil in 2008, $Nil in 2007, $Nil in
2006, $Nil in 2005, $Nil in 2004, $0.9 million in 2003, $0.1 million in 2002,
$Nil in 2001 and $0.3 million in 2000 to record the recognition of the benefit
of tax losses available to the Company equal to the liability arising from
renouncing tax pools to the subscribers.

|2010 | 40
|---- | --

---

|NOTES TO
      CONSOLIDATED FINANCIAL STATEMENTS
|------------------------------------------------

Under U.S. GAAP, enacted tax rates are used to calculate future
taxes, whereas Canadian GAAP uses substantively enacted tax rates. The effect of
this change between Canadian and U.S. GAAP would result in an increase in future
income tax expense and future tax liability of $Nil in 2010, $Nil in 2009, $Nil
in 2008, $Nil in 2007, $0.2 million in 2006, $0.2 million in 2005, $0.2 million
in 2004 and $0.4 million in 2003 representing the higher enacted tax rates over
the substantively enacted tax rates and a corresponding reduction in future
income tax expense and future tax liability of $Nil in 2010, $Nil in 2009, $Nil
in 2008, $Nil in 2007, $0.2 million in 2006, $0.2 million in 2005, $0.2 million
in 2004 and $0.4 million in 2003 to record an additional valuation allowance
against the increased tax asset.

d) Escrowed Shares

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

e) Accounting for Uncertainty in Income Taxes

Effective January 1, 2007, the Company adopted an accounting
interpretation providing guidance for accounting for uncertainty in income
taxes, which clarifies the accounting for uncertainty in income taxes recognized
in an enterprises financial statements. The interpretation prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return.

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

f) Deferred Financing Costs

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

g) Accounting Policies Adopted for U.S. GAAP

Variable Interest EntitiesIn June 2009,
authoritative guidance was released which required the enterprise to
qualitatively assess if it is the primary beneficiary of the VIE and, if so, the
VIE must be consolidated. This standard is effective for years beginning after
November 15, 2009; therefore, the Company adopted it for the year-ended December
31, 2010. Upon adoption, it was determined that there was no material impact on
the Consolidated Financial Statements.

Transfers of Financial AssetsIn June 2009,
authoritative guidance was released which changes how companies account for
transfers of financial assets and eliminates the concept of qualifying
special-purpose entities. This standard is effective for years beginning after
November 15, 2009; therefore, the Company adopted it for the year-ended December
31, 2010. Upon adoption, it was determined that there was no material impact on
the Consolidated Financial Statements.

Fair Value Measurements and DisclosuresIn January
2010, the FASB issued Accounting Standards Update (ASU) 2010-06, Improving
Disclosures about Fair Value Measurements, which updates the guidance in ASC
Topic 820, Fair Value Measurements and Disclosures, to provide more disclosures
regarding the different classes of assets and liabilities measured at fair value
and the levels in which they are grouped (see Note 16), the valuation techniques
and inputs used, and the activity within and transfers between different levels.
This updated guidance became effective for interim and annual periods beginning
after December 15, 2009; therefore, the Company adopted it for the year ended
December 31, 2010. Upon adoption, it was determined that there was no material
impact on the Consolidated Financial Statements.

|41 | 2010
|-- | ----

---

|NOTES TO
      CONSOLIDATED FINANCIAL STATEMENTS
|------------------------------------------------

Subsequent EventsIn February 2010, the FASB issued
ASU No. 2010-09, which updates the guidance in ASC Topic 855, Subsequent Events,
to no longer require companies that file with the United States Securities and
Exchange Commission (SEC) to indicate the date through which subsequent events
have been reviewed and analyzed. This updated guidance became effective for
interim or annual periods ending after June 15, 2010; therefore, the Company
adopted it for the year-ended December 31, 2010. Upon adoption, it was
determined that there was no material impact on the Consolidated Financial
Statements.

|42 | 2010
|-- | ----

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