---







---

| | REPORTOF              
| | ----------------------
| | INDEPENDENT REGISTERED
| | CHARTERED ACCOUNTANTS 

To
  the Shareholders TransGlobe Energy Corporation:

We
  have audited the consolidated balance sheets of TransGlobe Energy Corporation
  as at December 31, 2005 and 2004 and the consolidated statements of income and
  retained earnings (deficit) and cash flows for the years then ended. These financial
  statements are the responsibility of the Company’s management. Our responsibility
  is to express an opinion on these financial statements based on our audits.

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

In
  our opinion, these consolidated financial statements present fairly, in all
  material respects, the financial position of TransGlobe Energy Corporation as
  at December 31, 2005 and 2004 and the results of its operations and its cash
  flows for the years then ended in accordance with Canadian generally accepted
  accounting principles.

The
  Company is not required to have, nor were we engaged to perform, an audit of
  its internal control over financial reporting. Our audit included consideration
  of internal control over financial reporting as a basis for designing audit
  procedures that are appropriate in the circumstances, but not for the purpose
  of expressing an opinion on the effectiveness of the Company’s internal
  control over financial reporting. Accordingly we express no such opinion.

| |                                             
| | --------------------------------------------
| | Independent Registered Chartered Accountants
| | Calgary, Alberta, Canada                    
| | February 24, 2006                           

40

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|CONSOLIDATED STATEMENTS OF
      INCOME
|---------------------------------------
|AND RETAINEDEARNINGS
      ( DEFICIT ) 

|(Expressed in thousands of U.S. Dollars)               |       | **Year Ended**        |   |   | Year Ended        |  
|------------------------------------------------------ | ----- | --------------------- | - | - | ----------------- | -
|                                                       |       | **December 31, 2005** |   |   | December 31, 2004 |  
|                                                       |       |                       |   |   |                   |  
|REVENUE                                                |       |                       |   |   |                   |  
|Oil
      and gas sales, net of royalties              | $     | 58,911                |   | $ | 31,630            |  
|Unrealized gain on
      commodity contracts (Note 13) |       | 83                    |   |   | -                 |  
|Other
      income                                     |       | 46                    |   |   | 13                |  
|                                                       |       | 59,040                |   |   | 31,643            |  
|                                                       |       |                       |   |   |                   |  
|EXPENSES                                               |       |                       |   |   |                   |  
|Operating                                              |       | 10,253                |   |   | 7,064             |  
|General and administrative                             |       | 2,821                 |   |   | 1,664             |  
|Stock-based
      compensation (Note 7e)               |       | 723                   |   |   | 1,310             |  
|Foreign exchange loss                                  |       | 42                    |   |   | 289               |  
|Interest                                               |       | 8                     |   |   | 56                |  
|Depletion, depreciation
      and accretion            |       | 16,990                |   |   | 10,346            |  
|                                                       |       | 30,837                |   |   | 20,729            |  
|                                                       |       |                       |   |   |                   |  
|Income before income taxes                             |       | 28,203                |   |   | 10,914            |  
|                                                       |       |                       |   |   |                   |  
|Income taxes (Note 8)                                  |       |                       |   |   |                   |  
|- future                                               |       | 471                   |   |   | (285              | )
|-
      current                                        |       | 7,882                 |   |   | 5,280             |  
|                                                       |       | 8,353                 |   |   | 4,995             |  
|NET INCOME                                             |       | 19,850                |   |   | 5,919             |  
|                                                       |       |                       |   |   |                   |  
|Deficit, beginning of year                             |       | (685                  | ) |   | (6,604            | )
|RETAINED EARNINGS (DEFICIT), END OF YEAR               | $     | 19,165                |   | $ | (685              | )
|                                                       |       |                       |   |   |                   |  
|Net income per share(Note 10)                          |       |                       |   |   |                   |  
|Basic                                                  | **$** | **0.34**              |   | $ | 0.11              |  
|Diluted                                                | **$** | **0.33**              |   | $ | 0.10              |  

|41
|--

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CONSOLIDATED BALANCE SHEETS

|(Expressed
      in thousands of U.S. Dollars) |   | December 31,**2005** |  |   | December 31, 2004 |  
|---------------------------------------------- | - | -------------------- |  | - | ----------------- | -
|                                               |   |                      |  |   |                   |  
|ASSETS                                         |   |                      |  |   |                   |  
|Current                                        |   |                      |  |   |                   |  
|Cash
      and cash equivalents                | $ | 12,221               |  | $ | 4,988             |  
|Accounts receivable                            |   | 7,414                |  |   | 6,029             |  
|Oil
      inventory                            |   | 436                  |  |   | 389               |  
|Prepaid expenses                               |   | 463                  |  |   | 274               |  
|Unrealized
      commodity contracts (Note 13) |   | 83                   |  |   | -                 |  
|                                               |   | 20,617               |  |   | 11,680            |  
|Property and equipment                         |   |                      |  |   |                   |  
|Republic of Yemen (Note 2)                     |   | 30,898               |  |   | 26,054            |  
|Canada (Note 3)                                |   | 30,261               |  |   | 19,111            |  
|Arab Republic of Egypt (Note 4)                |   | 2,512                |  |   | 992               |  
|                                               |   | 63,671               |  |   | 46,157            |  
|Future income tax asset (Note 8)               |   | 1,886                |  |   | 2,299             |  
|Deferred financing costs (Note 5)              |   | 112                  |  |   | 386               |  
|                                               | $ | 86,286               |  | $ | 60,522            |  
|                                               |   |                      |  |   |                   |  
|LIABILITIES                                    |   |                      |  |   |                   |  
|Current                                        |   |                      |  |   |                   |  
|Accounts payable and
      accrued liabilities | $ | 11,146               |  | $ | 8,841             |  
|                                               |   |                      |  |   |                   |  
|Asset retirement obligations (Note 6)          |   | 1,503                |  |   | 902               |  
|                                               |   |                      |  |   |                   |  
|                                               |   | 12,649               |  |   | 9,743             |  
|                                               |   |                      |  |   |                   |  
|Commitments and contingencies (Note 12)        |   |                      |  |   |                   |  
|                                               |   |                      |  |   |                   |  
|SHAREHOLDERS EQUITY                           |   |                      |  |   |                   |  
|Share capital (Note 7)                         |   | 48,922               |  |   | 47,296            |  
|Contributed surplus (Note 7e)                  |   | 1,908                |  |   | 1,593             |  
|Cumulative translation adjustment              |   | 3,642                |  |   | 2,575             |  
|Retained earnings (deficit)                    |   | 19,165               |  |   | (685              | )
|                                               |   | 73,637               |  |   | 50,779            |  
|                                               |   |                      |  |   |                   |  
|                                               | $ | 86,286               |  | $ | 60,522            |  

APPROVED BY THE BOARD

|/s/ Ross G. Clarkson       | /s/
      Lloyd W. Herrick
|-------------------------- | --------------------------
|Ross G. Clarkson, Director | Lloyd W. Herrick, Director

42

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|CONSOLIDATED STATEMENTS
      OF CASH FLOWS
|-------------------------------------------

|                                                                   |   | Year Ended        |   |   | Year Ended        |  
|------------------------------------------------------------------ | - | ----------------- | - | - | ----------------- | -
|(Expressed
      in thousands of U.S. Dollars)                     |   | December 31, 2005 |   |   | December 31, 2004 |  
|                                                                   |   |                   |   |   |                   |  
|CASH FLOWS RELATED TO THE FOLLOWING
      ACTIVITIES:              |   |                   |   |   |                   |  
|                                                                   |   |                   |   |   |                   |  
|OPERATING                                                          |   |                   |   |   |                   |  
|Net income                                                         | $ | 19,850            |   | $ | 5,919             |  
|Adjustments
      for:                                             |   |                   |   |   |                   |  
|Depletion, depreciation and accretion                              |   | 16,990            |   |   | 10,346            |  
|Amortization of deferred financing costs                           |   | 291               |   |   | 35                |  
|Future income taxes                                                |   | 471               |   |   | (285              | )
|Stock-based compensation                                           |   | 723               |   |   | 1,310             |  
|Unrealized gain on commodity contracts                             |   | (83               | ) |   | -                 |  
|Settlement of asset retirement obligations                         |   | (165              | ) |   | -                 |  
|Changes in non-cash
      working capital (Note 9)                 |   | 1,280             |   |   | (4,259            | )
|                                                                   |   | 39,357            |   |   | 13,066            |  
|                                                                   |   |                   |   |   |                   |  
|FINANCING                                                          |   |                   |   |   |                   |  
|Issue of common shares
      for cash                              |   | 1,218             |   |   | 10,006            |  
|Deferred
      financing costs                                     |   | (17               | ) |   | (421              | )
|Changes in non-cash
      working capital (Note 9)                 |   | (24               | ) |   | 24                |  
|                                                                   |   | 1,177             |   |   | 9,609             |  
|                                                                   |   |                   |   |   |                   |  
|INVESTING                                                          |   |                   |   |   |                   |  
|Exploration and development
      expenditures                     |   |                   |   |   |                   |  
|Republic of Yemen                                                  |   | (17,939           | ) |   | (15,275           | )
|Canada                                                             |   | (13,189           | ) |   | (10,100           | )
|Arab Republic of Egypt                                             |   | (1,526            | ) |   | (992              | )
|Changes in non-cash
      working capital (Note 9)                 |   | (509              | ) |   | 4,678             |  
|                                                                   |   | (33,163           | ) |   | (21,689           | )
|                                                                   |   |                   |   |   |                   |  
|Effect of exchange rate changes on cash
      and cash equivalents |   | (138              | ) |   | (450              | )
|                                                                   |   |                   |   |   |                   |  
|NET INCREASE IN CASH AND CASH EQUIVALENTS                          |   | 7,233             |   |   | 536               |  
|                                                                   |   |                   |   |   |                   |  
|CASH AND CASH EQUIVALENTS, BEGINNING
      OF YEAR                 |   | 4,988             |   |   | 4,452             |  
|                                                                   |   |                   |   |   |                   |  
|CASH AND CASH EQUIVALENTS, END OF
      YEAR                       | $ | 12,221            |   | $ | 4,988             |  

|43
|--

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

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Consolidated
  Financial Statements include the accounts of TransGlobe Energy Corporation and
  subsidiaries (“TransGlobe” or the “Company”), and are
  presented in accordance with Canadian generally accepted accounting principles
  (information prepared in accordance with generally accepted accounting principles
  in the United States is included in Note 14). In these Consolidated Financial
  Statements, unless otherwise indicated, all dollar amounts are expressed in
  United States (U.S.) dollars. All references to US$ or to $ are to United States
  dollars and references to C$ are to Canadian dollars.

**Nature
  of Business and Principles of Consolidation**

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

- Block 32, Block S-1 and Block 72 within the Republic of Yemen.
- the Western Canadian Sedimentary Basin within Canada.
- Nuqra Block 1 within the Arab Republic of Egypt.

**Joint Ventures**

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

**Currency
  Translation**

The accounts
  of the self-sustaining Canadian operations are translated using the current
  rate method, whereby assets and liabilities are translated at year end exchange
  rates, while revenues and expenses are translated using average annual rates.
  Translation gains and losses relating to the self-sustaining Canadian operations
  are included as a separate component of shareholders’ equity.

Monetary
  assets and liabilities of the Company that are denominated in foreign currencies
  are translated into its functional currency at the rates of exchange in effect
  at the period end date. Any gains or losses are recorded in the Consolidated
  Statements of Income and Retained Earnings (Deficit).

**Measurement
  Uncertainty**

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

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

44

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Revenue
  Recognition

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

Income
  Taxes

The
  Company records income taxes using the liability method. Under this method,
  future income tax assets and liabilities are measured using the substantively
  enacted tax rates expected to apply to taxable income in the years in which
  the temporary differences are expected to be recovered or settled.

Flow
  Through Shares

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

Per
  Share Amounts

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

Cash
  and Cash Equivalents

Cash
  includes actual cash held and short-term investments such as treasury bills
  with original maturity of less than three months.

Inventories

Product
  inventories are valued at the lower of average cost and net realizable value
  on a first-in, first-out basis.

Property
  and Equipment

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

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

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

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

|45
|--

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An
  impairment loss is recognized in net income if the carrying amount of a country
  (cost centre) is not recoverable and the carrying amount of the cost centre
  exceeds its fair value. The carrying amount of the cost centre is not recoverable
  if the carrying amount exceeds the sum of the undiscounted cash flows from proved
  reserves. If the sum of the cash flows is less than carrying amount, the impairment
  is the amount by which the carrying amount exceeds the sum of:

i.
  the fair value of proved plus probable reserves; and ii.
  the costs of unproved properties that have been subject to a separate impairment
  test and contain no probable

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

Capitalization
  of Costs

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

Amortization
  of Deferred Financing Costs

Deferred
  financing costs are charged to expense over the term of the related loan facility.

Asset
  Retirement Obligations

The
  fair value of estimated asset retirement obligations is recognized in the Consolidated
  Balance Sheet when the incurred. Asset retirement obligations include those
  legal obligations where the Company will be required ible long-lived assets
  to retire tang such as producing well sites. The asset retirement cost, equal
  to the estimated fair value of the asset retirement obligation, part of the
  cost of the related long-lived asset. Asset retirement costs for natural gas
  and crude oil assets are amortized production method.

Amortization
  of asset retirement costs are included in depletion, depreciation and accretion
  on the Consolidated Statements of Income and Retained Earnings (Deficit). Increases
  in the asset retirement obligation resulting from the passage of time are recorded
  as depletion, depreciation and accretion in the Consolidated Statements of Income
  and Retained Earnings (Deficit). Actual expenditures incurred are charged against
  the accumulated obligation.

Stock-based
  Compensation

The
  Company records compensation expense in the Consolidated Financial Statements
  for stock options granted to and directors using the fair value method. Fair
  values are determined using the Black-Scholes option pricing model. Compensation
  are recognized over the vesting period.

Derivative
  Financial Instruments

Derivative
  financial instruments are used by the Company to manage its exposure to market
  risks relating to commodity The Companys policy is not to utilize derivative
  financial instruments for speculative purposes.

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

46

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2. PROPERTY AND EQUIPMENT - REPUBLIC OF YEMEN

|(000s)                                        |   | 2005    |   |   | 2004    |  
|---------------------------------------------- | - | ------- | - | - | ------- | -
|Oil and gas properties        -
      Block 32 | $ | 25,790  |   | $ | 21,651  |  
|-
      Block S-1                              |   | 37,269  |   |   | 24,782  |  
|-
      Block 72                               |   | 1,479   |   |   | 25      |  
|-
      Other                                  |   | 90      |   |   | 90      |  
|Accumulated depletion and depreciation         |   | (33,730 | ) |   | (20,494 | )
|                                               | $ | 30,898  |   | $ | 26,054  |  

The
  Company has working interests in three blocks in Yemen: Block 32, Block S-1
  and Block 72. The Block 32 (13.81087%) Production Sharing Agreement (“PSA”)
  continues to 2020, with provision for a five year extension. The Block S-1 (25%)
  PSA continues to 2023, with provision for a five year extension. The Contractor
  (Joint Venture Partners) is in the first exploration period of the Block 72
  (33%) PSA which ends in January 2008, at which time the Contractor can elect
  to proceed to the second exploration period.

During
  the year the Company capitalized overhead costs relating to exploration and
  development activities of $351,000 (2004 - $301,000). Unproven property costs
  in the amount of $1,479,000 in 2005 ($Nil in 2004) were excluded in the costs
  subject to depletion and depreciation representing the costs incurred at Block
  72.

3. PROPERTY AND EQUIPMENT - CANADA

|(000s)                                |       | 2005   |   |   | 2004   |  
|-------------------------------------- | ----- | ------ | - | - | ------ | -
|Oil and gas properties                 | **$** | 38,144 |   | $ | 23,444 |  
|Furniture and fixtures                 |       | 867    |   |   | 366    |  
|Accumulated depletion and depreciation |       | (8,750 | ) |   | (4,699 | )
|                                       | **$** | 30,261 |   | $ | 19,111 |  

During
  the year the Company capitalized overhead costs relating to exploration and
  development activities of (2004 - $257,000).

4. PROPERTY AND EQUIPMENT - ARAB REPUBLIC OF EGYPT

|(000s)                  |   | 2005  |   |   | 2004 | 
|------------------------ | - | ----- | - | - | ---- | 
|Oil and gas properties   | $ | 2,457 |   | $ | 989  | 
|Furniture and fixtures   |   | 61    |   |   | 3    | 
|Accumulated depreciation |   | (6    | ) |   | -    | 
|                         | $ | 2,512 |   | $ | 992  | 

The
  Contractor is in the initial exploration period for two years of the Concession
  Agreement which expires in successive extensions to the initial exploration
  period, each three years, are available to the Contractor at its option.

The
  Company capitalized general and administrative costs relating to the start-up
  of TransGlobe Petroleum Egypt Inc. of $1,007,000 (2004 - $453,000). The remaining
  costs related to geological and geophysical activity. Unproven property costs
  associated with Nuqra Block 1 in the amount of $2,457,000 in 2005 (2004 - $989,000)
  were excluded from costs subject to depletion and depreciation.

|47
|--

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5. LONG-TERM DEBT

The
  Company has a $7,000,000 loan facility which expires May 2006. The loan facility
  bears interest at the Eurodollar Rate plus four percent and is secured by a
  first floating charge debenture over all assets of the Company, a general assignment
  of book debts and certain covenants, among other things. At December 31, 2005
  $Nil (2004 - $Nil) was drawn on these loan facilities.

During
  the year the Company spent $17,000 (2004 - $421,000) to secure the loan facility,
  of which $291,000 (2004 - $35,000) was amortized to the income statement and
  the remaining $112,000 was deferred and will be amortized to income over the
  term of the
  loan facility.

6. ASSET RETIREMENT OBLIGATIONS

The
  following table presents the reconciliation of the beginning and ending aggregate
  carrying amount of the obligation associated with the retirement of oil and
  gas properties:

|(000s)                                               |   | 2005  |   |   | 2004 | 
|----------------------------------------------------- | - | ----- | - | - | ---- | 
|Asset retirement obligations, beginning
      of year | $ | 1,902 |   | $ | 467  | 
|Liabilities incurred                                  |   | 638   |   |   | 274  | 
|Liabilities settled                                   |   | (165  | ) |   | -    | 
|Accretion                                             |   | 75    |   |   | 34   | 
|Foreign exchange loss                                 |   | 53    |   |   | 127  | 
|Asset retirement
      obligations, end of year       | $ | 1,503 |   | $ | 902  | 

At
  December 31, 2005, the estimated total undiscounted amount required to settle
  the asset retirement obligations was $2,171,000 (2004 - $1,331,000). These obligations
  will be settled at the end of the useful lives of the underlying assets, which
  currently extend up to 9 years into the future. This amount has been discounted
  using a credit-adjusted risk-free interest rate of 6.5%.

7. SHARE CAPITAL

a) Authorized

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

48

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b)
  Issued

|                                                                               |  | Number    |  |   |        | 
|------------------------------------------------------------------------------ |  | --------- |  | - | ------ | 
|(000s)                                                                        |  | of shares |  |   | Amount | 
|Balance, December 31, 2003                                                     |  | 53,743    |  | $ | 36,996 | 
|Stock options exercised (d)                                                    |  | 523       |  |   | 164    | 
|Bought deal financing net
      of issue costs (c)                             |  | 2,530     |  |   | 8,557  | 
|Bought deal financing over-allotment net of
      issue costs (c)              |  | 380       |  |   | 1,285  | 
|Future
      tax effect of bought deal financing costs (c)                     |  | -         |  |   | 294    | 
|Balance, December 31, 2004                                                     |  | 57,176    |  |   | 47,296 | 
|Stock options exercised (d)                                                    |  | 1,297     |  |   | 1,218  | 
|Transfer
      from contributed surplus related to stock options exercised (e) |  | -         |  |   | 408    | 
|Balance,
      December 31, 2005                                               |  | 58,473    |  | $ | 48,922 | 

c)
  Bought Deal Financing

In
  November 2004, the Company issued 2,530,000 common shares in a bought deal financing
  at C$4.35 per share for net proceeds of US$8,557,000. In December 2004, the
  Company issued an additional 379,500 shares as part of the over-allotment of
  the bought deal financing in November 2004 at C$4.35 per share for net proceeds
  of US$1,285,000. The issue costs were $848,686 for the bought deal financing
  and over-allotment. Share capital is increased and future income tax asset increased
  by the estimated future income taxes recoverable by the Company for the share
  issue expenses.

d)
  Stock Options

The
  Company adopted a new stock option plan in May 2004 (the “Plan”).
  The maximum number of common shares to be issued upon the exercise of options
  granted under the Plan is 5,847,300 common shares. All incentive stock options
  granted under the Plan have a per-share exercise price not less than the trading
  market value of the common shares at the date of grant and vest as to 50% of
  the options, six months after the grant date, and as to the remaining 50%, one
  year from the grant date. Effective February 1, 2005, all new grants of stock
  options will vest one-third on each of the first, second and third anniversaries
  of the grant date.

|                                               | 2005    |   | 2004                 | 
|---------------------------------------------- | ------- | - | -------------------- | 
|                                               | Number  |   | Weighted-            | 
|                                               | of      |   | Average              | 
|(000s
      except per share amounts)         | Options |   | Exercise
      Price | 
|Options outstanding at beginning of
      year | 3,462   |   | $1.15                | 
|Granted                                        | 1,196   |   | $5.31                | 
|Exercised                                      | (1,297  | ) | $0.83                | 
|Expired                                        | -       |   | -                    | 
|Options
      outstanding at end of year       | 3,361   |   | $2.76                | 
|Options
      exercisable at end of year       | 2,165   |   | $1.35                | 

|49
|--

---

The following table summarizes information about the stock options
  outstanding at December 31, 2005:

|         |             | Options Outstanding |           |             | Options Exercisable |          
|-------- | ----------- | ------------------- | --------- | ----------- | ------------------- | ---------
|         |             | Weighted-           |           |             | Weighted-           |          
|         | Number      | Average             |           | Number      | Average             |          
|         | Outstanding | Remaining           | Weighted- | Exercisable | Remaining           | Weighted-
|         | at Dec. 31, | Contractual         | Average   | at Dec. 31, | Contractual         | Average  
|Exercise | 2005        | Life                | Exercise  | 2005        | Life                | Exercise 
|Prices   | (000s)     | (Years)             | Price     | (000s)     | (Years)             | Price    
|C$0.50   | 1,100       | 1.3                 | C$0.50    | 1,100       | 1.3                 | C$0.50   
|C$0.63   | 70          | 2.5                 | C$0.63    | 70          | 2.5                 | C$0.63   
|C$3.40   | 150         | 3.0                 | C$3.40    | 150         | 3.0                 | C$3.40   
|C$3.26   | 700         | 3.2                 | C$3.26    | 700         | 3.2                 | C$3.26   
|C$3.43   | 80          | 3.3                 | C$3.43    | 80          | 3.3                 | C$3.43   
|US$3.25  | 40          | 3.7                 | US$3.25   | 40          | 3.7                 | US$3.25  
|C$4.50   | 25          | 3.9                 | C$4.50    | 25          | 3.9                 | C$4.50   
|C$7.30   | 40          | 4.2                 | C$7.30    | -           | -                   | -        
|C$7.74   | 39          | 4.2                 | C$7.74    | -           | -                   | -        
|C$6.56   | 175         | 4.3                 | C$6.56    | -           | -                   | -        
|C$7.82   | 24          | 4.6                 | C$7.82    | -           | -                   | -        
|C$6.44   | 21          | 4.9                 | C$6.44    | -           | -                   | -        
|C$6.03   | 843         | 4.9                 | C$6.03    | -           | -                   | -        
|US$5.17  | 54          | 4.9                 | US$5.17   | -           | -                   | -        
|         | 3,361       |                     | US$2.76   | 2,165       |                     | US$1.35  

e)
  Stock-based Compensation

Compensation
  expense of $723,000 has been recorded in the Consolidated Statements of Income
  and Retained Earnings (Deficit) in 2005 (2004 - $1,310,000). The fair value
  of all common share options granted is estimated on the date of grant using
  the Black-Scholes option-pricing model. The weighted average fair value of options
  granted during the year and the assumptions used in their determination are
  as noted below:

|                                                         | 2005  | 2004 
|-------------------------------------------------------- | ----- | -----
|Weighted average fair market value
      per option (C$) | 3.38  | 1.84 
|Risk free interest rate (%)                              | 3.86  | 5.17 
|Expected lives (years)                                   | 4.00  | 4.00 
|Expected volatility (%)                                  | 68.19 | 66.37
|Dividend per share                                       | 0.00  | 0.00 

During
  the year, employees exercised 1,297,000 stock options. In accordance with Canadian
  Generally Accepted Accounting Principles, the fair value related to these options
  was $408,000 at time of grant and has been transferred from contributed surplus
  to common shares.

50

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|                                                             |   | 2005  |   |   | 2004  | 
|------------------------------------------------------------ | - | ----- | - | - | ----- | 
|Contributed surplus, beginning of year                       | $ | 1,593 |   | $ | -     | 
|Stock-based compensation expense on adoption of              |   |       |   |   |       | 
|CICA
      section 3870                                      |   | -     |   |   | 283   | 
|Stock-based compensation expense                             |   | 723   |   |   | 1,310 | 
|Transfer of stock-based compensation
      expense to common |   |       |   |   |       | 
|shares related to stock options exercised                    |   | (408  | ) |   | -     | 
|Contributed surplus,
      end of year                       | $ | 1,908 |   | $ | 1,593 | 

8. INCOME TAXES

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

|                                         |       | 2005      |  |   | 2004  |  
|---------------------------------------- | ----- | --------- |  | - | ----- | -
|Temporary differences related to:        |       |           |  |   |       |  
|Oil
      and gas properties             | **$** | **1,555** |  | $ | 2,154 |  
|Non-capital
      losses carried forward |       | 118       |  |   | 457   |  
|Share
      issue expenses               |       | 213       |  |   | 287   |  
|Valuation
      allowance                |       | -         |  |   | (599  | )
|                                         | **$** | **1,886** |  | $ | 2,299 |  

The
  Company has deductible temporary differences of C$385,000 related to non-capital
  losses carried forward, C$722,000 related to share issuance expenses and C$5,243,000
  related to income tax pools in excess of the carrying value of the Company’s
  Canadian property and equipment. The Company also has $12,700,000 of income
  tax losses in the United States of America. The Canadian losses carried forward
  expire between 2007 and 2009 and the United States of America losses carried
  forward expire between 2006 and 2020. In total, these temporary differences
  would generate a future income tax asset of C$2,193,000 on Canadian operations.

Current
  income taxes in the amount of $7,882,000 (2004 - $5,269,000) represents income
  taxes incurred and paid under the laws of the Republic of Yemen pursuant to
  the PSA on Block 32 and Block S-1 and $Nil (2004 - $11,000) paid in Canada.

The
  provision for income taxes has been computed as follows:

|                                                         |   | 2005   |   |   | 2004   |  
|-------------------------------------------------------- | - | ------ | - | - | ------ | -
|Computed Canadian expected income tax                    |   |        |   |   |        |  
|expense
      at 37.62% (2004 - 38.87%)                  | $ | 10,660 |   | $ | 4,301  |  
|Non-deductible Crown charges (net of
      ARTC)         |   | 407    |   |   | 261    |  
|Resource allowance                                       |   | (522   | ) |   | (180   | )
|Non-deductible stock-based compensation
      expense    |   | 272    |   |   | 509    |  
|Different tax rates in the Republic
      of Yemen       |   | (1,751 | ) |   | 945    |  
|Future income tax assets not previously
      recognized |   | (594   | ) |   | (1,083 | )
|Other differences                                        |   | (119   | ) |   | 242    |  
|                                                         | $ | 8,353  |   | $ | 4,995  |  

|51
|--

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9. SUPPLEMENTAL CASH FLOW INFORMATION

|(000s)                                          |   | 2005  |   |   | 2004   |  
|------------------------------------------------ | - | ----- | - | - | ------ | -
|Operating activities                             |   |       |   |   |        |  
|Decrease
      (increase) in current assets      |   |       |   |   |        |  
|Accounts
      receivable                        | $ | (591  | ) | $ | (3,896 | )
|Prepaid
      expenses                           |   | (189  | ) |   | (113   | )
|Oil
      inventory                              |   | 17    |   |   | (180   | )
|Increase
      (decrease) in current liabilities |   |       |   |   |        |  
|Accounts
      payable                           |   | 2,043 |   |   | (70    | )
|                                                 | $ | 1,280 |   | $ | (4,259 | )
|Investing activities                             |   |       |   |   |        |  
|Decrease
      (increase) in current assets      |   |       |   |   |        |  
|Accounts
      receivable                        | $ | (795  | ) | $ | 250    |  
|                                                 |   |       |   |   |        |  
|Increase
      (decrease) in current liabilities |   |       |   |   |        |  
|Accounts
      payable                           |   | 286   |   |   | 4,428  |  
|                                                 | $ | (509  | ) | $ | 4,678  |  
|Financing activities                             |   |       |   |   |        |  
|Increase
      (decrease) in current liabilities |   |       |   |   |        |  
|Accounts
      payable                           | $ | (24   | ) | $ | 24     |  
|                                                 | $ | (24   | ) | $ | 24     |  
|                                                 |   |       |   |   |        |  
|Interest paid                                    | $ | 8     |   | $ | 56     |  
|                                                 |   |       |   |   |        |  
|Taxes paid                                       | $ | 7,882 |   | $ | 5,280  |  

10. NET INCOME PER SHARE

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

|                                                            |  | 2005   |   |  | 2004   |  
|----------------------------------------------------------- |  | ------ | - |  | ------ | -
|Weighted average number of shares outstanding               |  | 57,903 |   |  | 54,388 |  
|Shares issuable pursuant to stock options                   |  | 3,251  |   |  | 3,445  |  
|Shares to be purchased from proceeds of stock
      options |  |        |   |  |        |  
|under treasury stock method                                 |  | (824   | ) |  | (1,114 | )
|Weighted average number of diluted shares outstanding       |  | 60,330 |   |  | 56,719 |  

The
  treasury stock method assumes that the proceeds received from the exercise of
  “in-the-money” stock options are used to repurchase common shares
  at the average market price. In calculating the weighted average number of diluted
  common shares outstanding for the year ended December 31, 2005, we excluded
  63,000 options (2004 - 125,000) because their exercise price was greater than
  the annual average common share market price in this period.

52

---

11. SEGMENTED INFORMATION

In
  2005 the Company had oil and natural gas production in two geographic segments,
  the Republic of Yemen and Canada, and start-up operations in a third geographic
  segment, the Arab Republic of Egypt. The property and equipment in each geographic
  segment are disclosed in Notes 2, 3 and 4.

The
  results of operations for the year ended December 31, 2005 are comprised of
  the following:

|                                            |   | Republic       |  |   |        |  | Arab Republic |    |   |       |       
|------------------------------------------- | - | -------------- |  | - | ------ |  | ------------- | -- | - | ----- | ------
|(000s)                                     |   | of
      Yemen |  |   | Canada |  | of Egypt      |    |   | Total |       
|REVENUE                                     |   |                |  |   |        |  |               |    |   |       |       
|Oil and gas sales, net of royalties         | $ | 47,384         |  | $ | 11,527 |  | $             | -  |   | $     | 58,911
|EXPENSES                                    |   |                |  |   |        |  |               |    |   |       |       
|Operating                                   |   | 8,219          |  |   | 2,034  |  |               | -  |   |       | 10,253
|Depletion,
      depreciation and accretion |   | 13,172         |  |   | 3,812  |  |               | 6  |   |       | 16,990
|Segmented operations                        | $ | 25,993         |  | $ | 5,681  |  | $             | (6 | ) |       | 31,668
|Unrealized gain on commodity contracts      |   |                |  |   |        |  |               |    |   |       | 83    
|Other income                                |   |                |  |   |        |  |               |    |   |       | 46    
|                                            |   |                |  |   |        |  |               |    |   |       | 31,797
|General and administrative                  |   |                |  |   |        |  |               |    |   |       | 2,821 
|Stock-based compensation                    |   |                |  |   |        |  |               |    |   |       | 723   
|Foreign exchange loss                       |   |                |  |   |        |  |               |    |   |       | 42    
|Interest                                    |   |                |  |   |        |  |               |    |   |       | 8     
|Income taxes                                |   |                |  |   |        |  |               |    |   |       | 8,353 
|NET INCOME                                  |   |                |  |   |        |  | $             |    |   |       | 19,850

The
  results of operations for the year ended December 31, 2004 are comprised of
  the

|                                            |   | Republic |  |   |        |  |   |        | 
|------------------------------------------- | - | -------- |  | - | ------ |  | - | ------ | 
|(000s)                                     |   | of Yemen |  |   | Canada |  |   | Total  | 
|REVENUE                                     |   |          |  |   |        |  |   |        | 
|Oil and gas sales, net of royalties         | $ | 24,966   |  | $ | 6,664  |  | $ | 31,630 | 
|EXPENSES                                    |   |          |  |   |        |  |   |        | 
|Operating                                   |   | 5,449    |  |   | 1,615  |  |   | 7,064  | 
|Depletion,
      depreciation and accretion |   | 8,162    |  |   | 2,184  |  |   | 10,346 | 
|Segmented operations                        | $ | 11,355   |  | $ | 2,865  |  |   | 14,220 | 
|Other income                                |   |          |  |   |        |  |   | 13     | 
|                                            |   |          |  |   |        |  |   | 14,233 | 
|General and administrative                  |   |          |  |   |        |  |   | 1,664  | 
|Stock-based compensation                    |   |          |  |   |        |  |   | 1,310  | 
|Foreign exchange loss                       |   |          |  |   |        |  |   | 289    | 
|Interest                                    |   |          |  |   |        |  |   | 56     | 
|Income taxes                                |   |          |  |   |        |  |   | 4,995  | 
|NET INCOME                                  |   |          |  |   |        |  | $ | 5,919  | 

|2005 ANNUAL REPORT
|------------------
|53                

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12. COMMITMENTS AND CONTINGENCIES

The
  Company is committed to office and equipment leases over the next five years
  as follows:

2006
      $ 270,0002007
      243,0002008
      339,0002009
      359,0002010
      353,000


In September
  2005, the Company entered into a crude oil costless collar for 15,000 barrels
  per month from January 1, 2006 to December 31, 2006. The transaction consisted
  of the purchase of a $50.00 per barrel dated Brent put (floor) and a $77.93
  per barrel dated Brent call (ceiling).

Upon
  the determination that proved recoverable reserves are 40 million barrels or
  greater for Block S-1, Yemen, the Company will be required to pay a finders’
  fee to third parties in the amount of $281,000.

Pursuant
  to the Company’s farm-in agreement on the Nuqra Concession in Egypt, the
  Company is committed to spend $6 million before July 1, 2009 to earn its 50%
  working interest. As at December 31, 2005, the Company has spent $2,065,000
  of earning expense. As part of this commitment the Company issued a $2 million
  letter of credit on July 8, 2004 to a division of the Ministry of Oil (Ganoub
  El Wadi Holding Petroleum Company) which expires on February 14, 2007. This
  letter of credit is secured by a guarantee granted by Export Development Canada.

Pursuant
  to the PSA for Block 72, Yemen, the Contractor (Joint Venture Partners) has
  a minimum financial commitment of $4 million ($1.32 million to TransGlobe) during
  the first exploration period of 30 months for exploration work, including reprocessing
  of seismic data, acquisition of new seismic data and drilling two exploration
  wells.

13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

Carrying Values and Estimated Fair Values of Financial
  Assets and Liabilities

Carrying
  values of financial instruments, which include cash and cash equivalents, accounts
  receivable, accounts payable and accrued liabilities approximate their fair
  value due to the short-term nature of these amounts.

Credit Risk

The
  majority of the accounts receivable are in respect of oil and gas operations.
  The Company generally extends unsecured credit to these customers and therefore
  the collection of accounts receivable may be affected by changes in economic
  or other conditions. Management believes the risk is mitigated by the size and
  reputation of the companies to which they extend credit. The Company has not
  experienced any material credit loss in the collection of accounts receivable
  to date.

In
  the Republic of Yemen, the Company sold all of its 2005 Block 32 production
  to one purchaser and all of its 2005 Block S-1 production to another single
  purchaser. In Canada, the Company sold primarily all of its 2005 gas production
  to one purchaser and primarily all of its 2005 oil production to another single
  purchaser.

Commodity Price Risk Management

The
  Company has commodity price risk associated with its sale of crude oil and natural
  gas.

The
  Company has entered into various financial derivative contracts and physical
  contracts to manage fluctuations in commodity prices in the normal course of
  operations.

In
  June 2004, the Company entered into a one year fixed price contract to sell
  10,000 barrels of oil per month in Block 32 commencing July 1, 2004 at $33.90
  per barrel for dated Brent plus or minus the Yemen Government’s official
  selling price differential.

In
  March 2005, the Company entered into a physical contract to sell 2,000 gigajoules
  (GJ) per day (approximately 2,000 Mcfpd) of natural gas in Canada from April
  1 to April 30, 2005 and from June 1 to October 31, 2005 for Cdn$6.95/GJ.

54

---

In
  September 2005, the Company entered into a crude oil costless collar for 15,000
  barrels per month from January 1, 2006 to December 31, 2006. The transaction
  consisted of the purchase of a $50.00 per barrel dated Brent put (floor) and
  a $77.93 per barrel dated Brent call (ceiling).

The
  estimated fair value of unrealized commodity contracts is reported on the consolidated
  balance sheet with any change in the unrealized positions recorded to income.
  The 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 December 31, 2005 with reference to forward prices
  and market values provided by independent sources. The actual amounts realized
  may differ from these estimates.

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

The
  consolidated financial statements have been prepared in accordance with Canadian
  generally accepted accounting principles (Canadian GAAP or Cdn. GAAP) which
  differ in certain material respects from those principles that the Company would
  have followed had its consolidated financial statements been prepared in accordance
  with United States of America generally accepted accounting principles (U.S.
  GAAP) as described below:

Consolidated Statements of Income and Retained Earnings
  (Deficit)

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

|(000s,
      except per share amounts)                    |   | 2005   |   |   | 2004   |  
|---------------------------------------------------------- | - | ------ | - | - | ------ | -
|Net income for the year under
      Canadian GAAP          | $ | 19,850 |   | $ | 5,919  |  
|Adjustments, before income taxes:                          |   |        |   |   |        |  
|Stock-based
      compensation (b)                         |   | 723    |   |   | 1,310  |  
|Net income for the year under U.S. GAAP                    |   | 20,573 |   |   | 7,229  |  
|Deficit,
      beginning of year - U.S. GAAP               |   | (1,203 | ) |   | (8,432 | )
|Retained
      earnings (deficit), end of year - U.S. GAAP | $ | 19,370 |   | $ | (1,203 | )
|                                                           |   |        |   |   |        |  
|Net income per share under U.S.   -
      BasicGAAP        | $ | 0.36   |   | $ | 0.13   |  
|-
      Diluted                                            | $ | 0.34   |   | $ | 0.13   |  

Statement of Other Comprehensive Income

|(000s)                                   |       | 2005       |  |   | 2004  | 
|----------------------------------------- | ----- | ---------- |  | - | ----- | 
|Net income - U.S. GAAP                    | **$** | **20,573** |  | $ | 7,229 | 
|Currency translation
      adjustment (d) |       | 1,067      |  |   | 734   | 
|Other comprehensive
      income          | **$** | **21,640** |  | $ | 7,963 | 

|55
|--

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Consolidated Balance Sheets

Had
  the Company followed U.S. GAAP, asset and liability sections of the balance
  sheet would not have changed GAAP to U.S. GAAP, however the shareholders
  equity would have been reported as follows:

|                                            |       | 2005          |  |   |           |  |   | 2004            |   |   |                 |  
|------------------------------------------- | ----- | ------------- |  | - | --------- |  | - | --------------- | - | - | --------------- | -
|                                            |       | **Cdn. GAAP** |  |   | U.S. GAAP |  |   | Cdn.
      GAAP |   |   | U.S.
      GAAP |  
|Share capital (b, c, e)                     | **$** | 48,922        |  | $ | 50,625    |  | $ | 47,296          |   | $ | 49,407          |  
|Contributed surplus (b)                     |       | 1,908         |  |   | -         |  |   | 1,593           |   |   | -               |  
|Cumulative translation adjustment
      (d) |       | 3,642         |  |   | -         |  |   | 2,575           |   |   | -               |  
|Accumulated other comprehensive income (d)  |       | -             |  |   | 3,642     |  |   | -               |   |   | 2,575           |  
|Retained earnings (deficit) (b, c, e)       |       | 19,165        |  |   | 19,370    |  |   | (685            | ) |   | (1,203          | )
|                                            | **$** | 73,637        |  | $ | 73,637    |  | $ | 50,779          |   | $ | 50,779          |  

The
  reconciling items between share capital and retained earnings (deficit) for
  Canadian and U.S. GAAP are $833,000 related to escrowed shares, and $1,278,000
  related to flow through shares. The reconciling items between contributed surplus
  and deficit for Canadian and U.S. GAAP are $283,000 for the adoption of stock-based
  compensation under Canadian GAAP and $2,033,000 for the 2005 and 2004 stock-based
  compensation expense under Canadian GAAP, which is not expensed under U.S. GAAP
  APB Opinion No. 25 as interpreted by FASB Interpretation No. 44. The reconciling
  item between share capital and contributed surplus is $408,000 for the transfer
  of compensation expense related to options exercised.

a)
  Full Cost Accounting

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

There
  are no impairment charges under Canadian GAAP or U.S. GAAP.

b)
  Stock-based Compensation

The
  Company has a stock-based compensation plan as more fully described in Note
  7. Under Canadian GAAP, compensation costs have been recognized in the financial
  statements for stock options granted to employees and directors since January
  1, 2002. For U.S. GAAP, the Company uses the intrinsic value method of accounting
  for stock options granted to employees and directors whereby no costs are recognized
  in the financial statements, per APB Opinion No. 25 as interpreted by FASB Interpretation
  No. 44.

The
  effect of applying this provision to the Company’s U.S. GAAP financial
  statements results in a decrease to stock-based compensation in 2005 by $723,000
  (2004 - $1,310,000) and a corresponding decrease to the contributed surplus
  account. Also, the deficit would decrease by $283,000 in 2004 with a corresponding
  decrease to the contributed surplus account relating to the 2004 adoption entry
  for Canadian GAAP that is not required for U.S. GAAP. Also, the share capital
  would decrease by $408,000 for options exercised since the compensation expense
  was transferred into common shares for Canadian GAAP, this is not required for
  U.S. GAAP.

Had
  compensation expense been determined based on fair value at the grant dates
  for the stock option grants consistent with the method under SFAS No. 123, the
  pro forma effect on the Company’s net income under U.S. GAAP would be
  as follows:

56

---

|(000s,
      except per share amounts) |   | 2005   |  |   | 2004  | 
|--------------------------------------- | - | ------ |  | - | ----- | 
|Compensation costs                      | $ | 723    |  | $ | 1,310 | 
|                                        |   |        |  |   |       | 
|Net Income (U.S. GAAP)                  |   |        |  |   |       | 
|As reported                             | $ | 20,573 |  | $ | 7,229 | 
|Pro forma                               | $ | 19,850 |  | $ | 5,919 | 
|                                        |   |        |  |   |       | 
|Net Income per share (U.S.
      GAAP)  |   |        |  |   |       | 
|As reported    -
      Basic            | $ | 0.36   |  | $ | 0.13  | 
|-
      Diluted                         | $ | 0.34   |  | $ | 0.13  | 
|                                        |   |        |  |   |       | 
|Pro
      forma         - Basic         | $ | 0.34   |  | $ | 0.11  | 
|-
      Diluted                         | $ | 0.33   |  | $ | 0.10  | 

c)
  Future Income Taxes

The Company
  records the renouncement of tax deductions related to flow through shares by
  reducing share capital and recording a future tax liability in the amount of
  the estimated cost of the tax deductions flowed to the shareholders. U.S. GAAP
  requires that the share capital on flow through shares be stated at the quoted
  market value of the shares at the date of issuance. In addition, the temporary
  difference that arises as a result of the renouncement of the deductions, less
  any proceeds received in excess of the quoted market value of the shares is
  recognized in the determination of income tax expense for the period. The effect
  of applying this provision to the Company’s financial statements would
  result in an increase in income tax expense and future tax liability by $Nil
  in 2005, $Nil in 2004, $876,000 in 2003, $67,000 in 2002 and $335,000 in 2000
  representing the tax effect of the flow through shares and a corresponding increase
  to share capital and decrease to future tax liability by $Nil in 2005, $Nil
  in 2004, $876,000 in 2003, $67,000 in 2002 and $335,000 in 2000 to record the
  recognition of the benefit of tax losses available to the Company equal to the
  liability arising from renouncing tax pools to the subscribers.

Under
  U.S. GAAP, enacted tax rates are used to calculate future taxes, whereas Canadian
  GAAP uses substantively enacted tax rates. The effect of this change between
  Canadian and U.S. GAAP would result in an increase in future income tax expense
  and future tax liability of $168,000 in 2005, $231,000 in 2004, $435,000 in
  2003 and $Nil in 2002 representing the higher enacted tax rates over the substantively
  enacted tax rates and a corresponding reduction in future income tax expense
  and future tax liability of $168,000 in 2005, $231,000 in 2004, $435,000 in
  2003 and $Nil in 2002 to record an additional valuation allowance against the
  increased tax asset.

d)
  Foreign Currency Translation Adjustments and Other Comprehensive Income

U.S.
  GAAP requires gains or losses arising from the translation of self-sustaining
  operations to be included in other comprehensive income. Canadian GAAP requires
  these amounts to be recorded in a separate component of Shareholders’
  Equity. Other comprehensive income arose from the translation adjustment resulting
  from the translation of Canadian currency financial statements into U.S. dollars
  under FAS 52. At December 31, 2005, accumulated other comprehensive income related
  to these items was a gain of $3,642,000 (2004 - $2,575,000 of which $1,841,000
  represents the translation adjustment resulting from the Canadian operations
  becoming a self-sustaining operation effective October 1, 2004).

e)
  Escrowed Shares

For
  U.S. GAAP purposes, escrowed shares would be considered a separate compensatory
  arrangement between the Company and the holder of the shares. Accordingly, the
  fair market value of shares at the time the shares are released from escrow
  will be recognized as a charge to income in that year with a corresponding increase
  in share capital. The difference in share capital between Canadian GAAP and
  U.S. GAAP represents the effect of applying this provision in 1995 when 188,000
  escrow shares were released resulting in an increase in share capital of $833,000
  with the offset to deficit.

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f)
  Derivative Instruments and Hedging

For
  U.S. GAAP, the Company adopted Statement of Financial Accounting Standards (“SFAS”)
  133 effective January 1, 2001. SFAS 133 requires all derivatives to be recorded
  on the balance sheet as either assets or liabilities at their fair value. Changes
  in the derivative’s fair value are recognized in current period earnings
  unless specific hedge accounting criteria are met. To eliminate future GAAP
  reconciling items the Company has not designated any of its financial instruments,
  for the year ended December 31, 2005, as hedges for U.S. GAAP purposes under
  SFAS 133.

g)
  Recent Accounting Pronouncements

Inventory
  Costs

The
  Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting
  Standard (SFAS) 151, Inventory Costs. This statement amends Accounting Research
  Bulletin (ARB) 43 to clarify that abnormal amounts of idle facility expense,
  freight, handling costs and wasted material (spoilage) should be recognized
  as current-period charges and requires the allocation of fixed production overhead
  to inventory based on the normal capacity of the production facilities. The
  provisions of this statement are effective for inventory costs incurred during
  fiscal years beginning after June 15, 2005. We do not expect the adoption of
  this statement will have any material impact on our results of operations or
  financial position.

Share-based
  Payments

The
  FASB issued SFAS 123(R), Share-Based Payments, which replaces SFAS 123, Accounting
  for Stock-Based Compensation, and supersedes APB Opinion 25, Accounting for
  Stock Issued to Employees. It requires compensation costs related to share-based
  payment transactions to be recognized as an expense at fair value with remeasurement
  to fair value each period. The compensation expense is recognized over the period
  that an employee provides service in exchange for the award with forfeitures
  estimated at each period end. This Statement is effective for interim or annual
  reporting periods beginning after December 15, 2005. Application is to be on
  a modifiedretrospective or modified-prospective basis of transition for new
  or modified awards and to unvested awards. Restatement of prior periods under
  the modified-retrospective approach is optional. The Company is currently assessing
  the impact of these new requirements on the Consolidated Financial Statements.

Exchanges
  of Nonmonetary Assets

The
  FASB issued SFAS 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion
  29, Accounting for Nonmonetary Transactions. This amendment eliminates the exception
  for nonmonetary exchanges of similar productive assets and replaces it with
  a general exception for exchanges of nonmonetary assets that do not have commercial
  substance. Under Statement 153, if a nonmonetary exchange of similar productive
  assets meets a commercial-substance criterion and fair value is determinable,
  the transaction must be accounted for at fair value resulting in recognition
  of any gain or loss. This statement is effective for nonmonetary transactions
  in fiscal periods that begin after June 15, 2005. The adoption of this statement
  will not have any material impact on our Consolidated Financial Statements.

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Accounting
  for Changes and Error Corrections

The
  FASB issued SFAS 154, Accounting Changes and Error Corrections, which replaces
  APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting
  Accounting Changes in Interim Financial Statements and changes the requirements
  for the accounting and reporting of a change in accounting principles. The Statement
  applies to all voluntary changes in accounting principles as well as changes
  required by an accounting pronouncement unless the pronouncement includes specific
  transition provisions. The Statement requires the retrospective application
  to prior periods’ financial statements of changes in accounting principle,
  unless it is impracticable to determine either the period-specific effects or
  the cumulative effect of the change. Application is on a prospective basis and
  is effective for changes in accounting principles made in fiscal years beginning
  after December 15, 2005. The change, which harmonizes United States GAAP with
  Canadian GAAP, will affect the reporting of future changes in accounting principles
  under United States GAAP.

Purchase
  and Sales of Inventory with the Same Counterparty

The
  EITF issued EITF Abstract 04-13, Accounting for Purchases and Sales of Inventory
  with the Same Counterparty. The Abstract provides accounting guidance where
  an entity may sell inventory to another entity in the same line of business
  from which it also purchases inventory. It prescribes under what circumstances
  these exchanges with the same counterparty would be viewed as a single nonmonetary
  transaction and whether they would be accounted for at fair value or carrying
  value. The Abstract is applicable to transactions completed in reporting periods
  beginning after March 15, 2006, whether pursuant to arrangements that were in
  place at the date of initial application of the Abstract or arrangements executed
  subsequent to that date. The Company does not expect there to be any material
  impact on the Consolidated Financial Statements upon adoption of the Abstract.

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