---

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

March 6, 2011

The following discussion and analysis is managements opinion
of TransGlobes historical financial and operating results and should be read in
conjunction with the message to shareholders and the audited consolidated
financial statements of the Company for the years ended December 31, 2011 and
2010, together with the notes related thereto. The consolidated financial
statements have been prepared in accordance with International Financial
Reporting Standards (IFRS) in the currency of the United States (except where
otherwise noted). Additional information relating to the Company, including the Companys Annual Information Form, is on
SEDAR at www.sedar.com. The Companys annual report on Form 40-F may be found on
EDGAR at www.sec.gov.

READER ADVISORIES

Forward-Looking Statements

Certain statements or information contained herein may
constitute forward-looking statements or information under applicable securities
laws,including managements assessment of future plans and operations,
drilling plans and thetiming thereof, commodity price risk management
strategies, adapting to the current political situations in Egypt and Yemen,
reserve estimates, the resolution of potential litigation and claims and impact
on the Company of the costs of resolutions, completion of the acquisition of the
50% working interest in the South Alamein Concession agreement in theArab Republic of Egypt, managements expectation for results
of operations for 2012, including expected 2012 averageproduction, funds
flow from operations, the 2012 capital program for exploration and development,
the timing and method of financing thereof, method of funding drilling
commitments, commodity prices and expected volatility thereof and use of
proceeds from recent financings.

Forward-looking statements or information relate to
the Companys future events or performance. All statements otherthan
statements of historical fact may be forward-looking statements or information.
Such statements or information are often but not always identified bythe
use of words such as seek, anticipate, plan, continue, estimate,
expect, may, will, project, predict, potential, targeting,
intend, could, might, should, believe, and similarexpressions.

Forward-looking statements or information necessarily
involve risks including, without limitation, risks associated with oil and gas
exploration, development, exploitation, production, marketing and
transportation, loss of markets, economic and political instability, volatility
of commodity prices, currency fluctuations, imprecision of reserve estimates,
environmental risks, competition from other producers, inability to retain
drilling rigs and other services, incorrect assessment of the value of
acquisitions, failure to realize the anticipated benefits of acquisitions,
delays resulting from or inability to obtain required regulatory approvals and
ability to access sufficient capital from internal and external sources. The
recovery and reserve estimates of the Company's reserves provided herein are
estimates only and there is no guarantee that the estimated reserves will be
recovered. Events or circumstances may cause actual results to differ materially
from those predicted, as a result of the risk factors set out and other known
and unknown risks, uncertainties, and other factors, many of which are beyond
the control of the Company.

In addition, forward-looking statements or information are
based on a number of factors and assumptions which have been used to develop
such statements and information in order to provide shareholders with a more
complete perspective on the Company's future operations. Such statements and
information may prove to be incorrect and readers are cautioned that such
statements and information may not be appropriate for other purposes. Although
the Company believes that the expectations reflected in such forward-looking
statements or information are reasonable, undue reliance should not be placed on
forward-looking statements or information because the Company can give no
assurance that such expectations will prove to be correct. In addition to other
factors and assumptions which may be identified herein, assumptions have been
made regarding, among other things: the impact of increasing competition; the
general stability of the economic and political environment in which the Company
operates; the timely receipt of any required regulatory approvals; the ability
of the Company to obtain qualified staff, equipment and services in a timely and
cost efficient manner; drilling results; the ability of the operator of the
projects which the Company has an interest in to operate the field in a safe,
efficient and effective manner; the ability of the Company to obtain financing
on acceptable terms; field production rates and decline rates; the ability to
replace and expand oil and natural gas reserves through acquisition, development
and exploration; the timing and costs of pipeline, storage and facility
construction and expansion and the ability of the Company to secure adequate
product transportation; future commodity prices; currency, exchange and interest
rates; the regulatory framework regarding royalties, taxes and environmental
matters in the jurisdictions in which the Company operates; and the ability of
the Company to successfully market and receive payment for its oil and natural
gas products.

Readers are cautioned that the foregoing list is not
exhaustive of all factors and assumptions which have been used. As a
consequence, actual results may differ materially from those anticipated in the
forward-looking statements. Additional information on these and other factors
that could affect the Company's operations and financial results are included in
reports on file with Canadian securities regulatory authorities and may be
accessed through the SEDAR website (www.sedar.com), EDGAR website(www.sec.gov)and at the Company's website (www.trans-globe.com).
Furthermore, the forward-looking statements or information contained herein are
made as at the date hereof and the Company does not undertake any obligation to
update publicly or to revise any of the included forward-looking statements,
whether as a result of new information, future events or otherwise, except as
may be required by applicable securities laws.

The reader is further cautioned that the preparation of
financial statements in accordance with IFRS requires management to make certain
judgments and estimates that affect the reported amounts of assets, liabilities,
revenues and expenses. Estimating reserves is also critical to several
accounting estimates and requires judgments and decisions based upon available
geological, geophysical, engineering and economic data. These estimates may
change, having either a negative or positive effect on net earnings as further
information becomes available, and as the economic environment changes.

1

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

Additional Measures

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

Reconciliation of Funds Flow from Operations

|($000s)                                   |  | 2011    |  |  | 2010   | 
|----------------------------------------- |  | ------- |  |  | ------ | 
|Cash flow from operating activities       |  | 63,630  |  |  | 56,969 | 
|Changes in
      non-cash working capital |  | 56,346  |  |  | 18,491 | 
|Funds flow from operations*               |  | 119,976 |  |  | 75,460 | 

|* | Funds flow from operations does not include interest
      costs. Interest expense is included in financing costs on the Consolidated
      Statements of Earnings and Comprehensive Income. Cash interest paid is
      reported as a financing activity on the Consolidated Statements of Cash
      Flows.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

TRANSGLOBES BUSINESS

TransGlobe is a Canadian-based, publicly traded, oil
exploration and production company whose activities are concentrated in two main
geographic areas, the Arab Republic of Egypt (Egypt) and the Republic of Yemen
(Yemen). Egypt and Yemen include the Companys exploration, development and
production of crude oil.

BUSINESS ACQUISITIONS

On December 29, 2011, the Company completed the acquisition of
a 100% working interest in the West Bakr Concession agreement in the Arab
Republic of Egypt from the Egyptian Petroleum Development Co. Ltd. (of Japan)
(EPEDECO). The transaction provided for operatorship of three fields with
28 producing wells, located immediately adjacent to the Companys West Gharib
development leases. West Bakr is producing approximately 4,350 Bopd and had
Proved reserves of 7.4 million barrels and Proved plus Probable reserves of 11.6
million barrels as of January 1, 2012. The transaction was structured as an
all-cash deal, effective July 1, 2010, to acquire all the Egyptian assets of
EPEDECO, funded through working capital and the Borrowing Base Facility. Total
consideration for the transaction was $74.5 million, comprised of $52.6 million
cash and $21.9 million payable to EPEDECO ($10.0 million due by May 31, 2012,
with the balance due by June 29, 2012). Total consideration represents an
initial $60 million base purchase price plus $14.5 million in working capital
and other closing adjustments between the effective date and the acquisition
closing date.

2

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

SELECTED ANNUAL INFORMATION

($000s, except per share, price and volumeamounts)
    
    2011
    
    
    %
      Change
    
    
    2010
    
    
    %
      Change
    
    
    2009***OperationsAverage sales volumes (Bopd)
    
    12,132
    
    
    22
    
    
    9,960
    
    
    11
    
    
    8,980Average price
      ($/Bbl)
    
    101.58
    
    
    37
    
    
    73.97
    
    
    45
    
    
    51.19Oil and gas sales
    
    449,794
    
    
    67
    
    
    268,901
    
    
    60
    
    
    167,798Oil and gas
      sales, net of royalties and other
    
    247,754
    
    
    58
    
    
    157,220
    
    
    53
    
    
    102,805Cash flow from operating
      activities
    
    63,630
    
    
    12
    
    
    56,969
    
    
    55
    
    
    36,799Funds flow from
      operations*
    
    119,976
    
    
    59
    
    
    75,460
    
    
    67
    
    
    45,064Funds flow from operations per
      share- Basic
    
    1.65
    
    
    
    
    
    1.14
    
    
    
    
    
    0.70- Diluted
    
    1.60
    
    
    
    
    
    1.10
    
    
    
    
    
    0.70Net earnings (loss)
    
    81,392
    
    
    101
    
    
    40,565
    
    
    -
    
    
    (8,417
    )Net earnings
      (loss) per share- Basic
    
    1.12
    
    
    
    
    
    0.61
    
    
    
    
    
    (0.13
    )- Diluted
    
    1.09
    
    
    
    
    
    0.59
    
    
    
    
    
    (0.13
    )Total assets
    
    525,806
    
    
    52
    
    
    345,625
    
    
    51
    
    
    228,882Cash and cash
      equivalents
    
    43,884
    
    
    (24
    )
    
    57,782
    
    
    257
    
    
    16,177Total long-term debt, including
      current portion
    
    57,609
    
    
    (33
    )
    
    86,420
    
    
    74
    
    
    49,799Debt-to-funds flow ratio**
    
    0.5
    
    
    
    
    
    1.1
    
    
    
    
    
    1.1ReservesTotal Proved (MMBbl)
    
    28.1
    
    
    37
    
    
    20.5
    
    
    7
    
    
    19.2Total Proved plus Probable (MMBbl)
    
    44.2
    
    
    45
    
    
    30.4
    
    
    26
    
    
    24.2


|*   | Funds flow from operations is a measure that represents
      cash generated from operating activities before changes in non-cash
      working capital, and may not be comparable to measures used by other
      companies.      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|**  | Debt-to-funds flow ratio is a measure that represents
      total current and long-term debt over funds flow from operations for the
      trailing 12 months, and may not be comparable to measures used by other
      companies.
|*** | Financial information presented for 2009 has been
      prepared in accordance with GAAP. This information has not been restated
      for differences between GAAP and IFRS.                                                      

In 2011 compared with 2010, TransGlobe,

- Increased Proved reserves by 7.6 MMBbl and Proved plus Probable reserves
  by 13.8 MMBbl, representing production replacements of 275% and 412%,
  respectively, primarily from the acquisition of the West Bakr concession and
  the development of its operated West Gharib concession in Egypt;
- Increased total production by 22%, as a result of a 47% increase in
  production from Egypt offset by a 46% decline in production in Yemen;
- Funds flow increased by 59% primarily due to a 37% increase in realized
  oil prices combined with increased production;
- Realized a net earnings of $81.4 million due to increased revenues
  combined with a purchase gain on acquisition of West Bakr of $13.2 million,
  which was partially offset by a $9.8 million increase in operating costs, a
  $6.9 million increase in depletion and depreciation expense, and a $12.1
  million impairment loss on theCompanys Nuqra assets; and
- Decreased debt by $28.8 million which resulted in a strong debt-to-funds
  flow ratio of 0.5 at December 31, 2011 (1.1 at December 31, 2010).

3

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

2011 TO 2010 NET EARNINGS VARIANCES

|                                         |  |         |   |  | $Per Share |   |  |                  |  
|---------------------------------------- |  | ------- | - |  | ---------- | - |  | ---------------- | -
|                                         |  | $000s   |   |  | Diluted    |   |  | %
      Variance |  
|2010 net earnings                        |  | 40,565  |   |  | 0.59       |   |  |                  |  
|Cash items                               |  |         |   |  |            |   |  |                  |  
|Volume variance                          |  | 80,527  |   |  | 1.07       |   |  | 199              |  
|Price variance                           |  | 100,366 |   |  | 1.33       |   |  | 247              |  
|Royalties                                |  | (90,359 | ) |  | (1.21      | ) |  | (223             | )
|Expenses:                                |  |         |   |  |            |   |  |                  |  
|Operating                                |  | (9,812  | ) |  | (0.14      | ) |  | (24              | )
|Realized derivative loss                 |  | 856     |   |  | 0.01       |   |  | 2                |  
|Exploration                              |  | (1,230  | ) |  | (0.02      | ) |  | (3               | )
|Cash general and
      administrative    |  | (2,383  | ) |  | (0.03      | ) |  | (6               | )
|Current
      income taxes               |  | (34,210 | ) |  | (0.47      | ) |  | (84              | )
|Realized foreign exchange
      gain     |  | 322     |   |  | -          |   |  | 1                |  
|Interest on long-term debt               |  | (1,313  | ) |  | (0.02      | ) |  | (3               | )
|Other income                             |  | 439     |   |  | 0.01       |   |  | 1                |  
|Total cash items variance                |  | 43,203  |   |  | 0.53       |   |  | 107              |  
|Non-cash items                           |  |         |   |  |            |   |  |                  |  
|Unrealized derivative loss               |  | (993    | ) |  | (0.01      | ) |  | (4               | )
|Unrealized foreign exchange loss         |  | (416    | ) |  | (0.01      | ) |  | (1               | )
|Depletion and depreciation               |  | (6,941  | ) |  | (0.10      | ) |  | (17              | )
|Gain on acquisition                      |  | 13,187  |   |  | 0.18       |   |  | 33               |  
|Impairment loss                          |  | (12,147 | ) |  | (0.16      | ) |  | (30              | )
|Stock-based compensation                 |  | (702    | ) |  | (0.01      | ) |  | (2               | )
|Deferred income taxes                    |  | 6,339   |   |  | 0.08       |   |  | 16               |  
|Deferred lease inducement                |  | (350    | ) |  | -          |   |  | -                |  
|Amortization of deferred financing costs |  | (353    | ) |  | -          |   |  | (1               | )
|Total non-cash
      items variance      |  | (2,376  | ) |  | (0.03      | ) |  | (6               | )
|2011 net earnings                        |  | 81,392  |   |  | 1.09       |   |  | 101              |  

Net earnings increased to $81.4 million in 2011 compared to
$40.6 million in 2010, which was mostly due to significant increases in
commodity prices and production volumes, which was partially offset by higher
royalties and income taxes, and increases in depletion and depreciation and
operating costs. Also significantly impacting net earnings was a purchase gain
recognized on the acquisition of the West Bakr assets, which was partially
offset by an impairment loss on the Companys Nuqra assets.

BUSINESS ENVIRONMENT

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

|                                                 |  | 2011   |  |  | 2010   | 
|------------------------------------------------ |  | ------ |  |  | ------ | 
|Dated Brent average oil price ($/Bbl)            |  | 111.27 |  |  | 79.42  | 
|U.S./Canadian
      Dollar average exchange rate |  | 0.9918 |  |  | 1.0301 | 

The price of Dated Brent oil averaged 40% higher in 2011
compared with 2010. All of the Companys production is priced based on Dated
Brent and shared with the respective governments through Production Sharing
Agreements. When the price of oil goes up, it takes fewer barrels to recover
costs (cost recovery barrels) which are assigned 100% to the Company. The
contracts provide for cost recovery per quarter up to a maximum percentage of
total revenue. Typically maximum cost recovery ranges from 25% to 60% of
production depending on the country and the contract. Generally the balance of
the production is shared with the respective government (production sharing
oil). Depending on the contract, the government receives 70% to 85% of the
production sharing oil. Production sharing splits are set in each contract for
the life of the contract. Typically the governments share of production sharing
oil increases when production exceeds pre-set production levels in the
respective contracts. During times of increased oil prices, the Company receives
less cost oil and may receive more production sharing oil. For reporting
purposes, the Company records the respective governments share of production as
royalties and taxes (all taxes are paid out of the governments share of
production).

The recent political instability in Egypt and Yemen could
present challenges to the Company if the issues persist over an extended period
of time. TransGlobes management believes the Company is well positioned to
adapt to the current political situations in Egypt and Yemen due to its
increasing production, manageable debt levels, positive cash generation from
operations and the availability of cash and cash equivalents.

4

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

SELECTED QUARTERLY FINANCIAL INFORMATION

2011
      
      
      2010($000s, except per share,price and volume amounts)
      
      Q-4
      
      
      Q-3
      
      
      Q-2
      
      
      Q-1
      
      
      Q-4
      
      
      Q-3
      
      
      Q-2
      
      
      Q-1Total OperationsAverage sales volumes (Bopd)
      
      12,054
      
      
      13,406
      
      
      11,826
      
      
      11,218
      
      
      10,789
      
      
      10,138
      
      
      9,206
      
      
      9,694Average price ($/Bbl)
      
      99.12
      
      
      104.00
      
      
      105.57
      
      
      97.06
      
      
      79.83
      
      
      71.27
      
      
      73.46
      
      
      70.66Oil sales
      
      109,919
      
      
      128,265
      
      
      113,615
      
      
      97,995
      
      
      79,240
      
      
      66,470
      
      
      61,540
      
      
      61,651Oil sales, net of royalties and other
      
      60,609
      
      
      71,769
      
      
      62,513
      
      
      52,863
      
      
      45,198
      
      
      38,980
      
      
      35,638
      
      
      37,404Cash flow from operating activities
      
      2,330
      
      
      3,575
      
      
      54,235
      
      
      3,490
      
      
      17,010
      
      
      15,024
      
      
      13,283
      
      
      11,652Funds flow from operations*
      
      26,469
      
      
      38,099
      
      
      30,478
      
      
      24,930
      
      
      19,355
      
      
      19,849
      
      
      17,007
      
      
      19,249Funds flow from operations per shareBasic
      
      0.36
      
      
      0.52
      
      
      0.42
      
      
      0.35
      
      
      0.29
      
      
      0.30
      
      
      0.26
      
      
      0.29Diluted
      
      0.35
      
      
      0.51
      
      
      0.40
      
      
      0.34
      
      
      0.28
      
      
      0.29
      
      
      0.25
      
      
      0.29Net earnings
      
      30,519
      
      
      26,110
      
      
      21,874
      
      
      2,889
      
      
      8,932
      
      
      9,321
      
      
      9,711
      
      
      12,601Net earnings per shareBasic
      
      0.42
      
      
      0.36
      
      
      0.30
      
      
      0.04
      
      
      0.13
      
      
      0.14
      
      
      0.15
      
      
      0.19Diluted
      
      0.41
      
      
      0.35
      
      
      0.29
      
      
      0.04
      
      
      0.13
      
      
      0.13
      
      
      0.14
      
      
      0.19Total assets
      
      525,806
      
      
      465,262
      
      
      420,956
      
      
      404,184
      
      
      345,625
      
      
      278,426
      
      
      264,490
      
      
      248,837Cash and cash equivalents
      
      43,884
      
      
      105,007
      
      
      122,659
      
      
      86,353
      
      
      57,782
      
      
      15,412
      
      
      21,437
      
      
      18,845Total long-term debt, including      
        current portion
      
      57,609
      
      
      57,303
      
      
      56,998
      
      
      56,731
      
      
      86,420
      
      
      46,045
      
      
      49,977
      
      
      49,888Debt-to-funds flow ratio**
      
      0.5
      
      
      0.5
      
      
      0.6
      
      
      0.7
      
      
      1.1
      
      
      0.7
      
      
      0.9
      
      
      0.9


|*  | Funds flow from operations is a measure that represents
      cash generated from operating activities before changes in non-cash
      working capital, and may not be comparable to measures used by other
      companies.      
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|** | Debt-to-funds flow ratio is a measure that represents
      total current and long-term debt over funds flow from operations for the
      trailing 12 months, and may not be comparable to measures used by other
      companies.

During the fourth quarter of 2011, TransGlobe has:

- Experienced a reduction in average sales volumes due to shut-in production
  at Block S-1, Yemen, from October 8, 2011 of approximately 2,250 Bopd, which
  was offset by an increase in Egypt of 3,477 Bopd compared to Q4- 2010;
- Maintained a strong financial position, reporting a debt-to-funds flow
  ratio of 0.5 at December 31, 2011;
- Reported a 37% increase in funds flow from operations due to a 24%
  increase in commodity prices along with a 12% increase in sales volumes
  compared to Q4-2010;
- Reported funds flow from operations that varies significantly from cash
  flow from operating activities. These measures fluctuate from quarter to
  quarter depending on the timing of collections of accounts receivable and
  payment of accounts payable; and
- Reported an increase in net earnings of 242% in Q4-2011 compared to
  Q4-2010. This is due to increased production and prices, combined with a gain
  on the acquisition of the West Bakr assets in the amount of $13.2 million.

OPERATING RESULTS AND NETBACK

Daily Volumes, Working Interest before Royalties and Other
(Bopd)

|                                    |  | 2011   |  |  | 2010  | 
|----------------------------------- |  | ------ |  |  | ----- | 
|Egypt - Oil sales                   |  | 10,671 |  |  | 7,259 | 
|Yemen - Oil sales                   |  | 1,461  |  |  | 2,701 | 
|Total Company  daily sales volumes |  | 12,132 |  |  | 9,960 | 

Netback

Consolidated

|                                     |  | 2011    |  |  | 2010   | 
|------------------------------------ |  | ------- |  |  | ------ | 
|(000s, except per
      Bbl amounts) |  | $       |  |  | $/Bbl  | 
|Oil sales                            |  | 449,794 |  |  | 101.58 | 
|Royalties and other                  |  | 202,040 |  |  | 45.63  | 
|Current taxes                        |  | 74,017  |  |  | 16.71  | 
|Operating expenses                   |  | 36,662  |  |  | 8.28   | 
|Netback                              |  | 137,075 |  |  | 30.96  | 

5

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

|Egypt                                |  |         |  |  |        |  |  |         |  |  |       | 
|------------------------------------ |  | ------- |  |  | ------ |  |  | ------- |  |  | ----- | 
|                                     |  | 2011    |  |  | 2010   | 
|(000s, except
      per Bbl amounts) |  | $       |  |  | $/Bbl  |  |  | $       |  |  | $/Bbl | 
|Oil sales                            |  | 391,884 |  |  | 100.61 |  |  | 190,234 |  |  | 71.80 | 
|Royalties and other                  |  | 176,033 |  |  | 45.20  |  |  | 75,339  |  |  | 28.43 | 
|Current taxes                        |  | 66,630  |  |  | 17.11  |  |  | 29,686  |  |  | 11.20 | 
|Operating expenses                   |  | 27,407  |  |  | 7.04   |  |  | 16,464  |  |  | 6.21  | 
|Netback                              |  | 121,814 |  |  | 31.26  |  |  | 68,745  |  |  | 25.96 | 

The netback per Bbl in Egypt increased 20% in 2011 compared with
  2010, mainly as a result of oil prices increasing by 40% which was partially
  offset by higher royalty and tax rates. In 2011, the average selling price was
  $100.61/Bbl, which represents a quality adjustment of approximately 10% relative
  to the average Dated Brent oil price of $111.27/Bbl for West Gharib sales. This
  adjustment is consistent with the discount applied in 2010.

Royalties and taxes as a percentage of revenue increased to 62%
in 2011, compared with 55% in 2010. Royalty and tax rates fluctuate in Egypt due
to changes in the cost oil whereby the Production Sharing Contract (PSC)
allows for recovery of operating and capital costs through a reduction in
government take. Cost recovery for the purposes of calculating cost oil is based
on expenses incurred and paid in the period plus capital costs which are
amortized over four years in West Gharib.

Operating expenses on a per Bbl basis increased 13% in 2011
compared with 2010. This is mainly due to increases in oil treatment fees, fuel
costs and workovers during 2011.

|Yemen                                |  |        |  |  |        |  |  |        |  |  |       | 
|------------------------------------ |  | ------ |  |  | ------ |  |  | ------ |  |  | ----- | 
|                                     |  | 2011   |  |  | 2010   | 
|(000s, except
      per Bbl amounts) |  | $      |  |  | $/Bbl  |  |  | $      |  |  | $/Bbl | 
|Oil sales                            |  | 57,910 |  |  | 108.60 |  |  | 78,667 |  |  | 79.79 | 
|Royalties and other                  |  | 26,007 |  |  | 48.77  |  |  | 36,342 |  |  | 36.86 | 
|Current taxes                        |  | 7,387  |  |  | 13.85  |  |  | 10,121 |  |  | 10.27 | 
|Operating expenses                   |  | 9,255  |  |  | 17.36  |  |  | 10,386 |  |  | 10.53 | 
|Netback                              |  | 15,261 |  |  | 28.62  |  |  | 21,818 |  |  | 22.13 | 

In Yemen, the netback per Bbl increased 29% in 2011 compared
  with 2010, primarily due to the 36% increase in oil prices in 2011.

Royalties and taxes as a percentage of revenue decreased to 58%
in 2011, compared with 59% 2010. Royalty and tax rates fluctuate in Yemen due to
changes in the amount of cost sharing oil, whereby the Block 32 and Block S-1
Production Sharing Agreements (PSAs) allow for the recovery
  of operating and capital costs through a reduction in Ministry of Oil and Minerals
  take of oil production.

Operating expenses on a per Bbl basis increased by 65% in 2011.
This was mostly due to a decrease in production volumes of 46% and cost
increases associated with the unstable political situation in Yemen. This
decrease in production volumes is mainly the result of production being shut-in
on Block S-1 for approximately seven months (from March 17, 2011 through to July
16, 2011, and from October 8, 2011 to the end of the calendar year). While
production volumes were down, the Company continued to incur the majority of the
operating costs on Block S-1 which significantly impacted operating expenses per
Bbl.

Production from Block S-1 remains shut-in following an attack
on the oil export pipeline on October 8, 2011, and production will not commence
until repairs to the export pipeline can be completed. It is difficult to
predict when production will resume as local tribal groups are currently
preventing access to the pipeline.

DERIVATIVE COMMODITY CONTRACTS

TransGlobe uses hedging arrangements as part of its risk
management strategy to manage commodity price fluctuations and stabilize cash
flows for future exploration and development programs. The hedging program is
actively monitored and adjusted as deemed necessary to protect the cash flows
from the risk of commodity price exposure.

The estimated fair value of unrealized commodity contracts is
  reported on the Consolidated Balance Sheets, with any change in the unrealized
  positions recorded to earnings. 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 balance
  sheet date with reference to forward prices and market values provided by independent
  sources. The actual amounts realized may differ from these estimates.

The realized losses on commodity contracts in 2011 and 2010 relate
  to the purchase of new financial floor derivative commodity contracts. The mark-to-market
  valuation of TransGlobes future derivative commodity contracts decreased
  from a $0.3 million asset at December 31, 2010 to a $0.1 million asset at December
  31, 2011, thus resulting in a $0.2 million unrealized loss on future derivative
  commodity contracts being recorded in the year.

6

---

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

|(000s)                                                  |  | 2011 |   |  | 2010   |  
|------------------------------------------------------- |  | ---- | - |  | ------ | -
|Realized cash gain (loss) on commodity
      contracts* |  | (630 | ) |  | (1,486 | )
|Unrealized gain
      (loss) on commodity contracts**   |  | (177 | ) |  | 816    |  
|Total derivative gain (loss) on commodity contracts     |  | (807 | ) |  | (670   | )

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

If the Dated Brent oil price remains at the level experienced
  in 2011, the derivative asset will be realized over the balance of the year.
  A 10% increase or decrease in Dated Brent oil prices would not result in a material
  adjustment to the derivative commodity contract asset. The following commodity
  contracts are outstanding as at December 31, 2011:

|                                |                  |                 | Dated Brent Pricing
|------------------------------- | ---------------- | --------------- | -------------------
|Period                          | Volume           | Type            | Put                
|Crude Oil                       |                  |                 |                    
|January 1, 2012  June 30, 2012 | 20,000 Bbl/month | Financial Floor | $ 80.00            

As at December 31, 2011, the total volumes hedged for 2012 are:

|                                             |  | 2012    | 
|-------------------------------------------- |  | ------- | 
|                                             |  |         | 
|Bbls                                         |  | 120,000 | 
|Bopd (January 1,
      2012  June 30, 2012) |  | 659     | 

At December 31, 2011, all of the derivative commodity contracts
were classified as current assets.

GENERAL AND ADMINISTRATIVE EXPENSES
(G&A)

|                                        |  | 2011   |   |  | 2010  |  
|--------------------------------------- |  | ------ | - |  | ----- | -
|(000s, except Bbl
      amounts)        |  | $      |   |  | $/Bbl |  
|G&A (gross)                             |  | 17,946 |   |  | 4.05  |  
|Stock-based compensation                |  | 3,062  |   |  | 0.69  |  
|Capitalized G&A and overhead recoveries |  | (2,115 | ) |  | (0.48 | )
|G&A (net)                               |  | 18,893 |   |  | 4.26  |  

G&A expenses (net) increased 22% (no change on a per Bbl
basis) in 2011, compared with 2010. This is mostly due to increased staffing and
associated costs and increased professional fees. The increase in stock-based
compensation is due to an increase in the total value of new options awarded
during the second quarter of 2011 as compared to those issued during 2010, which
was partially offset by expense recoveries on share appreciation rights in 2011
which were caused by a lower share price in 2011 compared to 2010.

FINANCE COSTS

Finance costs for 2011 increased to $5.0 million compared to
$3.3 million in 2010. Finance costs include interest on long-term debt and
amortization of transaction costs associated with long-term debt. The Company
expensed $1.2 million of transaction costs in 2011 (2010 - $0.8 million). The
Company had $60.0 million of debt outstanding at December 31, 2011 (December 31,
2010 - $90.0 million). The long-term debt that was outstanding at December 30,
2011 bore interest at LIBOR plus an applicable margin that varies from 3.75% to
4.75% depending on the amount drawn under the facility.

In February 2012, the Company closed an agreement to issue convertible
  unsecured subordinated debentures with an aggregate principal amount of C$97.8
  million. The debentures have a maturity date of March 31, 2017, and are convertible
  into common shares of the Company at a price of C$15.10 per common share. The
  debentures will not be redeemable by the Company on or before March 31, 2015.
  After March 31, 2015 and prior to March 31, 2017, the debentures may be redeemed
  by the Company at a redemption price equal to the principal amount plus accrued
  and unpaid interest, provided that the weighted average trading price of the
  common shares for the 20 consecutive trading days ending five trading days prior
  to the date on which notice of redemption is provided is not less than 125 percent
  of the conversion price. Interest of 6% will be payable semi-annually in arrears
  on March 31 and September 30 of each year, commencing on September 30, 2012.
  The Company has the option to settle all or any portion of principal obligations
  by delivering to the debenture holders sufficient common shares to satisfy these
  obligations.

DEPLETION AND DEPRECIATION (DD&A)

|                                     |  | 2011   |  |  | 2010  | 
|------------------------------------ |  | ------ |  |  | ----- | 
|(000s, except per
      Bbl amounts) |  | $      |  |  | $/Bbl | 
|Egypt                                |  | 31,035 |  |  | 7.97  | 
|Yemen                                |  | 3,585  |  |  | 6.72  | 
|Corporate                            |  | 461    |  |  | -     | 
|                                     |  | 35,081 |  |  | 7.92  | 

7

---

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

In Egypt and Yemen, DD&A on a per Bbl basis remained consistent
  in 2011. DD&A expense in Egypt increased 45% in 2011 due to production volume
  increases of 47%. DD&A expense in Yemen decreased 45% due to production
  volume decreases of 46%. The volume decreases in Yemen were caused by the shut-in
  of Block S-1 for approximately seven months during 2011, which was the result
  of damage to the oil export pipeline from Marib to the Ras Eisa port on the
  Red Sea. The pipeline was the target of a number of attacks during 2011, and
  completing the necessary repairs is difficult due to local tribal groups preventing
  access to the pipeline.

IMPAIRMENT OF EXPLORATION AND EVALUATION ASSETS

On the Nuqra Block, the Company drilled two exploration wells
during 2011,bothof which were dry. The 3.65 million acre Nuqra
Block exploration concession is in the second and final extension period which
is scheduled to expire in July 2012. The Company has met all the work
commitments of the second extension period and has no plans for further
exploration in the Nuqra Block at this time. As a result, the Company recorded
an impairment loss on these exploration and evaluation assets in the amount of
$12.1 million ($0.16/share) during 2011. All exploration and evaluation
expenditures incurred at Nuqra up to December 31, 2011 have been written off as
an impairment loss.

CAPITAL EXPENDITURES

|($000s)      |  | 2011    |  |  | 2010   | 
|------------ |  | ------- |  |  | ------ | 
|Egypt        |  | 63,177  |  |  | 56,946 | 
|Yemen        |  | 5,495   |  |  | 7,583  | 
|Acquisitions |  | 74,814  |  |  | -      | 
|Corporate    |  | 1,447   |  |  | 813    | 
|Total        |  | 144,933 |  |  | 65,342 | 

In Egypt, total capital expenditures in 2011 were $63.2 million
(2010 - $56.9 million). The Company drilled 44 wells in West Gharib, resulting
in 36 oil wells (nineteen at Arta, twelve at East Arta, four at Hoshia and one
at Hana West), threewater injector wells at East
Arta, one water source well at East Arta, one water source well at Hoshia, one
dry hole at West Hoshia, one dry hole at North Hoshia and one dry hole at East
Arta. Outside of West Gharib, the Company drilled three dry holes (one at East
Ghazalat and two at Nuqra).

In Yemen, total capital expenditures in 2011 were $5.5 million
(2010 - $7.6 million). Two oil development wells were drilled in 2011 at Block
S-1, along with one oil exploration discovery well and one dry hole at Block 72.

On December 29, 2011, the Company completed the acquisition of
a 100% working interest in the West Bakr Concession agreement in Egypt from the
Egyptian Petroleum Development Co. Ltd. (of Japan) (EPEDECO). The property and
equipment acquired in the transaction was valued at $74.8 million at closing.

Corporate expenditures in 2011 were primarily due to costs
incurred for the new head office in Calgary.

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

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

|Proved                                               |  |         |   |  |        |  |  |        | 
|---------------------------------------------------- |  | ------- | - |  | ------ |  |  | ------ | 
|($000s,
      except volumes and $/Bbl amounts)      |  | 2011    |   |  | 2010   |  |  | 2009*  | 
|Total capital expenditure                            |  | 70,119  |   |  | 65,342 |  |  | 35,546 | 
|Acquisitions                                         |  | 39,497  |   |  | -      |  |  | -      | 
|Dispositions                                         |  | -       |   |  | -      |  |  | -      | 
|Net change
      from previous years future capital |  | (6,165  | ) |  | 4,776  |  |  | 1,816  | 
|                                                     |  | 103,451 |   |  | 70,118 |  |  | 37,362 | 
|Reserve additions and revisions (MBbl)               |  |         |   |  |        |  |  |        | 
|Exploration and development                          |  | 4,672   |   |  | 4,845  |  |  | 9,921  | 
|Acquisitions, net of dispositions                    |  | 7,448   |   |  | -      |  |  | -      | 
|Total reserve additions (MBbl)                       |  | 12,120  |   |  | 4,845  |  |  | 9,921  | 
|                                                     |  |         |   |  |        |  |  |        | 
|Average cost per Bbl                                 |  |         |   |  |        |  |  |        | 
|F&D                                                  |  | 13.45   |   |  | 14.47  |  |  | 3.77   | 
|FD&A                                                 |  | 8.54    |   |  | 14.47  |  |  | 3.77   | 
|                                                     |  |         |   |  |        |  |  |        | 
|Three-year weighted average cost per
      Bbl       |  |         |   |  |        |  |  |        | 
|F&D                                                  |  | 8.76    |   |  | 8.06   |  |  | 7.40   | 
|FD&A                                                 |  | 7.85    |   |  | 8.10   |  |  | 9.75   | 

|* | Information presented for 2009 has been prepared in
      accordance with GAAP. This information has not been restated for
      differences between GAAP and IFRS.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

8

---

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

|Proved Plus Probable                                 |  |         |   |  |         |  |  |        | 
|---------------------------------------------------- |  | ------- | - |  | ------- |  |  | ------ | 
|($000s,
      except volumes and $/Bbl amounts)      |  | 2011    |   |  | 2010    |  |  | 2009*  | 
|Total capital expenditure                            |  | 70,119  |   |  | 65,342  |  |  | 35,546 | 
|Acquisitions                                         |  | 39,497  |   |  | -       |  |  | -      | 
|Dispositions                                         |  | -       |   |  | -       |  |  | -      | 
|Net change
      from previous years future capital |  | (14,256 | ) |  | 42,546  |  |  | 4,112  | 
|                                                     |  | 95,360  |   |  | 107,888 |  |  | 39,658 | 
|Reserve additions and revisions (MBbl)               |  |         |   |  |         |  |  |        | 
|Exploration and development                          |  | 6,612   |   |  | 9,895   |  |  | 7,670  | 
|Acquisitions, net of dispositions                    |  | 11,586  |   |  | -       |  |  | -      | 
|Total reserve additions (MBbl)                       |  | 18,198  |   |  | 9,895   |  |  | 7,670  | 
|                                                     |  |         |   |  |         |  |  |        | 
|Average cost per Bbl                                 |  |         |   |  |         |  |  |        | 
|F&D                                                  |  | 7.07    |   |  | 10.90   |  |  | 5.17   | 
|FD&A                                                 |  | 5.24    |   |  | 10.90   |  |  | 5.17   | 
|                                                     |  |         |   |  |         |  |  |        | 
|Three-year weighted average cost per
      Bbl       |  |         |   |  |         |  |  |        | 
|F&D                                                  |  | 8.04    |   |  | 8.00    |  |  | 7.27   | 
|FD&A                                                 |  | 6.79    |   |  | 7.83    |  |  | 8.59   | 

|Note: | The aggregate of the exploration and development costs
      incurred in the most recent financial year and the change during that year
      in estimated future development costs generally will not reflect total
      finding and development costs related to reserves additions for that year.
|----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*     | Information presented for 2009 has been prepared in
      accordance with GAAP. This information has not been restated for
      differences between GAAP and IFRS.                                                                                                                                  

|RECYCLE RATIO             |  |            |  |  |       |  |  |       |  |  |        | 
|------------------------- |  | ---------- |  |  | ----- |  |  | ----- |  |  | ------ | 
|                          |  | Three-Year |  |  |       |  |  |       |  |  |        | 
|Proved                    |  | Weighted   |  |  |       |  |  |       |  |  |        | 
|                          |  | Average    |  |  | 2011  |  |  | 2010  |  |  | 2009** | 
|Netback ($/Bbl)*          |  | 20.65      |  |  | 26.24 |  |  | 20.07 |  |  | 13.75  | 
|Proved F&D costs ($/Bbl)  |  | 8.76       |  |  | 13.45 |  |  | 14.47 |  |  | 3.77   | 
|Proved FD&A costs ($/Bbl) |  | 7.85       |  |  | 8.54  |  |  | 14.47 |  |  | 3.77   | 
|F&D Recycle ratio         |  | 2.36       |  |  | 1.95  |  |  | 1.39  |  |  | 3.65   | 
|FD&A Recycle ratio        |  | 2.63       |  |  | 3.07  |  |  | 1.39  |  |  | 3.65   | 

|*  | Netback, for the purposes of calculating the recycle
      ratio, is defined as net sales less operating, exploration, G&A
      (excluding non-cash items), foreign exchange (gain) loss, interest and
      current income tax expense per Bbl of production.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|** | Information presented for 2009 has been prepared in
      accordance with GAAP. This information has not been restated for
      differences between GAAP and IFRS.                                                                                            

|                                        |  | Three-Year |  |  |       |  |  |       |  |  |        | 
|--------------------------------------- |  | ---------- |  |  | ----- |  |  | ----- |  |  | ------ | 
|Proved Plus Probable                    |  | Weighted   |  |  |       |  |  |       |  |  |        | 
|                                        |  | Average    |  |  | 2011  |  |  | 2010  |  |  | 2009** | 
|Netback ($/Bbl)*                        |  | 20.65      |  |  | 26.24 |  |  | 20.07 |  |  | 13.75  | 
|Proved plus Probable F&D costs ($/Bbl)  |  | 8.04       |  |  | 7.07  |  |  | 10.90 |  |  | 5.17   | 
|Proved plus Probable FD&A costs ($/Bbl) |  | 6.79       |  |  | 5.24  |  |  | 10.90 |  |  | 5.17   | 
|F&D Recycle ratio                       |  | 2.57       |  |  | 3.71  |  |  | 1.84  |  |  | 2.66   | 
|FD&A Recycle ratio                      |  | 3.04       |  |  | 5.01  |  |  | 1.84  |  |  | 2.66   | 

|*  | Netback, for the purposes of calculating the recycle
      ratio, is defined as net sales less operating, exploration, G&A
      (excluding non-cash items), foreign exchange (gain) loss, interest and
      current income tax expense per Bbl of production.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|** | Information presented for 2009 has been prepared in
      accordance with GAAP. This information has not been restated for
      differences between GAAP and IFRS.                                                                                            

The 2011 Proved and Proved plus Probable recycle ratios
increasedfrom 2010, which is the result of higher
netbacks due to stronger oil prices in the year, combined with reduced finding
and development costs. In particular, the acquisition cost per Bbl of reserves
in West Bakr was $5.47/Bbl on a Proved basis and $4.20/Bbl on a Proved plus
Probable basis including future capital costs. The increased ratios were also
impacted by reduced future capital associated with both Proved and Proved plus
Probable reserves in 2011.

Due to the nature of international projects, the Company
considers the three-year weighted average recycle ratios to provide the most
useful information. The three-year weighted average ratios are consistent with
Company expectations and with prior periods.

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

9

---

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

|Recycle Netback Calculation                           |  |         |   |  |        |   |  |        |  
|----------------------------------------------------- |  | ------- | - |  | ------ | - |  | ------ | -
|($000s, except
      volumes and per Bbl amounts)     |  | 2011    |   |  | 2010   |   |  | 2009** |  
|Net earnings                                          |  | 81,392  |   |  | 40,565 |   |  | (8,417 | )
|Adjustments for non-cash items:                       |  |         |   |  |        |   |  |        |  
|Depletion,
      depreciation and accretion           |  | 35,081  |   |  | 28,140 |   |  | 47,579 |  
|Stock-based compensation                              |  | 3,062   |   |  | 2,360  |   |  | 2,011  |  
|Deferred income
      taxes                           |  | (4,445  | ) |  | 1,894  |   |  | -      |  
|Amortization of deferred
      financing costs        |  | 1,189   |   |  | 836    |   |  | 569    |  
|Amortization of
      deferred lease inducement       |  | 350     |   |  | -      |   |  | -      |  
|Unrealized (gain) loss on
      commodity contracts   |  | 177     |   |  | (816   | ) |  | 3,322  |  
|Unrealized
      foreign exchange (gain) loss         |  | 416     |   |  | -      |   |  | -      |  
|Impairment of exploration and
      evaluation assets |  | 12,147  |   |  | -      |   |  | -      |  
|Gain on acquisition                                   |  | (13,187 | ) |  | -      |   |  | -      |  
|Recycle netback*                                      |  | 116,182 |   |  | 72,979 |   |  | 45,064 |  
|Sales volumes (MBbl)                                  |  | 4,428   |   |  | 3,635  |   |  | 3,278  |  
|Recycle netback
      per Bbl*                        |  | 26.24   |   |  | 20.07  |   |  | 13.75  |  

|*  | Netback, for the purposes of calculating the recycle
      ratio, is defined as net sales less operating, exploration, G&A
      (excluding non-cash items), foreign exchange (gain) loss, interest and
      current income tax expense per Bbl of production.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|** | Information presented for 2009 has been prepared in
      accordance with GAAP. This information has not been restated for
      differences between GAAP and IFRS.                                                                                            

OUTSTANDING SHARE DATA

As at December 31, 2011, the Company had 73,054,138common shares issued and outstanding. On February 1, 2011, the Company
closed an equity offering of 5,000,000 common shares at C$15.00 per common share
for gross proceeds of C$75.0 million (US$75.6 million).

LIQUIDITY AND CAPITAL RESOURCES

Liquidity describes a companys ability to access cash.
Companies operating in the upstream oil and gas industry require sufficient cash
in order to fund capital programs necessary to maintain and increase production
and reserves, to acquire strategic oil and gas assets and to repay debt.
TransGlobes capital programs are funded principally by cash provided from
operating activities. A key measure that TransGlobe uses to evaluate the
Companys overall financial strength is debt-to-funds flow from operating
activities (calculated on a 12-month trailing basis). TransGlobes debt-to-funds
flow from operating activities ratio, a key short-term leverage measure,
remained strong at 0.5 times at December 31, 2011. This was within the Companys target range of no more than 2.0
times.

The following table illustrates TransGlobes sources and uses
of cash during the year ended December 31, 2011 and 2010:

|Sources and Uses of Cash                               |  |         |   |  |         |  
|------------------------------------------------------ |  | ------- | - |  | ------- | -
|($000s)                                                |  | 2011    |   |  | 2010    |  
|Cash sourced                                           |  |         |   |  |         |  
|Funds flow from operations*                            |  | 119,976 |   |  | 75,460  |  
|Transfer from
      restricted cash                    |  | 1,161   |   |  | -       |  
|Increase in long-term debt                             |  | -       |   |  | 95,916  |  
|Exercise of
      options                              |  | 1,946   |   |  | 9,959   |  
|Issuance of common shares, net of share issuance costs |  | 71,583  |   |  | -       |  
|Other                                                  |  | 772     |   |  | -       |  
|                                                       |  | 195,438 |   |  | 181,335 |  
|Cash used                                              |  |         |   |  |         |  
|Capital expenditures                                   |  | 70,119  |   |  | 65,343  |  
|Acquisitions                                           |  | 73,836  |   |  | -       |  
|Repayment of long-term debt                            |  | 30,000  |   |  | 55,916  |  
|Transfer to
      restricted cash                      |  | -       |   |  | 3,387   |  
|Deferred financing costs                               |  | -       |   |  | 4,216   |  
|Interest paid                                          |  | 3,550   |   |  | 2,481   |  
|Other                                                  |  | 315     |   |  | -       |  
|                                                       |  | 177,820 |   |  | 131,343 |  
|                                                       |  | 17,618  |   |  | 49,992  |  
|Changes in
      non-cash working capital              |  | (31,516 | ) |  | (8,387  | )
|Increase (decrease) in cash and cash
      equivalents |  | (13,898 | ) |  | 41,605  |  
|Cash and cash
      equivalents  beginning of period  |  | 57,782  |   |  | 16,177  |  
|Cash and cash equivalents  end of period              |  | 43,884  |   |  | 57,782  |  

|* | Funds flow from operations is a measure that represents
      cash generated from operating activities before changes in non-cash
      working capital, and may not be comparable to measures used by other
      companies.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Funding for the Companys capital expenditures was provided by
funds flow from operations. The Company funded its 2011 exploration and
development program of $68.7 million and contractual commitments through the use
of working capital and cash generated by operating activities. The use of new
financing during 2011 was utilized to finance the acquisition of a 100% working
interest in the West Bakr Concession agreement in Egypt. Fluctuations in
commodity prices, product demand, foreign exchange rates, interest rates and
various other risks may impact capital resources.

10

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

Working capital is the amount by which current assets exceed
current liabilities. At December 31, 2011, the Company had working capital of
$140.0 million (December 31, 2010 - $88.2 million). The increase to working
capital in 2011 is due almost entirely to higher accounts receivable than 2010,
which was partially offset by a decrease in cash and increased accounts payable.
Cash has decreased by $13.9 million from December 31, 2010, which is due mostly
to the acquisition of the West Bakr assets along with the repayment of long-term
debt, which was partially offset by cash flows generated from operations and the
issuance of common shares in the first quarter of 2011. Accounts receivable have
increased by $93.1 million from December 31, 2010, which is due to increased
production and higher commodity prices resulting in significantly larger monthly
billings combined with the acquisition of the West Bakr assets which added $34.5
million of accounts receivable. The majority of these receivables are due from
the Egyptian Government, and the recent political unrest in the country has
increased the Companys credit risk. Despite these factors the Company still
expects to collect in full all outstanding receivables.

In February 2012, the Company closed an agreement to issue
convertible unsecured subordinated debentures with an aggregate principal amount
of C$97.8 million. The debentures have a maturity date of March 31, 2017, and
are convertible into common shares of the Company at a price of C$15.10 per
common share. The debentures will not be redeemable by the Company on or before
March 31, 2015. After March 31, 2015 and prior to March 31, 2017, the debentures
may be redeemed by the Company at a redemption price equal to the principal
amount plus accrued and unpaid interest, provided that the weighted average
trading price of the common shares for the 20 consecutive trading days ending
five trading days prior to the date on which notice of redemption is provided is
not less than 125 percent of the conversion price. Interest of 6% will be
payable semi-annually in arrears on March 31 and September 30 of each year,
commencing on September 30, 2012. The Company has the option to settle all or
any portion of principal obligations by delivering to the debenture holders
sufficient common shares to satisfy these obligations.

At December 31, 2011, TransGlobe had a $100.0 million Borrowing
Base Facility of which $60.0 millionwas drawn. As repayments on the
Borrowing Base Facility are not expected to commence until 2013, the entire
balance is presented as a long-term liability on the Consolidated Balance
Sheets. Repayments will be made on a semi-annual basis according to the
scheduled reduction of the facility.

|($000s)                                          |  | December 31, 2011 |   |  | December 31, 2010 |  
|------------------------------------------------ |  | ----------------- | - |  | ----------------- | -
|Bank debt                                        |  | 60,000            |   |  | 90,000            |  
|Deferred financing costs                         |  | (2,391            | ) |  | (3,580            | )
|Longterm debt (net of deferred financing costs) |  | 57,609            |   |  | 86,420            |  

COMMITMENTS AND CONTINGENCIES

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

($000s)
      
      
      Payment Due by Period 12Recognizedin Financial
      
      Contractual
      
      
      Less than
      
      
      
      
      
      
      
      
      More thanStatements
      
      Cash
        Flows
      
      
      1 year
      
      
      1-3
        years
      
      
      4-5
        years
      
      
      5 yearsAccounts payable and accrued liabilities
      Yes - Liability
      
      73,692
      
      
      73,692
      
      
      -
      
      
      -
      
      
      -Long-term debt
      Yes - Liability
      
      60,000
      
      
      -
      
      
      60,000
      
      
      -
      
      
      -Office and equipment leases
      No
      
      17,300
      
      
      8,368
      
      
      3,465
      
      
      2,028
      
      
      3,439Minimum work commitments3
      No
      
      750
      
      
      750
      
      
      -
      
      
      -
      
      
      -Total
      
      
      151,742
      
      
      82,810
      
      
      63,465
      
      
      2,028
      
      
      3,439


|1 | Payments exclude ongoing operating costs, finance costs
      and payments made to settle derivatives.                                                    
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|2 | Payments denominated in foreign currencies have been
      translated at December 31, 2011 exchange rates.                                                
|3 | Minimum work commitments include contracts awarded for
      capital projects and those commitments related to exploration and drilling
      obligations.

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. Drilling has been
suspended in Yemen due to security and logistics concerns.

Pursuant to the August 18, 2008 asset purchase agreement for a
25% financial interest in eight development leases on the West Gharib Concession
in Egypt, the Company has committed to paying the vendor a success fee to a
maximum of $2.0 million if incremental reserve thresholds are reached in the
South Rahmi development lease, to be evaluated annually. As at December 31,
2011, no additional fees are due in 2012.

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.

The Company is not aware of any material provisions or other
contingent liabilities as at December 31, 2011.

Proposed Transactions

On June 29, 2011, the Company entered into an agreement to acquire
  a 50% working interest in the South Alamein Concession agreement in the Arab
  Republic of Egypt from Cepsa Egypt SA B.V. (Cepsa Egypt), a wholly-owned
subsidiary of Compania Espanola De Petroleos, S.A. (of Spain),
subject to the approval of the Egyptian Government and customary closing
conditions. The proposed transaction provides for the operatorship of the
concession and near-term appraisal/development of one oil discovery well and of
a significant number of ready to drill exploration projects, located in Egypts
Western Desert. The Company has structured the transaction as an all-cash deal
effective on and subject to approval from the Egyptian Government. Consideration
for the transaction is $3.0 million plus an inventory adjustment to be
determined based on customary due diligence and other closing conditions.
Because of uncertainty related to the successful approval of the transaction by
the Egyptian Government, management is not able to provide any assurances that
it will successfully close the subject transaction. Accordingly, no amount has
been accrued in the Consolidated Financial Statements for the year ended
December 31, 2011 related to the contingency.

11

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

OFF BALANCE SHEET ARRANGEMENTS

The Company has certain lease arrangements, all of which are
reflected in the Commitments and Contingencies table, which were entered into in
the normal course of operations. All leases have been treated as operating
leases whereby the lease payments are included in operating expenses or G&A
expenses depending on the nature of the lease. No asset or liability value has
been assigned to these leases in the balance sheet as of December 31, 2011.

MANAGEMENT STRATEGY AND OUTLOOK

The 2012 outlook provides information as to managements
expectation for results of operations for 2012. Readers are cautioned that the
2012 outlook may not be appropriate for other purposes. The Companys expected
results are sensitive to fluctuations in the business environment and may vary
accordingly. This outlook contains forward-looking statements that
should be read in conjunction with the Companys disclosure under
Forward-Looking Statements, outlined on the first page of this
MD&A.

2012 Outlook Highlights

- Production is expected to average between 16,000 Bopd and 20,000 Bopd, a
  32% to 65% increase over the 2011 average production;
- Exploration and development spending is budgeted to be between $70.0
  million and $90.0 million (firm plus contingent) excluding acquisitions, a
  potential 28% increase from 2011, to be funded from funds flow from operations
  and cash-on-hand; and
- Funds flow from operations is estimated at $133.0 an increase of 11% from
  2011, using mid-point production guidance and an average oil price assumption
  of $90.00 per barrel Dated Brent Oil price.

2012 Updated Production Outlook

Production for 2012 is expected to average between 16,000 and
20,000 Bopd, representing a 32% to 65% increase over the 2011 average production
of 12,132 Bopd. The large spread in the estimated production is due to a number
of variables outside of the Companys control such as government approvals, the
start of production at East Ghazalat and South Alamein and the repair of the
export pipeline for Block S-1 in Yemen.

|Production Forecast    |  |               |  |  |             |  |  |                | 
|---------------------- |  | ------------- |  |  | ----------- |  |  | -------------- | 
|                       |  | 2012 Guidance |  |  | 2011 Actual |  |  | %
      Change | 
|Barrels of oil per day |  | 16,00020,000 |  |  | 12,132      |  |  | 32 - 65        | 

2012 Updated Funds Flow From Operations Outlook

Funds flow from operations is estimated at $133.0 million ($1.76/share)
  based on an annual average Dated Brent oil price of $90/Bbl and using the mid-point
  of the production guidance. Variations in production and commodity prices during
  2012 could significantly change this outlook. An increase or decrease in the
  average Dated Brent oil price of $10/Bbl for the year would result in a corresponding
  change in anticipated 2012 funds flow by approximately $14.0 million or $0.19/share.

|Funds Flow Forecast         |  |               |  |  |             |  |  |                |  
|--------------------------- |  | ------------- |  |  | ----------- |  |  | -------------- | -
|($millions)                 |  |               |  |  |             |  |  |                |  
|                            |  | 2012 Guidance |  |  | 2011 Actual |  |  | %
      Change |  
|Funds Flow from operations  |  | 133.0         |  |  | 120.0       |  |  | 11             |  
|Brent oil price ($ per bbl) |  | 90.00         |  |  | 111.27      |  |  | (19            | )

The Company entered into an agreement to acquire a 50% working
interest in the South Alamein Concession agreement. Closing is subject to the
approval of the Egyptian Government and customary closing conditions. TransGlobe
cannot make assurances that it will successfully close the subject
transaction.

12

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

|2012 Capital Budget |  |      | 
|------------------- |  | ---- | 
|($ million)         |  | 2012 | 
|Egypt               |  | 69.2 | 
|Yemen               |  | 5.5  | 
|Corporate           |  | 1.0  | 
|Total               |  | 75.7 | 

The 2012 capital program is split 77:23 between development and
exploration, respectively. The Company plans to participate in 38 wells in 2012.
It is anticipated that the Company will fund its 2012 capital budget from funds
flow from operations and working capital.

RISKS

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

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

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

Financial Risk

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

To mitigate these risks, the Company raised C$75.0 million
(US$75.6 million), before fees and expenses, in a public offering of common
shares that closed on February 1, 2011. The Company also raised C$97.8 million
(US$97.8 million), before fees and expenses, through a public sale of
convertible debentures. The amount raised was comprised of an original issuance
in the amount of C$85.0 million (US$85.0 million) that closed on February 22,
2012, along with an overallotment option in the amount of C$12.8 million
(US$12.9 million) that was exercised by the underwriters and closed on February
29, 2012. The Company actively maintains credit facilities to ensure it has
sufficient available funds to meet current and foreseeable financial
requirements at a reasonable cost. Management believes that future funds flows
from operations, working capital and availability under existing banking
arrangements will be adequate to support these financial liabilities, as well as
its capital programs.

The recent political instability in Egypt and Yemen could
present challenges to the Company if the issues persist over an extended period
of time. Continued instability could reduce the Companys ability to access
debt, capital and banking markets. To mitigate potential financial risk factors,
management regularly evaluates operational and financial risk strategies and
continues to monitor the 2012 capital budget and the Companys long-term plans.
The Company has designed its 2012 budget to be flexible allowing spending to be
adjusted for any unforeseen events and changes in commodity prices.

Market Risk

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

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

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

Foreign currency exchange riskAs the Companys
business is conducted primarily in U.S. dollars and its financial instruments
are primarily denominated in U.S. dollars, the Companys exposure to foreign
currency exchange risk relates to certain cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities denominated in Canadian
dollars and Egyptian pounds. Periodically, the Company utilizes derivatives to
manage this risk, however, there are no outstanding derivative foreign currency
exchange contracts as at December 31, 2011. When assessing the potential impact
of foreign currency exchange risk, the Company believes 10% volatility is a
reasonable measure. The effect of a 10% increase or decrease in the value of the
Canadian dollar against the U.S. dollar would not have a material impact on net
earnings for the year ended December 31, 2011. The Company maintains Egyptian
pound cash balances to offset the Egyptian pound liabilities, and therefore, the
Company believes its exposure to Egyptian pound fluctuations is not
significant.

13

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

Interest rate risk Fluctuations in interest rates
could result in a change in the amount the Company pays to service
variable-interest, U.S.-dollar-denominated debt. No derivative contracts were
entered into during 2011 to mitigate this risk. When assessing interest rate
risk applicable to the Companys variable-interest, U.S.-dollar-denominated
debt, the Company believes 1% volatility is a reasonable measure. The effect of
interest rates increasing by 1% would decrease the Companys net earnings by
$0.6 million for the year ended December 31, 2011. The effect of interest rates
decreasing by 1% would increase the Companys net earnings by $0.6 million for
year ended December 31, 2011.

Credit Risk

Credit risk is the risk of loss if counterparties do not
fulfill their contractual obligations. The Companys exposure to credit risk
primarily relates to accounts receivable, the majority of which are in respect
of oil operations and derivative commodity contracts. The Company is and may in
the future be exposed to third-party credit risk through its contractual
arrangements with its current or future joint venture partners, marketers of its
petroleum production and other parties, including the governments of Egypt and
Yemen. Significant changes in the oil industry, including fluctuations in
commodity prices and economic conditions, environmental regulations, government
policy, royalty rates and other geopolitical factors, could adversely affect the
Companys ability to realize the full value of its accounts receivable. The Company currently has, and historically has had, a significant
account receivable outstanding from the Government of Egypt. While the
Government of Egypt does make payments on these amounts owing, the timing of
these payments has historically been longer than normal industry standard. The
recent political unrest in Egypt has increased the delay in payments. Despite
these factors, the Company still expects to collect this account receivable in
full, although there can be no assurance that this will occur. In the event the
Government of Egypt fails to meet its obligations, or other third-party
creditors fail to meet their obligations to the Company, such failures could
individually or in the aggregate have a material adverse effect on the Company,
its cash flow from operating activities and its ability to conduct its ongoing
capital expenditure program. The Company has not experienced any material credit
loss in the collection of accounts receivable to date.

In Egypt, the Company sold all of its 2011 and 2010 production
to one purchaser. In Yemen, the Company sold all of its 2011 and 2010 Block 32
production to one purchaser and all of its 2011 and 2010 Block S-1 production to
one purchaser. Management considers such transactions normal for the Company and
the international oil industry in which it operates.

Liquidity Risk

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

To mitigate these risks, the Company raised C$75.0 million
(US$75.6 million), before fees and expenses, in a public offering that closed on
February 1, 2011. The Company also raised C$97.8 million (US$97.9 million),
before fees and expenses, through a public sale of convertible debentures. The
amount raised was comprised of an original issuance in the amount of C$85.0
million (US$85.0 million) that closed on February 22, 2012, along with an
overallotment option in the amount of C$12.8 million (US$12.9 million) that was
exercised by the underwriters and closed on February 29, 2012. The Company
actively maintains credit facilities to ensure it has sufficient available funds
to meet current and foreseeable financial requirements at a reasonable cost.
Management believes that future funds flows from operations, working capital and
availability under existing banking arrangements will be adequate to support
these financial liabilities, as well as its capital programs.

Exchange controls may prevent the Company from transferring
funds abroad. In Egypt, the Government have imposed monetary and currency
exchange control measures that include restrictions on the free disposition of
funds deposited with banks and tight restrictions on transferring funds abroad,
with certain exceptions for transfers related to foreign trade and other
authorized transactions approved by the country's central bank. The Egyptian
central bank may require prior authorization and may or may not grant such
authorization for the Company's foreign subsidiaries to make dividend payments
to it and there may be a tax imposed with respect to the expatriation of the
proceeds from the Company's foreign subsidiaries.

To date, the Company has experienced no difficulties with
transferring funds abroad.

Operational Risk

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

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

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

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

14

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

Safety, Environmental and Regulatory Risk

To mitigate environmental risks, the Company conducts its
operations to ensure compliance with government regulations and guidelines.
Monitoring and reporting programs for environmental health and safety
performance in day-to-day operations, as well as inspections and assessments,
are designed to provide assurance that environmental and regulatory standards
are met. Security risks are managed through security procedures designed to
protect TransGlobes personnel and assets. The Company has a Whistleblower
Protection Policy which protects employees if they raise any concerns regarding
TransGlobes operations, accounting or internal control matters.

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

Political Risk

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

While the recent civil unrest in Egypt and Yemen has created
uncertainty regarding the Companys political risk, management believes that the
Company is well positioned to adapt to this situation due to its increasing
production, manageable debt levels, positive cash generation from operations and
the availability of cash and cash equivalents. However, if the political issues
in Egypt and Yemen continue for an extended period of time, the Company may be
forced to reduce its capital spending and participate in fewer wells than
anticipated, which will have a negative effect on production volumes and cash
flows.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in accordance with IFRS
requires that management make appropriate decisions with respect to the
selection of accounting policies and in formulating estimates and assumptions
that affect the reported amount of assets, liabilities, revenues and expenses.
The following is included in the MD&A to aid the reader in assessing the
critical accounting policies and practices of the Company. The information will
also aid in assessing the likelihood of materially different results being
reported depending on managements assumptions and changes in prevailing
conditions which affect the application of these policies and practices.
Significant accounting policies are disclosed in Note 3 of the Consolidated
Financial Statements.

Oil and Gas Reserves

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

Property and Equipment and Intangible Exploration and
Evaluation Assets

Recognition and measurement

The Company accounts for exploration and evaluation (E&E)
costs, in accordance with the requirements of IFRS 6: Exploration for and
Evaluation of Mineral Resources. E&E costs related to each license/prospect
are initially capitalized within intangible exploration and evaluation assets.
Such E&E costs may include costs of license acquisition, technical services
and studies, seismic acquisition, exploration drilling and testing, directly
attributable expenses, including remuneration of production personnel and
supervisory management, and the projected costs of retiring the assets (if any),
but do not include pre-licensing costs incurred prior to having obtained the
legal rights to explore an area, which are expensed directly to earnings as they
are incurred.

Tangible assets acquired for use in E&E activities are
classified as other assets; however, to the extent that such a tangible asset is
consumed in developing an intangible exploration asset, the amount reflecting
that consumption is recorded as part of the cost of the intangible exploration
and evaluation asset.

Intangible exploration and evaluation assets are not depleted.
They are carried forward until technical feasibility and commercial viability of
extracting a mineral resource is considered to be determined. The technical
feasibility and commercial viability is considered to be determined when proved
and/or probable reserves are determined to exist or they can be empirically
supported with actual production data or conclusive formation tests. A review of
each concession agreement is carried out at least annually. Intangible
exploration and evaluation assets are transferred to petroleum properties as
development and production (D&P) assets upon determination of technical
feasibility and commercial viability.

15

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

Petroleum properties and other assets are measured at cost less
accumulated depletion, depreciation, and amortization, and accumulated
impairment losses. The initial cost of an asset comprises its purchase price or
construction cost, any costs directly attributable to bringing the asset into
operation, including qualifying E&E costs on reclassification from
intangible exploration and evaluation assets, and for qualifying assets, where
applicable, borrowing costs. When significant parts of an item of property and
equipment have different useful lives, they are accounted for as separate
items.

As at January 1, 2010, the date of transition to IFRS, the cost
of petroleum properties and other assets was determined by reference to IFRS 1:
First-time Adoption of International Financial Reporting Standards. The
methodology adopted for initial recognition of these costs at transition was the
cost model, whereby all non-petroleum assets and all E&E assets were
measured at the amount recognized under the Companys previous accounting
framework, Canadian GAAP, and assets in the development and production phases
were measured at the amount determined for the cost centre to which they relate.
The adopted process allocated the development and production asset amounts to
the underlying assets pro rata based on reserve values as at the date of
transition.

Gains and losses on disposal of items of property and equipment
are determined by comparing the proceeds from disposal with the carrying amount
of property and equipment and are recognized in earnings immediately.

Subsequent costs

Costs incurred subsequent to the determination of technical
feasibility and commercial viability and the costs of replacing parts of
property and equipment are recognized as petroleum properties or other assets
only when they increase the future economic benefits embodied in the specific
asset to which they relate. All other expenditures are recognized in earnings as
incurred. Such capitalized property and equipment generally represent costs
incurred in developing Proved and/or Probable reserves and bringing in or
enhancing production from such reserves, and are accumulated on a field or
geotechnical area basis.

The carrying amount of any replaced or sold component is
derecognized.

Depletion, depreciation and amortization

The depletion, depreciation and amortization of petroleum
properties and other assets, and any eventual reversal thereof, are recognized
in earnings.

The net carrying value of D&P assets included in petroleum
properties is depleted using the unit of production method by reference to the
ratio of production in the year to the related proved and probable reserves
using estimated future prices and costs. Costs subject to depletion include
estimated future development costs necessary to bring those reserves into
production. These estimates are reviewed by independent reserve engineers at
least annually.

Proved and probable reserves are estimated using independent
reserve evaluator reports and represent the estimated quantities of crude oil,
natural gas and natural gas liquids which geological, geophysical and
engineering data demonstrate with a specified degree of certainty to be
recoverable in future years from known reservoirs and which are considered
commercially viable. The specified degree of certainty must be a minimum 90%
statistical probability that the actual quantity of recoverable reserves will be
more than the amount estimated as proved and a minimum 50% statistical
probability for proved and probable reserves to be considered commercially
viable.

Furniture and fixtures are depreciated at declining balance
rates of 20% to 30%, whereas vehicles and leasehold improvements are depreciated
on a straight-line basis over their estimated useful lives.

Depreciation methods, useful lives and residual values are
reviewed at each reporting date.

Production Sharing Agreements

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

Financial Instruments

Non-derivative financial instruments

Non-derivative financial instruments comprise investment in
accounts receivable, cash and cash equivalents, restricted cash, loans and
borrowings, and accounts payable and accrued liabilities. Non-derivative
financial instruments are recognized initially at fair value plus, for
instruments not at fair value through profit or loss, any directly attributable
transaction costs. Subsequent to initial recognition non-derivative financial
instruments are measured as described below.

16

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|MANAGEMENTS DISCUSSION AND ANALYSIS
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Financial assets at fair value through profit or loss

An instrument is classified at fair value through profit or
loss if it is held for trading or is designated as such upon initial
recognition, such as cash and cash equivalents, and restricted cash. Financial
instruments are designated at fair value through profit or loss if the Company
makes purchase and sale decisions based on their fair value in accordance with
the Companys documented risk management strategy. Upon initial recognition, any
transaction costs attributable to the financial instruments are recognized
through earnings when incurred. Financial instruments at fair value through
profit or loss are measured at fair value, and changes therein are recognized in
earnings.

Other

Other non-derivative financial instruments, such as accounts
receivable, loans and borrowings, and accounts payable and accrued liabilities
are measured at amortized cost using the effective interest method, less any
impairment losses

Derivative financial instruments

The Company has entered into certain financial derivative
contracts in order to reduce its exposure to market risks from fluctuations in
commodity prices. These instruments are not used for trading or speculative
purposes. The Company has not designated its financial derivative contracts as
effective accounting hedges, and thus has not applied hedge accounting, even
though the Company considers all commodity contracts to be economic hedges. As a
result, all financial derivative contracts are classified as fair value through
profit or loss and are recorded on the balance sheet at fair value. Attributable
transaction costs are recognized in earnings when incurred. The estimated fair
value of all derivative instruments is based on quoted market prices and/or
third party market indications and forecasts.

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 measured at
fair value through profit or loss. Changes in the fair value of separable
embedded derivatives are recognized immediately in profit or loss.

The Company applies trade-date accounting for the recognition
of a purchase of derivative contracts.

CHANGES IN ACCOUNTING POLICIES

New Accounting
  Policies

International Financial Reporting Standards (IFRS)

In October 2009, the Accounting Standards Board issued a third
and final IFRS Omnibus Exposure Draft confirming that publicly accountable
enterprises were required to apply IFRS, in full and without modification, for
all financial periods beginning on or after January 1, 2011. The adoption of
IFRS required the restatement, for comparative purposes, of amounts reported by
the Company for the year ended December 31, 2010, including the opening balance
sheet as at January 1, 2010. The Companys first annual financial statements
prepared under IFRS are the financial statements for the year ended December 31,
2011. These financial statements include reconciliations of the previously
disclosed comparative period financial statements prepared in accordance with
Canadian GAAP to IFRS, as set out in Note 26.

The following standards and interpretations have not been
adopted as they apply to future periods. They may result in changes to the
Companys existing accounting policies and other note disclosures:

IFRS 7 (revised)Financial Instruments: Disclosures

In October 2010, the International Accounting Standards Board
(IASB) issued amendments to IFRS 7 to provide additional disclosure on the
transfer of financial assets including the possible effects of any residual
risks that the transferring entity retains. These amendments are effective for
annual periods beginning after July 1, 2011; therefore, the Company will adopt
them for the year ending December 31, 2012. The Company is currently evaluating
the impact of these amendments to its Consolidated Financial Statements, but the
impact, if any, is not expected to be material.

IFRS 9 (revised) Financial Instruments: Classification
  and Measurement

In November 2009, the IASB issued IFRS 9 as part of its project
to replace IAS 39, Financial Instruments: Recognition and Measurement.
In October 2010, the IASB updated IFRS 9 to include the requirements for
financial liabilities. IFRS 9 replaces the multiple rules in IAS 39 with a single approach
to determine whether a financial asset is measured at amortized cost or fair
value. The approach in IFRS 9 is based on how an entity manages its financial
instruments in the context of its business model and the contractual cash flow
characteristics of the financial assets. IFRS 9 is effective for annual periods
beginning on or after January 1, 2013. The Company is currently evaluating the
impact of this standard on its Consolidated Financial Statements.

IFRS 10 (new) Consolidated Financial Statements

In May 2011, the IASB issued IFRS 10 to replace SIC-12,
ConsolidationSpecial Purpose Entities, and parts of
IAS 27, Consolidated and Separate Financial Statements. IFRS 10
establishes principles for the presentation and preparation of consolidated
financial statements when an entity controls one or more other entities. IFRS 10
is effective for annual periods beginning on or after January 1, 2013. The
Company is currently evaluating the impact of this standard on its Consolidated
Financial Statements.

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|MANAGEMENTS DISCUSSION AND ANALYSIS
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IFRS 11 (new) Joint Arrangements

In May 2011, the IASB issued IFRS 11 to replace IAS 31,
Interests in Joint Ventures, and SIC-13, Jointly Controlled
EntitiesNon-monetary Contributions by Venturers. IFRS 11
requires entities to follow the substance rather than legal form of a joint
arrangement and removes the choice of accounting method. IFRS 11 is effective
for annual periods beginning on or after January 1, 2013. The Company is
currently evaluating the impact of this standard on its Consolidated Financial
Statements, but the impact, if any, is not expected to be material.

IFRS 12 (new) Disclosure of Interests in Other Entities

In May 2011, the IASB issued IFRS 12, which aggregates and
amends disclosure requirements included within other standards. IFRS 12 requires
entities to provide disclosures about subsidiaries, joint arrangements,
associates and unconsolidated structured entities. IFRS 12 is effective for
annual periods beginning on or after January 1, 2013. The Company is currently
evaluating the impact of this standard on its Consolidated Financial Statements.

IFRS 13 (new) Fair Value Measurement

In May 2011, the IASB issued IFRS 13 to clarify the definition
of fair value and provide guidance on determining fair value. IFRS 13 amends
disclosure requirements included within other standards and establishes a single
framework for fair value measurement and disclosure. IFRS 13 is effective for
annual periods beginning on or after January 1, 2013. The Company is currently
evaluating the impact of this standard on its Consolidated Financial Statements.

IAS 1 (revised) Presentation of Financial Statements

In June 2011, the IASB issued amendments to IAS 1 to require
separate presentation for items of other comprehensive income that would be
reclassified to profit or loss in the future from those that would not. These
amendments are effective for annual periods beginning on or after July 1, 2012.
The Company is currently evaluating the impact of these amendments to its
Consolidated Financial Statements.

IAS 12 (revised) Income Taxes

In December 2010, the IASB issued amendments to IAS 12 to
remove subjectivity in determining on which basis an entity measures the
deferred tax relating to an asset. The amendments introduce a presumption that
entities will assess whether the carrying value of an asset will be recovered
through the sale of the asset. These amendments are effective for annual periods
beginning on or after January 1, 2012. The Company is currently evaluating the
impact of these amendments to its Consolidated Financial Statements, but the
impact, if any, is not expected to be material.

IAS 19 (revised) Employee Benefits

In June 2011, the IASB issued amendments to IAS 19 to revise
certain aspects of the accounting for pension plans and other benefits. The
amendments eliminate the corridor method of accounting for defined benefit
plans, change the recognition pattern of gains and losses, and require
additional disclosures. These amendments are effective for annual periods
beginning on or after January 1, 2013. The Company does not expect the impact of
this standard on its Consolidated Financial Statements to be material.

IAS 28 (revised) Investments in Associates and Joint
  Ventures

In May 2011, the IASB issued amendments to IAS 28 to prescribe
the accounting for investments in associates and set out the requirements for
applying the equity method when accounting for investments in associates and
joint ventures. These amendments are effective for annual periods beginning on
or after January 1, 2013. The Company is currently evaluating the impact of
these amendments to its Consolidated Financial Statements, but the impact, if
any, is not expected to be material.

DISCLOSURE CONTROLS AND PROCEDURES

As of December 31, 2011, an evaluation was carried out under
the supervision, and with the participation, of the Companys management, including the Chief Executive Officer and
Chief Financial Officer, on the effectiveness of the Companys disclosure
controls and procedures. Based on that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that as of the end of the fiscal year, the
design and operation of these disclosure controls and procedures were effective
to ensure that information required to be disclosed by the Company in its annual
filings is recorded, processed, summarized and reported within the specified
time periods.

INTERNAL CONTROLS OVER FINANCIAL REPORTING

TransGlobes management designed and implemented internal
controls over financial reporting, as defined under National Instrument 52-109 Certification of Disclosure in Issuers
Annual and Interim Filings, of the Canadian Securities Administrators and as
defined in Rule 13a-15 under the US Securities Exchange Act of 1934. Internal
controls over financial reporting is a process designed under the supervision of
the Chief Executive Officer and the Chief Financial Officer and effected by the
Board of Directors, management and other personnel to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with IFRS, focusing
in particular on controls over information contained in the annual and interim
financial statements. Due to its inherent limitations, internal controls over
financial reporting may not prevent or detect misstatements on a timely basis. A
system of internal controls over financial reporting, no matter how well
conceived or operated, can provide only reasonable, not absolute, assurance
  that the objectives of the internal controls over financial reporting are met.
  Also, projections of any evaluation of the effectiveness of internal control
  over financial reporting to future periods are subject to the risk that the
  controls may become inadequate because of changes in conditions, or that the
degree of compliance with policies or procedures may deteriorate.

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|MANAGEMENTS DISCUSSION AND ANALYSIS
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All changes in accounting policies that were required to
address reporting and the adoption of IFRS have been made in consideration of
the integrity of internal control over financial reporting and disclosure
controls and procedures. Throughout TransGlobes transition project, the Company
ensured that all changes in accounting policies relating to IFRS had controls
and procedures to ensure that information was captured appropriately. With
respect to internal controls over financial reporting and disclosure controls
and procedures, the Company did not require any material changes in control
procedures as a result of the transition to IFRS; however, the Company
supplemented its existing control procedures for the transition period by
increasing the level of third party consultation, management and executive
involvement, monitoring, and governance, as well as the level of awareness and
education of key parties involved in the transition project in order to ensure
the project was successful.

Management has assessed the effectiveness of the Companys
internal control over financial reporting based on the Committee of Sponsoring Organizations of the Treadway
Commission framework on Internal ControlIntegrated
Framework. Based on this assessment, management concluded that the Companys
internal control over financial reporting was effective as at December 31, 2011.
No changes were made to the Companys internal control over financial reporting
during the year ended December 31, 2011 that have materially affected, or are
reasonably likely to materially affect, the internal controls over financial
reporting.

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