---

|TRANSGLOBE ENERGY CORPORATION    
|---------------------------------
|CONSOLIDATED FINANCIAL STATEMENTS

Managements Report

Managements Responsibility On Financial Statements

The consolidated financial statements of TransGlobe Energy
Corporation were prepared by management within acceptable limits of materiality
and are in accordance with Canadian generally accepted accounting principles.
Management is responsible for ensuring that the financial and operating
information presented in this annual report is consistent with that shown in the
consolidated financial statements.

The consolidated financial statements have been prepared by
management in accordance with the accounting policies as described in the notes
to the consolidated financial statements. Timely release of financial
information sometimes necessitates the use of estimates when transactions
affecting the current accounting period cannot be finalized until future
periods. When necessary, such estimates are based on informed judgments made by
management.

Deloitte & Touche LLP, an independent firm of Chartered
Accountants appointed by the shareholders, have conducted an examination of the
corporate and accounting records in order to express their opinion on the
consolidated financial statements. The Audit Committee, consisting of three
independent directors, has met with representatives of Deloitte & Touche LLP
and management in order to determine if management has fulfilled its
responsibilities in the preparation of the consolidated financial statements.
The Board of Directors has approved the consolidated financial statements.

Managements Report On Internal Control Over Financial
Reporting

Management has designed and maintains an appropriate system of
internal controls to provide reasonable assurance that all assets are
safeguarded and financial records are properly maintained to facilitate the
preparation of consolidated financial statements for reporting purposes.

|Signed by:                          |                                                        
|----------------------------------- | -------------------------------------------------------
|                                    |                                                        
|Ross G. Clarkson                  | David C. Ferguson                                    
|                                    |                                                        
|Ross G. Clarkson                    | David C. Ferguson                                      
|President & Chief Executive Officer | Vice President, Finance & Chief Financial
      Officer
|                                    |                                                        
|March 9, 2010                       |                                                        

|2009 | 1
|---- | -

---

|TRANSGLOBE ENERGY CORPORATION    
|---------------------------------
|CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Chartered Accountants

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

We have audited the consolidated balance sheets of TransGlobe
Energy Corporation and subsidiaries (the Company) as at December 31, 2009 and
2008 and the consolidated statements of (loss) income and retained earnings,
comprehensive (loss) income and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, these consolidated financial statements present
fairly, in all material respects, the financial position of TransGlobe Energy
Corporation and subsidiaries as atDecember 31, 2009 and 2008 and the
results of their operations and their cash flows for the years then ended in
accordance with Canadian generally accepted accounting principles.

We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the Company's
internal control over financial reporting as of December 31, 2009, based onthe criteria established in Internal ControlIntegrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated March 9, 2010 expressed an unqualified opinion on the Companys
internal control over financial reporting.

Independent Registered Chartered Accountants Calgary,
Canada March 9, 2010

Comments by Independent Registered Chartered Accountants on
Canada-United States of America Reporting Differences

The standards of the Public Company Accounting Oversight Board
(United States) require the addition of an explanatory paragraph (following the
opinion paragraph) when there are changes in accounting principles that have a
material effect on the comparability of the Companys financial statements, such
as the changes described in Notes 2 and 19 to the consolidated financial
statements. Although we conducted our audits in accordance with both Canadian
generally accepted auditing standards and the standards of the Public Company
Accounting Oversight Board (United States), our report to the Board of Directors
and Shareholders of TransGlobe Energy Corporation, dated March 9, 2010, is
expressed in accordance with Canadian reporting standards which do not require a
reference to such changes in accounting principles in the auditors report when
the changes are properly accounted for and adequately disclosed in the financial
statements.

Independent Registered Chartered Accountants Calgary,
Canada March 9, 2010

|2009 | 2
|---- | -

---

|TRANSGLOBE ENERGY CORPORATION    
|---------------------------------
|CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Chartered Accountants

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

We have audited the internal control over financial reporting
of TransGlobe Energy Corporation and subsidiaries (the Company)as of
December 31, 2009, based on the criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission. The Company's management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Managements Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on the
Company's internal control over financial reporting based on our audit.

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

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

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

In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2009, based on the criteria established in Internal Control  Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission.

We have also audited, in accordance with Canadian generally
accepted auditing standards and the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements as at and
for the year ended December 31, 2009 of the Company and our report dated March
9, 2010 expressed an unqualified opinion on those financial statements and
included a separate report titled Comments by Independent Registered Chartered
Accountants on Canada-United States of America Reporting Difference referring to
changes in accounting principles.

Independent Registered Chartered Accountants Calgary,
Canada March 9, 2010

|2009 | 3
|---- | -

---

|TRANSGLOBE ENERGY CORPORATION    
|---------------------------------
|CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Statements of (Loss) Income and Retained
Earnings

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

|                                                                      |   | Year Ended        |   |   | Year Ended        |  
|--------------------------------------------------------------------- | - | ----------------- | - | - | ----------------- | -
|                                                                      |   | December 31, 2009 |   |   | December 31, 2008 |  
|                                                                      |   |                   |   |   |                   |  
|REVENUE                                                               |   |                   |   |   |                   |  
|Oil sales, net of royalties and other                                 | $ | 102,805           |   | $ | 123,231           |  
|Derivative (loss) gain on
      commodity contracts (Note 16)         |   | (4,213            | ) |   | 3,005             |  
|Other
      income                                                    |   | 44                |   |   | 170               |  
|                                                                      |   | 98,636            |   |   | 126,406           |  
|                                                                      |   |                   |   |   |                   |  
|EXPENSES                                                              |   |                   |   |   |                   |  
|Operating                                                             |   | 24,765            |   |   | 19,333            |  
|General and administrative                                            |   | 11,427            |   |   | 10,213            |  
|Foreign exchange gain                                                 |   | (1,032            | ) |   | (84               | )
|Interest on long-term debt                                            |   | 2,461             |   |   | 6,163             |  
|Depletion and depreciation (Note 4)                                   |   | 47,579            |   |   | 35,378            |  
|                                                                      |   | 85,200            |   |   | 71,003            |  
|                                                                      |   |                   |   |   |                   |  
|Income before income taxes                                            |   | 13,436            |   |   | 55,403            |  
|                                                                      |   |                   |   |   |                   |  
|Income taxes  current (Note 11)                                      |   | 21,853            |   |   | 32,230            |  
|                                                                      |   |                   |   |   |                   |  
|NET (LOSS) INCOME FROM CONTINUING
      OPERATIONS                    |   | (8,417            | ) |   | 23,173            |  
|NET INCOME FROM
      DISCONTINUED OPERATIONS(Note 5)                 |   | -                 |   |   | 8,350             |  
|NET (LOSS) INCOME                                                     |   | (8,417            | ) |   | 31,523            |  
|                                                                      |   |                   |   |   |                   |  
|Retained earnings, beginning of year                                  |   | 88,430            |   |   | 57,787            |  
|Repurchase of
      common shares (Note 8)                            |   | -                 |   |   | (880              | )
|                                                                      |   |                   |   |   |                   |  
|RETAINED
      EARNINGS, END OF YEAR                                  | $ | 80,013            |   | $ | 88,430            |  
|                                                                      |   |                   |   |   |                   |  
|                                                                      |   |                   |   |   |                   |  
|Net (loss) income from continuing
      operations per share(Note 14) |   |                   |   |   |                   |  
|Basic                                                                 | $ | (0.13             | ) | $ | 0.39              |  
|Diluted                                                               |   | (0.13             | ) |   | 0.38              |  
|Net income from discontinued operations per share(Note 14)            |   |                   |   |   |                   |  
|Basic                                                                 |   | -                 |   |   | 0.14              |  
|Diluted                                                               |   | -                 |   |   | 0.14              |  
|Net (loss) income per share(Note
      14)                            |   |                   |   |   |                   |  
|Basic                                                                 |   | (0.13             | ) |   | 0.53              |  
|Diluted                                                               |   | (0.13             | ) |   | 0.52              |  

See accompanying notes to the consolidated financial
statements.

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

|                                        |   | Year Ended        |   |   | Year Ended        |  
|--------------------------------------- | - | ----------------- | - | - | ----------------- | -
|                                        |   | December 31, 2009 |   |   | December 31, 2008 |  
|                                        |   |                   |   |   |                   |  
|Net (loss) income                       | $ | (8,417            | ) | $ | 31,523            |  
|Other comprehensive loss:               |   |                   |   |   |                   |  
|Foreign currency translation adjustment |   | -                 |   |   | (886              | )
|                                        |   |                   |   |   |                   |  
|COMPREHENSIVE (LOSS) INCOME             | $ | (8,417            | ) | $ | 30,637            |  

See accompanying notes to the consolidated financial
statements.

|2009 | 4
|---- | -

---

|TRANSGLOBE ENERGY CORPORATION
      CONSOLIDATED FINANCIAL STATEMENTS
|---------------------------------------------------------------------

Consolidated Balance Sheets

(Expressed in thousands of U.S. Dollars)

|                                                 |   | As at             |  |   | As at             | 
|------------------------------------------------ | - | ----------------- |  | - | ----------------- | 
|                                                 |   | December 31, 2009 |  |   | December 31, 2008 | 
|                                                 |   |                   |  |   |                   | 
|ASSETS                                           |   |                   |  |   |                   | 
|Current                                          |   |                   |  |   |                   | 
|Cash and cash equivalents                        | $ | 16,177            |  | $ | 7,634             | 
|Accounts receivable                              |   | 35,296            |  |   | 28,701            | 
|Derivative commodity contracts
      (Note 16)   |   | -                 |  |   | 2,336             | 
|Prepaid expenses                                 |   | 1,620             |  |   | 822               | 
|Assets of discontinued operations (Note 5)       |   | 312               |  |   | 764               | 
|                                                 |   |                   |  |   |                   | 
|                                                 |   | 53,405            |  |   | 40,257            | 
|                                                 |   |                   |  |   |                   | 
|Derivative commodity contracts (Note 16)         |   | -                 |  |   | 472               | 
|Goodwill (Note 6)                                |   | 8,180             |  |   | 8,180             | 
|Property and equipment (Note 4)                  |   | 167,297           |  |   | 179,329           | 
|                                                 |   |                   |  |   |                   | 
|                                                 | $ | 228,882           |  | $ | 228,238           | 
|                                                 |   |                   |  |   |                   | 
|                                                 |   |                   |  |   |                   | 
|LIABILITIES                                      |   |                   |  |   |                   | 
|Current                                          |   |                   |  |   |                   | 
|Accounts payable and accrued liabilities         | $ | 14,717            |  | $ | 15,852            | 
|Income taxes payable                             |   | 79                |  |   | 79                | 
|Derivative commodity contracts (Note 16)         |   | 514               |  |   | -                 | 
|Current portion of long-term
      debt (Note 7) |   | 49,799            |  |   | -                 | 
|Liabilities of discontinued operations (Note 5)  |   | 83                |  |   | 342               | 
|                                                 |   |                   |  |   |                   | 
|                                                 |   | 65,192            |  |   | 16,273            | 
|                                                 |   |                   |  |   |                   | 
|Long-term debt
      (Note 7)                    |   | -                 |  |   | 57,230            | 
|                                                 |   |                   |  |   |                   | 
|                                                 |   | 65,192            |  |   | 73,503            | 
|                                                 |   |                   |  |   |                   | 
|                                                 |   |                   |  |   |                   | 
|Commitments and contingencies (Note 17)          |   |                   |  |   |                   | 
|                                                 |   |                   |  |   |                   | 
|SHAREHOLDERS EQUITY                             |   |                   |  |   |                   | 
|Share capital (Note 8)                           |   | 66,106            |  |   | 50,532            | 
|Contributed surplus (Note 10)                    |   | 6,691             |  |   | 4,893             | 
|Accumulated other comprehensive income (Note 13) |   | 10,880            |  |   | 10,880            | 
|Retained earnings                                |   | 80,013            |  |   | 88,430            | 
|                                                 |   |                   |  |   |                   | 
|                                                 |   | 163,690           |  |   | 154,735           | 
|                                                 |   |                   |  |   |                   | 
|                                                 | $ | 228,882           |  | $ | 228,238           | 

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

|2009 | 5
|---- | -

---

|TRANSGLOBE ENERGY CORPORATION
      CONSOLIDATED FINANCIAL STATEMENTS
|---------------------------------------------------------------------

Consolidated Statements of Cash Flows

(Expressed in thousands of U.S. Dollars)

|                                                                   |   | Year Ended        |   |   | Year Ended        |  
|------------------------------------------------------------------ | - | ----------------- | - | - | ----------------- | -
|                                                                   |   | December 31, 2009 |   |   | December 31, 2008 |  
|                                                                   |   |                   |   |   |                   |  
|CASH FLOWS RELATED TO THE FOLLOWING
      ACTIVITIES:              |   |                   |   |   |                   |  
|                                                                   |   |                   |   |   |                   |  
|OPERATING                                                          |   |                   |   |   |                   |  
|Net (loss) income                                                  | $ | (8,417            | ) | $ | 31,523            |  
|Net income from discontinued operations                            |   | -                 |   |   | 8,350             |  
|Net (loss) income from continuing operations                       |   | (8,417            | ) |   | 23,173            |  
|Adjustments for:                                                   |   |                   |   |   |                   |  
|Depletion and
      depreciation                                   |   | 47,579            |   |   | 35,378            |  
|Amortization of deferred financing costs                           |   | 569               |   |   | 1,884             |  
|Stock-based compensation
      (Note 9)                            |   | 2,011             |   |   | 1,830             |  
|Unrealized (gain) loss on commodity contracts                      |   | 3,322             |   |   | (9,906            | )
|Changes in non-cash working capital (Note 12)                      |   | (8,458            | ) |   | (1,269            | )
|Cash provided by continuing
      operations                       |   | 36,606            |   |   | 51,090            |  
|Cash
      provided by discontinued operations                     |   | 193               |   |   | 6,703             |  
|                                                                   |   |                   |   |   |                   |  
|                                                                   |   | 36,799            |   |   | 57,793            |  
|                                                                   |   |                   |   |   |                   |  
|                                                                   |   |                   |   |   |                   |  
|FINANCING                                                          |   |                   |   |   |                   |  
|Increase in long-term debt (Note 7)                                |   | -                 |   |   | 55,000            |  
|Repayments of long-term debt
      (Note 7)                        |   | (8,000            | ) |   | (55,000           | )
|Deferred financing costs                                           |   | -                 |   |   | (1,339            | )
|Repurchase of common shares
      (Note 8)                         |   | -                 |   |   | (1,135            | )
|Options surrendered for cash payments (Note 8)                     |   | (13               | ) |   | (256              | )
|Issue of common shares for
      cash (Note 8)                     |   | 16,578            |   |   | 512               |  
|Issue costs for common shares (Note 8)                             |   | (1,204            | ) |   | -                 |  
|Changes in non-cash working capital (Note 12)                      |   | (1,515            | ) |   | 1,515             |  
|                                                                   |   |                   |   |   |                   |  
|                                                                   |   | 5,846             |   |   | (703              | )
|                                                                   |   |                   |   |   |                   |  
|                                                                   |   |                   |   |   |                   |  
|INVESTING                                                          |   |                   |   |   |                   |  
|Exploration and development
      expenditures                     |   | (35,546           | ) |   | (43,857           | )
|Acquisitions (Note 3)                                              |   | -                 |   |   | (62,392           | )
|Changes in non-cash working capital (Note 12)                      |   | 1,444             |   |   | (2,737            | )
|Cash used by continuing operations                                 |   | (34,102           | ) |   | (108,986          | )
|Cash provided by discontinued operations                           |   | -                 |   |   | 46,600            |  
|                                                                   |   |                   |   |   |                   |  
|                                                                   |   | (34,102           | ) |   | (62,386           | )
|                                                                   |   |                   |   |   |                   |  
|                                                                   |   |                   |   |   |                   |  
|Effect of exchange
      rate changes on cash and cash equivalents |   | -                 |   |   | 201               |  
|                                                                   |   |                   |   |   |                   |  
|NET INCREASE (DECREASE) IN CASH AND CASH
      EQUIVALENTS         |   | 8,543             |   |   | (5,095            | )
|                                                                   |   |                   |   |   |                   |  
|CASH AND CASH
      EQUIVALENTS, BEGINNING OF YEAR                 |   | 7,634             |   |   | 12,729            |  
|                                                                   |   |                   |   |   |                   |  
|CASH AND CASH
      EQUIVALENTS, END OF YEAR                       | $ | 16,177            |   | $ | 7,634             |  
|                                                                   |   |                   |   |   |                   |  
|                                                                   |   |                   |   |   |                   |  
|Supplemental Disclosure of Cash Flow
      Information             |   |                   |   |   |                   |  
|Cash interest paid                                                 | $ | 1,892             |   | $ | 4,279             |  
|Cash taxes paid                                                    |   | 21,853            |   |   | 32,230            |  
|Cash is comprised of cash on hand and balances
      with banks    |   | 14,274            |   |   | 6,634             |  
|Cash equivalents                                                   |   | 1,903             |   |   | 1,000             |  

See accompanying notes to the consolidated financial
statements.

|2009 | 6
|---- | -

---

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

As at December 31, 2009 and 2008 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 19. In these Consolidated Financial Statements, unless
otherwise indicated, all dollar amounts are expressed in United States (U.S.)
dollars. All references to US$ or to $ are to United States dollars and
references to C$ are to Canadian dollars.

Nature of Business and Principles of Consolidation

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

- West Gharib area, East Ghazalat area and Nuqra Block 1 within the Arab
  Republic of Egypt (Egypt);
- Block 32, Block S-1, Block 72, Block 75 and Block 84 within the Republic
  of Yemen (Yemen); and
- The Western Canadian Sedimentary Basin within Canada, until this area was
  sold in April 2008 (Note 5).

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 our international operations, all government interests, except for
income taxes, are considered royalty payments. Our revenue also includes the
recovery of costs paid on behalf of foreign governments in international
locations.

Income Taxes

The Company uses the liability method to account for income
taxes. Under this method, future income taxes are based on the difference
between assets and liabilities reported for financial accounting purposes from
those reported for income tax. Future income tax assets and liabilities are
measured using the substantively enacted tax rates expected to apply to taxable
income in the years in which the temporary differences are expected to be
recovered or settled. The Companys contractual arrangements in foreign
jurisdictions stipulate that income taxes are paid by the respective 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.

Flow Through Shares

The Company has financed a portion of its prior years
exploration and development activities in Canada through the issue of flow
through shares. Under the terms of these share issues, the tax attributes of the
related expenditures are renounced to subscribers. To recognize the foregone tax
benefits, share capital is reduced and a future income tax liability is recorded
for the income tax amount related to the renounced deductions.

|2009 | 7
|---- | -

---

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

Net (Loss) Income Per Share

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

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%.

Asset Retirement Obligations (ARO)

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

The ARO liabilities are carried on the Consolidated Balance
Sheets at their discounted present value and are accreted over time for the
change in present value, with the accretion charge included in depreciation,
depletion and accretion.

Actual expenditures incurred are charged against the
accumulated obligation.

|2009 | 8
|---- | -

---

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

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

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

The Company has classified its derivative commodity contracts
and cash and cash equivalents as held-for-trading, which are measured at fair
value with changes being recognized in net income. Accounts receivable are
classified as loans and receivables; operating bank loans, accounts payable and
accrued liabilities, and long-term debt, including interest payable, are
classified as other liabilities, all of which are measured at amortized cost the
classification of all financial instruments is the same at inception and at
December 31, 2009. The Company has elected to classify all derivatives as
held-for trading, which are measured at fair value with changes being recognized
in net income.

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

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

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

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

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.

|2009 | 9
|---- | -

---

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

Measurement Uncertainty

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

Amounts recorded for depletion, depreciation and amortization,
asset retirement costs and obligations, goodwill, stock-based compensation,
future income taxes, and amounts used for ceiling test and impairment
calculations are based on estimates of oil and natural gas reserves and future
costs required to develop those reserves. By their nature, these estimates of
reserves and the related future cash flows are subject to measurement
uncertainty, and the impact on the financial statements of future periods could
be material.

2. CHANGES IN ACCOUNTING POLICIES

Goodwill and Intangible Assets

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

Credit Risk and Fair Value of Financial Assets and
Liabilities

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

Financial Instruments

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

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

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

New Accounting Standards

a) Business Combinations

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

b) Non-Controlling Interests

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

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

---

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

c) International Financial Reporting Standards

On February 13, 2008 the Canadian Accounting Standards Board
has confirmed that effective for interim and annual financial statements related
to fiscal years beginning on or after January 1, 2011, IFRS will replace
Canadas current GAAP for all publicly accountable profit-oriented enterprises.

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

3. ACQUISITIONS

Corporate Acquisition

GHP Exploration (West Gharib) Ltd.

On February 5, 2008, TransGlobe acquired all of the common
shares of GHP Exploration (West Gharib) Ltd. (GHP) for cash consideration of
$44.1 million, net of cash acquired. The results of GHPs operations have been
included in the consolidated financial statements since that date. GHP holds a
30% interest in the West Gharib Concession area in Egypt. TransGlobe funded the
acquisition from bank debt of $40.0 million and cash on hand.

The acquisition has been accounted for using the purchase
method with TransGlobe as the acquirer, and the purchase price was allocated to
the fair value of the assets acquired and the liabilities assumed as follows:

|Cost of
      acquisition (000s)          |   |        | 
|----------------------------------------- | - | ------ | 
|Cash paid, net of cash acquired           | $ | 44,095 | 
|Transaction costs                         |   | 99     | 
|                                          |   |        | 
|                                          | $ | 44,194 | 
|                                          |   |        | 
|Allocation of
      purchase price (000s) |   |        | 
|Property and equipment                    | $ | 36,602 | 
|Goodwill                                  |   | 3,602  | 
|Working capital, net of cash acquired     |   | 3,990  | 
|                                          |   |        | 
|                                          | $ | 44,194 | 

Property Acquisition

On August 18, 2008, TransGlobe completed an oil and gas
property acquisition in Egypt for the 25% financial interest in the eight
non-Hana development leases on the West Gharib Concession. The total cost of the
acquisition was $18.0 million, adjusted to the effective date of June 1, 2008.
In addition, the Company could pay up to an additional $7.0 million if
incremental reserve thresholds are reached in the East Hoshia (up to $5.0
million) and in the South Rahmi (up to $2.0 million) development leases. As at
December 31, 2009, no additional fees are due in 2010. The value of the net
assets acquired has been assigned to property and equipment. Following this
property acquisition, TransGlobe holds 100% working interest in the West Gharib
Concession in Egypt.

4. PROPERTY AND EQUIPMENT

|Egypt                                  |   |         |   |   |         |  
|-------------------------------------- | - | ------- | - | - | ------- | -
|(000s)                                 |   | 2009    |   |   | 2008    |  
|Oil and gas properties                 | $ | 184,605 |   | $ | 157,635 |  
|Furniture and fixtures                 |   | 3,166   |   |   | 1,373   |  
|Accumulated depletion and depreciation |   | (68,692 | ) |   | (30,336 | )
|                                       |   |         |   |   |         |  
|                                       | $ | 119,079 |   | $ | 128,672 |  

On February 5, 2008 the Company acquired all common shares of
GHP which held a 30% working interest in the West Gharib Concession area in
Egypt. On August 18, 2008 the Company acquired an additional 25% financial
interest in the eight non-Hana development leases. As a result of these two
acquisitions and the Companys prior interest, TransGlobe now holds a 100%
working interest in the West Gharib Concession in Egypt. The nine approved West
Gharib development leases are valid for 20 years, expiring between 2019 and
2026.

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

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

---

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

During the year, the Company capitalized general and
administrative costs relating to exploration and development activities of $1.2
million (2008 - $1.9 million). Unproven property costs in the amount of $9.8
million (2008 - $10.0 million) were excluded from costs subject to depletion and
depreciation representing costs incurred in Nuqra and undeveloped land in West
Gharib. Future development costs for proved reserves included in the depletion
calculation for the year ended December 31, 2009 totaled $4.9 million (2008 -
$3.3 million).

|Yemen                                        |   |         |   |   |         |  
|-------------------------------------------- | - | ------- | - | - | ------- | -
|(000s)                                       |   | 2009    |   |   | 2008    |  
|Oil and gas properties                       | $ | 126,152 |   | $ | 119,139 |  
|Accumulated
      depletion and depreciation |   | (78,666 | ) |   | (69,230 | )
|                                             |   |         |   |   |         |  
|                                             | $ | 47,486  |   | $ | 49,909  |  

The Company has working interests in five blocks in Yemen:
Block 32, Block S-1, Block 72, Block 75 and Block 84. The Block 32 (13.81087%)
Production Sharing Agreement (PSA) continues to 2020, with provision for a
five year extension. The Block S-1 (25%) PSA continues to 2023, with provision
for a five year extension. At December 31, 2009, the Contractor (Joint Venture
Partners) was in the second 30-month exploration period of the Block 72 (33%)
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. The Block 84 (33%) PSA is in the ratification process with the
Government of Yemen.

During the year, the Company capitalized overhead costs
relating to exploration and development activities of $0.2 million (2008 - $0.3
million). Unproven property costs in the amount of $10.8 million in 2009 ($7.2
million in 2008) were excluded in the costs subject to depletion and
depreciation representing some of the costs incurred at Block 72, Block 75 and
Block 84. Future development costs for proved reserves included in the depletion
calculation for the year ended December 31, 2009 totaled $12.3 million (2008 -
$12.1 million).

|Corporate                      |   |        |   |   |        |  
|------------------------------ | - | ------ | - | - | ------ | -
|(000s)                         |   | 2009   |   |   | 2008   |  
|Furniture, fixtures and other  | $ | 2,333  |   | $ | 2,148  |  
|Accumulated
      depreciation |   | (1,601 | ) |   | (1,400 | )
|                               |   |        |   |   |        |  
|                               | $ | 732    |   | $ | 748    |  

Ceiling Test

An impairment test calculation was performed on property and
equipment at December 31, 2009 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, 2009:

|Year          |  | Egypt |  |  | Yemen | 
|------------- |  | ----- |  |  | ----- | 
|2010          |  | 73.25 |  |  | 78.43 | 
|2011          |  | 75.75 |  |  | 80.78 | 
|2012          |  | 78.33 |  |  | 83.26 | 
|2013          |  | 81.00 |  |  | 85.84 | 
|2014          |  | 83.76 |  |  | 88.52 | 
|Thereafter(1) |  | 2.0%  |  |  | 2.0%  | 

(1) Percentage change represents the increase in each year
after 2014 to the end of the reserve life.

5. DISCONTINUED OPERATIONS

On April 30, 2008, the Company sold its Canadian oil and
natural gas interests for C$56.7 million, subject to normal closing adjustments.
The Canadian operations have been accounted for as discontinued operations in
accordance with Canadian GAAP. Results of the Canadian operations have been
included in the financial statements up to the closing date of the sale (the
date control was transferred to the purchaser). The Company used the cash
proceeds from the sale and cash on hand to repay $55.0 million of debt.

Discontinued operations as at December 31, 2009 included
property and equipment of $0.3 million. Discontinued operations at December 31,
2008 included current assets of $0.5 million, property and equipment of $0.3
million, and current liabilities of $0.3 million.

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

---

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

|(000s)                                                 |   | 2009 |  |   | 2008  | 
|------------------------------------------------------ | - | ---- |  | - | ----- | 
|Revenue                                                |   |      |  |   |       | 
|Oil and gas sales, net of royalties                    | $ | -    |  | $ | 9,162 | 
|                                                       |   |      |  |   |       | 
|Expenses                                               |   |      |  |   |       | 
|Operating                                              |   | -    |  |   | 2,228 | 
|Depletion, depreciation and accretion                  |   | -    |  |   | 2,678 | 
|                                                       |   |      |  |   | 4,906 | 
|Gain on
      disposition, net of tax                  |   | -    |  |   | 4,012 | 
|Income from discontinued operations before
      taxes |   | -    |  |   | 8,268 | 
|Future income tax
      recovery (expense)             |   | -    |  |   | 82    | 
|                                                       |   |      |  |   |       | 
|Net income from
      discontinued operations          | $ | -    |  | $ | 8,350 | 

In Canada, the Company capitalized overhead costs relating to
exploration and development activities during the nine months ended September
30, 2008 of $0.4 million. Unproven property costs of $1.8 million were excluded
from the costs subject to depletion and depreciation for 2008. Depletion,
depreciation and accretion was not recorded while the assets were classified as
held for sale.

6. GOODWILL

Changes in the carrying amount of the Companys goodwill,
arising from acquisitions, are as follows:

|(000s)                        |   | 2009  |  |   | 2008  | 
|----------------------------- | - | ----- |  | - | ----- | 
|Balance, beginning of year    | $ | 8,180 |  | $ | 4,313 | 
|Changes during the
      year |   | -     |  |   | 3,867 | 
|Balance, end of year          | $ | 8,180 |  | $ | 8,180 | 

7. LONG-TERM DEBT

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

As at December 31, 2009, the Company has a $60.0 million
Revolving Credit Agreement of which $50.0 million is drawn. The Revolving Credit
Agreement expires on September 25, 2010 and is 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 bears interest at the Eurodollar Rate plus three
percent. During the year ended December 31, 2009, the average effective interest
rate was 4.3% (2008  7.3%) . In the year ended December 31, 2009, the Company
incurred $ Nil (2008 - $1.3 million), in fees to draw on its Revolving Credit
Agreement.

The future debt payments on long-term debt, as of December 31,
2009, are as follows:

|(000s)                        |   |        | 
|----------------------------- | - | ------ | 
|2010 (due September 25, 2010) | $ | 50,000 | 

The Company is in discussion on a new credit facility and
expects to enter into a new facility in the second quarter of 2010.

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

---

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

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, 2009 |  |   | December 31, 2008 |  
|(000s)                                      |  | Shares            |  |   | Amount            |  
|Balance, beginning of year                  |  | 59,500            |  | $ | 50,532            |  
|Share issuance                              |  | 5,798             |  |   | 16,312            |  
|Stock options exercised                     |  | 101               |  |   | 266               |  
|Stock options surrendered for cash payments |  | -                 |  |   | (13               | )
|Stock-based compensation on exercise        |  | -                 |  |   | 213               |  
|Repurchase of common shares                 |  | -                 |  |   | -                 |  
|Share issue costs                           |  | -                 |  |   | (1,204            | )
|                                            |  |                   |  |   |                   |  
|Balance, end of year                        |  | 65,399            |  | $ | 66,106            |  

In the first quarter of 2009, the Company issued 5,798,000
common shares at C$3.45 per common share for gross proceeds of C$20.0 million
(net C$18.5 million).

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

9. STOCK OPTION PLAN

The Company adopted a stock option plan in May 2007 (the
Plan). 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. Effective February 1, 2005; all new grants of stock options
vest one-third on each of the first, second and third anniversaries of the grant
date.

The following tables summarize information about the stock
options outstanding and exercisable at December 31:

|                                       |  | 2009    |   |  | 2008       | 
|-------------------------------------- |  | ------- | - |  | ---------- | 
|                                       |  |         |   |  | Weighted-  | 
|                                       |  | Number  |   |  | Average    | 
|                                       |  | of      |   |  | Exercise   | 
|(000s, except per
      share amounts) |  | Options |   |  | Price (C$) | 
|Options outstanding, beginning of year |  | 5,600   |   |  | 4.20       | 
|Granted                                |  | 815     |   |  | 3.45       | 
|Exercised                              |  | (101    | ) |  | 2.92       | 
|Exercised for cash                     |  | (80     | ) |  | 3.26       | 
|Forfeited                              |  | (756    | ) |  | 3.91       | 
|                                       |  |         |   |  |            | 
|Options outstanding, end of year       |  | 5,478   |   |  | 4.12       | 
|                                       |  |         |   |  |            | 
|Options exercisable, end of year       |  | 2,335   |   |  | 4.72       | 

|                |  | Options Outstanding |  |  | Options Exercisable | 
|--------------- |  | ------------------- |  |  | ------------------- | 
|                |  |                     |  |  | Weighted-           | 
|                |  |                     |  |  | Average             | 
|                |  | Number              |  |  | Remaining           | 
|                |  | Outstanding at      |  |  | Contractual         | 
|Exercise Prices |  | Dec. 31, 2009       |  |  | Life                | 
|(C$)            |  | (000s)              |  |  | (Years)             | 
|2.41-3.25       |  | 1,836               |  |  | 3.9                 | 
|3.26-4.08       |  | 770                 |  |  | 4.7                 | 
|4.09-5.18       |  | 1,700               |  |  | 3.1                 | 
|5.19-5.31       |  | 348                 |  |  | 2.6                 | 
|5.32-6.56       |  | 823                 |  |  | 1.1                 | 
|                |  | 5,477               |  |  | 3.2                 | 

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

---

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

Stockbased Compensation

Compensation expense of $2.0 million has been recorded in
general and administrative expenses in the Consolidated Statements of (Loss)
Income and Retained Earnings in 2009 (2008 - $1.8 million). The fair value of
all common stock options granted is estimated on the date of grant using the
lattice-based binomial option pricing model. The weighted average fair value of
options granted during the year and the assumptions used in their determination
are as noted below:

|                                                         |  | 2009               |  |  | 2008               | 
|-------------------------------------------------------- |  | ------------------ |  |  | ------------------ | 
|Weighted average fair market value per
      option (C$) |  | 1.25               |  |  | 1.62               | 
|Risk free interest rate (%)                              |  | 2.54               |  |  | 3.10               | 
|Expected life (years)                                    |  | 5                  |  |  | 5                  | 
|Expected volatility (%)                                  |  | 44.06              |  |  | 44.76              | 
|Dividend per share                                       |  | 0.00               |  |  | 0.00               | 
|Expected forfeiture rate (non-executive employees) (%)   |  | 12                 |  |  | 12                 | 
|Early exercise (Year 1/Year 2/Year 3/Year 4/Year 5)      |  | 0%/10%/20%/30%/40% |  |  | 0%/10%/20%/30%/40% | 

Options granted vest annually over a three-year period and
expire five years after the grant date.

During the year, employees exercised 101,000 (2008  173,300)
stock options. In accordance with Canadian generally accepted accounting
principles, the fair value related to these options was $0.2 million (2008 -
$0.4 million) at time of grant and has been transferred from contributed surplus
to common shares.

10. CONTRIBUTED SURPLUS

|(000s)                                           |   | 2009  |   |   | 2008  |  
|------------------------------------------------ | - | ----- | - | - | ----- | -
|Contributed surplus, beginning of year           | $ | 4,893 |   | $ | 3,562 |  
|Stock-based compensation expense                 |   | 2,011 |   |   | 1,734 |  
|Transfer to common shares on exercise of options |   | (213  | ) |   | (403  | )
|Contributed
      surplus, end of year           | $ | 6,691 |   | $ | 4,893 |  

11. INCOME TAXES

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

|(000s)                                                 |   | 2009   |   |   | 2008   |  
|------------------------------------------------------ | - | ------ | - | - | ------ | -
|Differences related to:                                |   |        |   |   |        |  
|Fixed assets and oil and gas properties                | $ | (227   | ) | $ | 1,479  |  
|Non-capital losses
      carried forward               |   | 2,728  |   |   | 210    |  
|Share issue expenses                                   |   | 535    |   |   | 111    |  
|                                                       |   | 3,036  |   |   | 1,800  |  
|Valuation
      allowance for future income tax assets |   | (3,036 | ) |   | (1,800 | )
|Future income tax asset                                | $ | -      |   | $ | -      |  

The Company has non-capital losses of $9.4 million that expire
between 2028 and 2029.

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 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 29.0% (2008  29.5%) to
income before taxes as follows:

|(000s)                                                        |   | 2009   |  |   | 2008   |  
|------------------------------------------------------------- | - | ------ |  | - | ------ | -
|Income taxes calculated at the Canadian
      statutory rate  | $ | 3,897  |  | $ | 15,017 |  
|Increases (decreases) in income taxes resulting from:         |   |        |  |   |        |  
|Permanent differences                                         |   | 540    |  |   | 3,166  |  
|Changes in valuation allowance, net of
      foreign exchange |   | 552    |  |   | (1,731 | )
|Different tax rates in
      Yemen and Egypt                  |   | 15,950 |  |   | 13,423 |  
|Changes in tax rates and other                                |   | 914    |  |   | 2,355  |  
|Current income taxes                                          | $ | 21,853 |  | $ | 32,230 |  

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

---

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

12. SUPPLEMENTAL CASH FLOW INFORMATION

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

|(000s)                                         |   | 2009   |   |   | 2008    |  
|---------------------------------------------- | - | ------ | - | - | ------- | -
|Operating activities                           |   |        |   |   |         |  
|Increase in current assets                     |   |        |   |   |         |  
|Accounts
      receivable                      | $ | (6,595 | ) | $ | (14,292 | )
|Prepaid expenses                               |   | (798   | ) |   | (265    | )
|Working capital acquired                       |   | -      |   |   | 3,925   |  
|Increase in current liabilities                |   |        |   |   |         |  
|Accounts
      payable and accrued liabilities |   | (1,065 | ) |   | 9,284   |  
|Income taxes payable                           |   | -      |   |   | 79      |  
|                                               | $ | (8,458 | ) | $ | (1,269  | )
|Financing                                      |   |        |   |   |         |  
|Increase in current
      liabilities          |   |        |   |   |         |  
|Accounts payable and accrued liabilities       | $ | (1,515 | ) | $ | 1,515   |  
|                                               | $ | (1,515 | ) | $ | 1,515   |  
|Investing activities                           |   |        |   |   |         |  
|Decrease in current
      liabilities          |   |        |   |   |         |  
|Accounts payable and accrued liabilities       |   | 1,444  |   |   | (2,737  | )
|                                               | $ | 1,444  |   | $ | (2,737  | )

13. ACCUMULATED OTHER COMPREHENSIVE INCOME

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

|(000s)                                                          |   | 2009   |  |   | 2008   |  
|--------------------------------------------------------------- | - | ------ |  | - | ------ | -
|Accumulated other comprehensive income,
      beginning of year | $ | 10,880 |  | $ | 11,766 |  
|Other comprehensive loss:                                       |   |        |  |   |        |  
|Foreign currency translation adjustment                         |   | -      |  |   | (886   | )
|Accumulated other
      comprehensive income, end of year       | $ | 10,880 |  | $ | 10,880 |  

14. PER SHARE AMOUNTS

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

|(000s)                                                |  | 2009   |  |  | 2008   | 
|----------------------------------------------------- |  | ------ |  |  | ------ | 
|Weighted average number of shares
      outstanding   |  | 64,443 |  |  | 59,692 | 
|Dilution effect
      stock options                   |  | -      |  |  | 1,012  | 
|Weighted average number of diluted shares outstanding |  | 64,443 |  |  | 60,704 | 

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, 2009, the
Company excluded all stock options outstanding because there was a net loss in
the year then ended. In calculating the weighted average number of diluted
shares outstanding for the year ended December 31, 2008, the Company excluded
3,014,700 options because their exercise price was greater than the annual
average common share market price in this period.

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 companys debt-to-funds flow ratio is less than two or total of the
long-term debt is not greater than two times the Companys funds flow from
operations for the trailing twelve months. Debt-to-funds flow is a non-GAAP
measure and may not be comparable to similar measures used by other companies.
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
(including net income or loss from discontinued operations) 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.

|2009 | 16
|---- | --

---

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

The Company defines and computes its capital as follows:

|                                              |   | As at             |   |   | As at             |  
|--------------------------------------------- | - | ----------------- | - | - | ----------------- | -
|(000s)                                        |   | December 31, 2009 |   |   | December 31, 2008 |  
|                                              |   |                   |   |   |                   |  
|Shareholders equity                          | $ | 163,690           |   | $ | 154,735           |  
|Long-term debt, including the current portion |   | 49,799            |   |   | 57,230            |  
|Cash and cash equivalents                     |   | (16,177           | ) |   | (7,634            | )
|                                              |   |                   |   |   |                   |  
|Total capital                                 | $ | 197,312           |   | $ | 204,331           |  

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

|                                              |   | 12 Months Trailing | 
|--------------------------------------------- | - | ------------------ | 
|(000s)                                        |   | December 31, 2009  | 
|Long-term debt, including the current portion | $ | 49,799             | 
|                                              |   |                    | 
|Cash flow from operating activities           | $ | 36,799             | 
|Changes in
      non-cash working capital     |   | 8,265              | 
|Funds flow from operations                    | $ | 45,064             | 
|                                              |   |                    | 
|Ratio                                         |   | 1.1                | 

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 its
revolving credit agreement. The key financial covenants are as follows:

- Interest coverage ratio of greater than 3.5 to 1.0, calculated as EBITDAX
  to interest expense, for the immediately preceding four consecutive fiscal
  quarters. For the purposes of the financial covenant calculations EBITDAX
  shall mean Consolidated Net Income before interest, income taxes,
  depreciation, depletion, amortization, and accretion, unrealized derivative
  losses on commodity contracts and stock-based compensation expense.
- Indebtedness to EBITDAX of less than 2.0 to 1.0. For the purposes of the
  financial covenant calculation, indebtedness shall mean the balance of the
  Revolving Credit Facility, letters of credit and any amounts payable in
  connection with a realized derivative loss.
- 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, 2009.

16. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

Fair
  Values of Financial Instruments

The Company has classified its cash and cash equivalents 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, liabilities
of discontinued operations, 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, 2009 | 
|-------------------------------------- | - | ----------------- | 
|Classification
      (000s)            |   | Carrying Value    | 
|Financial assets held-for-trading      | $ | 16,177            | 
|Loans and receivables                  |   | 35,296            | 
|Financial liabilities held-for-trading |   | 514               | 
|Other liabilities                      |   | 64,599            | 

Assets and liabilities at December 31, 2009 that are measured
at fair value are classified into the following 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 risk management
contracts have been 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.

|2009 | 17
|---- | --

---

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

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 losses to date.

Trade and other receivables from continuing operations are
analyzed in the table below. With respect to the trade and other receivables
that are not impaired and past due, there are no indications as of the reporting
date that the debtors will not meet their payment obligations.

|(000s)                                             |   |        | 
|-------------------------------------------------- | - | ------ | 
|Trade and other receivables at December 31, 2009   |   |        | 
|Neither impaired nor past due                      | $ | 12,552 | 
|Impaired (net of valuation allowance)              |   | -      | 
|Not impaired and past due in the following period: |   |        | 
|Within 30 days                                     |   | 5,648  | 
|31-60 days                                         |   | 4,922  | 
|61-90 days                                         |   | 4,930  | 
|Over 90 days                                       |   | 7,244  | 

In Egypt, the Company sold all of its 2009 and 2008 production
to one purchaser. In Yemen, the Company sold all of its 2009 and 2008 Block 32
production to one purchaser and all of its 2009 and 2008 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 at December
31, 2009:

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

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

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 increase the net loss, for
the year ended December 31, 2009, by $0.9 million. The effect of a 10% decrease
in commodity prices on the derivative commodity contracts would decrease the net
loss, for the year ended December 31, 2009, by $0.7 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 a decrease in the net loss for the year ended
December 31, 2009, of approximately $0.1 million and conversely a 10% decrease
in the value of the Canadian dollar against the U.S. dollar would increase the
net loss by said amount for the same period. The Company does not utilize
derivative instruments to manage this risk.

|2009 | 18
|---- | --

---

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

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 2009 to mitigate this risk. When assessing interest rate
risk applicable to the Companys variable-interest, U.S.-dollar-denominated debt
the Company believes 1% volatility is a reasonable measure. The effect of
interest rates increasing by 1% would increase the Companys net loss, for the
year ended December 31, 2009, by $0.6 million. The effect of interest rates
decreasing by 1% would decrease the Companys net loss, for the year ended
December 31, 2009, by $0.6 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, 2009:

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

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

The Company actively monitors its liquidity to ensure that its
cash flows, credit facilities and working capital are adequate to support these
financial liabilities, as well as the Companys capital programs. In addition,
the Company raised gross proceeds of $16.3 million in the first quarter of 2009
through a share issuance.

The existing banking arrangements at December 31, 2009 consist
of a Revolving Credit Facility of $60.0 million of which $50.0 million is drawn.
The Company is in discussion on a new credit facility and expects to enter into
a new facility in the second quarter of 2010.

The table above shows cash outflow for financial derivative
instruments based on forward-curve prices for Dated Brent oil of $74.28/Bbl at
December 31, 2009. Amounts due may change significantly due to fluctuations in
the price of Dated Brent oil.

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 of
two exploration wells in the second exploration extension. The second, 36-month
extension period commenced on July 18, 2009. The Contractor has met the second
extension financial commitment of $5.0 million in the prior periods. At the
request of the government, the Company provided a $4.0 million production
guarantee from the West Gharib Concession prior to entering the second extension
period.

TransGlobe has entered into a farm out agreement and has
committed to pay 100% of three (3) exploration wells to a maximum of $9.0
million to earn a 50% working interest in the East Ghazalat Concession in the
Western Desert of Egypt, subject to the approval of the Egyptian Government.

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

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

|2009 | 19
|---- | --

---

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

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

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

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

18. SEGMENTED INFORMATION

|                                                              |   | Egypt   |   |   | Yemen       |  |   | Total  | 
|------------------------------------------------------------- | - | ------- | - | - | ----------- |  | - | ------ | 
|(000s)                                                        |   | 2009    |   |   | 2008        |  |   | 2009   | 
|Revenue                                                       |   |         |   |   |             |  |   |        | 
|Oil sales, net of royalties and other                         | $ | 64,117  |   | $ | 51,368      |  | $ | 38,688 | 
|Other income                                                  |   | -       |   |   | 36          |  |   | -      | 
|                                                              |   |         |   |   |             |  |   |        | 
|Total revenue                                                 |   | 64,117  |   |   | 51,404      |  |   | 38,688 | 
|                                                              |   |         |   |   |             |  |   |        | 
|                                                              |   |         |   |   |             |  |   |        | 
|                                                              |   |         |   |   |             |  |   |        | 
|Segmented expenses                                            |   |         |   |   |             |  |   |        | 
|Operating expenses                                            |   | 14,703  |   |   | 6,972       |  |   | 10,062 | 
|Depletion and depreciation                                    |   | 37,942  |   |   | 23,052      |  |   | 9,436  | 
|Income taxes                                                  |   | 13,980  |   |   | 14,627      |  |   | 7,873  | 
|                                                              |   |         |   |   |             |  |   |        | 
|Total segmented
      expenses                                |   | 66,625  |   |   | 44,651      |  |   | 27,371 | 
|                                                              |   |         |   |   |             |  |   |        | 
|Segmented (loss)
      income                                 | $ | (2,508  | ) |   | ****$ 6,753 |  | $ | 11,317 | 
|                                                              |   |         |   |   |             |  |   |        | 
|                                                              |   |         |   |   |             |  |   |        | 
|                                                              |   |         |   |   |             |  |   |        | 
|Non-segmented expenses                                        |   |         |   |   |             |  |   |        | 
|Derivative loss (gain) on commodity
      contracts (Note 16) |   |         |   |   |             |  |   |        | 
|General and administrative                                    |   |         |   |   |             |  |   |        | 
|Interest on long-term debt                                    |   |         |   |   |             |  |   |        | 
|Depreciation                                                  |   |         |   |   |             |  |   |        | 
|Foreign exchange (gain) loss                                  |   |         |   |   |             |  |   |        | 
|Other income                                                  |   |         |   |   |             |  |   |        | 
|                                                              |   |         |   |   |             |  |   |        | 
|Total
      non-segmented expenses                            |   |         |   |   |             |  |   |        | 
|                                                              |   |         |   |   |             |  |   |        | 
|                                                              |   |         |   |   |             |  |   |        | 
|Net (loss) income from continuing
      operations            |   |         |   |   |             |  |   |        | 
|Net income from discontinued operations (Note
      5)        |   |         |   |   |             |  |   |        | 
|                                                              |   |         |   |   |             |  |   |        | 
|Net (loss)
      income                                       |   |         |   |   |             |  |   |        | 
|                                                              |   |         |   |   |             |  |   |        | 
|                                                              |   |         |   |   |             |  |   |        | 
|Capital expenditures                                          |   |         |   |   |             |  |   |        | 
|Exploration and development                                   | $ | 28,349  |   | $ | 34,797      |  | $ | 7,013  | 
|Property acquisitions                                         |   | -       |   |   | 18,000      |  |   | -      | 
|                                                              | $ | 28,349  |   | $ | 52,797      |  | $ | 7,013  | 
|Corporate                                                     |   |         |   |   |             |  |   |        | 
|Corporate
      acquisitions                                  |   |         |   |   |             |  |   |        | 
|                                                              |   |         |   |   |             |  |   |        | 
|Total capital
      expenditures                              |   |         |   |   |             |  |   |        | 
|                                                              |   |         |   |   |             |  |   |        | 
|                                                              |   | Dec.31  |   |   | Dec.31      |  |   | Dec.31 | 
|(000s)                                                        |   | 2009    |   |   | 2008        |  |   | 2009   | 
|Property and equipment                                        | $ | 119,079 |   | $ | 128,672     |  | $ | 47,486 | 
|Goodwill                                                      |   | 8,180   |   |   | 8,180       |  |   | -      | 
|Other                                                         |   | 41,347  |   |   | 27,517      |  |   | 5,877  | 
|Segmented assets                                              | $ | 168,606 |   | $ | 164,369     |  | $ | 53,363 | 
|Non-segmented assets                                          |   |         |   |   |             |  |   |        | 
|Discontinued operations                                       |   |         |   |   |             |  |   |        | 
|                                                              |   |         |   |   |             |  |   |        | 
|Total assets                                                  |   |         |   |   |             |  |   |        | 

|2009 | 20
|---- | --

---

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

19. 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)                                              |   | 2009    |   |   | 2008    |  
|----------------------------------------------------------------------------------- | - | ------- | - | - | ------- | -
|Net (loss) income from continuing
      operations for the year under Canadian GAAP | $ | (8,417  | ) | $ | 23,173  |  
|Adjustments:                                                                        |   |         |   |   |         |  
|Impairment of property and equipment
      and goodwill (Note 19a)                  |   | -       |   |   | (98,391 | )
|Depletion
      and depreciation (Note 19a)                                         |   | 24,514  |   |   | 611     |  
|Net income (loss) from continuing
      operations for the year under U.S. GAAP     |   | 16,097  |   |   | (74,607 | )
|Net income from
      discontinued operations for the year  Canadian and U.S. GAAP |   | -       |   |   | 8,350   |  
|Net income (loss) for the year under U.S.
      GAAP                                |   | 16,097  |   |   | (66,257 | )
|Purchase of common shares                                                           |   | -       |   |   | (880    | )
|(Deficit) retained earnings, beginning of year - U.S. GAAP                          |   | (19,760 | ) |   | 47,377  |  
|                                                                                    |   |         |   |   |         |  
|Deficit, end of year - U.S. GAAP                                                    | $ | (3,663  | ) | $ | (19,760 | )
|                                                                                    |   |         |   |   |         |  
|                                                                                    |   |         |   |   |         |  
|Net income (loss) from continuing operations per share
      under U.S. GAAP        |   |         |   |   |         |  
|- Basic                                                                             | $ | 0.25    |   | $ | (1.25   | )
|- Diluted                                                                           |   | 0.24    |   |   | (1.25   | )
|Net income from discontinued operations per
      share under U.S. GAAP             |   |         |   |   |         |  
|- Basic                                                                             |   | -       |   |   | 0.14    |  
|- Diluted                                                                           |   | -       |   |   | 0.14    |  
|Net income (loss) per share under U.S. GAAP                                         |   |         |   |   |         |  
|- Basic                                                                             |   | 0.25    |   |   | (1.11   | )
|-
      Diluted                                                                     |   | 0.24    |   |   | (1.11   | )

Statement of Other Comprehensive Income (Loss)

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

|(000s)                                           |   | 2009   |  |   | 2008    |  
|------------------------------------------------ | - | ------ |  | - | ------- | -
|Net income (loss)  U.S. GAAP                    | $ | 16,097 |  | $ | (66,257 | )
|Currency
      translation adjustment (Note 19d) |   | -      |  |   | (886    | )
|Other comprehensive income (loss)                | $ | 16,097 |  | $ | (67,143 | )

Consolidated Balance Sheets

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

|(000s)                                          |   | 2009      |  |   | 2008      |  
|----------------------------------------------- | - | --------- |  | - | --------- | -
|                                                |   | Cdn. GAAP |  |   | U.S. GAAP |  
|Current assets                                  | $ | 53,405    |  | $ | 53,405    |  
|Property and equipment (Note 19a)               |   | 167,297   |  |   | 91,596    |  
|Derivative commodity contracts                  |   | -         |  |   | -         |  
|Deferred financing costs (Note 19f)             |   | -         |  |   | 201       |  
|Goodwill (Note 19a)                             |   | 8,180     |  |   | -         |  
|                                                |   |           |  |   |           |  
|                                                | $ | 228,882   |  | $ | 145,202   |  
|                                                |   |           |  |   |           |  
|                                                |   |           |  |   |           |  
|Current liabilities                             | $ | 65,192    |  | $ | 65,393    |  
|Long-term debt (Note 19f)                       |   | -         |  |   | -         |  
|                                                |   | 65,192    |  |   | 65,393    |  
|                                                |   |           |  |   |           |  
|Share capital (Notes 19b, 19c and 19d)          |   | 66,106    |  |   | 67,809    |  
|Contributed surplus (Note 19b)                  |   | 6,691     |  |   | 4,783     |  
|Accumulated other comprehensive income          |   | 10,880    |  |   | 10,880    |  
|Retained earnings (deficit) (Notes 19b and 19c) |   | 80,013    |  |   | (3,663    | )
|                                                |   | 163,690   |  |   | 79,809    |  
|                                                |   |           |  |   |           |  
|                                                | $ | 228,882   |  | $ | 145,202   |  

|2009 | 21
|---- | --

---

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

The reconciling items between share capital and retained
earnings for Canadian and U.S. GAAP are $0.8 million related to escrowed shares,
and $1.3 million related to flow through shares. The reconciling items between
contributed surplus and deficit for Canadian and U.S. GAAP are $0.3 million for
the adoption of stock-based compensation under Canadian GAAP and $2.0 million
for the 2005 and 2004 stock-based compensation expense under Canadian GAAP,
which was not expensed in 2005. 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 from proved
reserves plus unimpaired unproved property costs less future development costs,
related production costs and applicable taxes. Under Canadian GAAP, a similar
ceiling test calculation is performed with the exception that cash flows from
proved reserves are undiscounted and utilize forecasted pricing and before tax
todetermine whether impairment exists. In Canada, the impaired amount is
measured using the fair value of reserves.

There are no impairment charges under Canadian GAAP or U.S.
GAAP for the year ended 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 (2007 - $6.3 million written off for the Egypt properties). These
impairment charges also decreased the depletion and depreciation expense for
U.S. GAAP purposes by $24.5 million in 2009 and $0.6 million in 2008. Goodwill
was tested for impairment by comparing the fair value of the reporting 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 as recognized over the period that an employee provides service in
exchange for the award with forfeitures estimated and 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.

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 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 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 and $0.3
million in 2000 to record the recognition of the benefit of tax losses available
to the Company equal to the liability arising from renouncing tax pools to the
subscribers.

Under U.S. GAAP, enacted tax rates are used to calculate future
taxes, whereas Canadian GAAP uses substantively enacted tax rates. The effect of
this change between Canadian and U.S. GAAP would result in an increase in future
income tax expense and future tax liability of $Nil in 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 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.

|2009 | 22
|---- | --

---

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

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. Upon adoption, it was determined that there was no effect to
TransGlobe.

Tax positions for TransGlobe and its subsidiaries are subject
to income tax audits by tax jurisdictions throughout the world. For the
Companys major tax jurisdictions, examinations of tax returns for certain prior
tax periods had not been completed as of December 31, 2009. In this regard,
examinations had not been finalized for years beginning after 2007 for the
Companys Canadian federal income taxes. For other tax jurisdictions, the
earliest years for which income tax examinations had not been finalized were as
follows: Egypt  2008 and Yemen  2008.

f) Deferred Financing Costs

The Company has accounted for 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

Business CombinationsEffective January 1, 2009, the
Company prospectively adopted the revised guidance on accounting for business
combinations. The guidance establishes principles and requirements for how and
acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, any non controlling interest in the
acquiree and the goodwill acquired. The objective of this authoritative guidance
is to improve the relevance, representational faithfulness, and comparability of
the information that a reporting entity provides in its financial reports about
a business combination and its effects. Since the Company did not close any
business combinations during 2009 the adoption of this standard did not impact
the Consolidated Financial Statements.

Noncontrolling Interests in Consolidated Financial
StatementsEffective January 1, 2009, the Company adopted the
authoritative guidance as it relates to noncontrolling interests. The guidance
changed the accounting for and and reporting for minority interest, which were
recharacterized as noncontrolling interests. The objective of this guidance is
to improve the relevance, comparability, and transparency of the financial
information that a reporting entity provides in its consolidated financial
statements. This standard did not impact the Company as it has full controlling
interest of all of its subsidiaries.

Derivative Instruments and Hedging ActivitiesEffective January 1, 2009, the Company adopted the authoritative
guidance as it relates to disclosures about derivative instruments and hedging
activities. This guidance requires enhanced disclosures about (a) how and why an
entity uses derivative instruments, (b) how derivative instruments and related
hedged items are accounted for, and (c) how derivative instruments and related
hedged items affect an entitys financial position, financial performance, and
cash flows. This standard did not impact the Consolidated Financial Statements.

Accounting Standards Codification (ASC) SystemIn
June 2009, the FASB issued SFAS No. 168, the FASB Accounting Standards
CodificationTMand the Hierarchy of Generally Accepted
Accounting Principles which has been primarily coded into ASC Topic 105,
Generally Accepted Accounting Standards. This standard which became
effective for financial statements issued for interim and annual periods ending
after September 15, 2009. The standard established the ASC as the single
authoritative source of U.S. GAAP and superseded existing literature of the
FASB, Emerging Issues Task Force, American Institute of CPAs and other sources.
The ASC did not change GAAP but organized the literature into accounting topics.
Adoption of the ASC did not affect the Companys accounting.

|2009 | 23
|---- | --

---

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

Oil and Gas ReportingAs of December 31, 2009,
TransGlobe is required to prospectively adopt the new reserves requirements that
arise from the completion of the SECs project, Modernization of Oil and Gas
Reporting. The new rules include provisions that permit the use of new
technologies to establish proved reserves if those technologies have been
demonstrated empirically to lead to reliable conclusions about reserves volumes.
Additionally, oil and gas reserves are reported using an average price based
upon the prior 12-month period rather than year-end prices. The new rules
affected the reserve estimate used in the calculation of DD&A and the
ceiling test for U.S. GAAP purposes.

h) New Accounting Pronouncements

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. The Company does not expect that this standard will have a
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. The Company is currently assessing the impact of this
requirement on the Consolidated Financial Statements.

|2009 | 24
|---- | --

---