---

Management's Discussion
  and Analysis

March 20, 2007

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 the shareholders,
  the operations review, the audited consolidated financial statements of the
  Company for the years ended December 31, 2006 and 2005, together with the notes
  related thereto. The consolidated financial statements have been prepared in
  accordance with accounting principles generally accepted in Canada in the currency
  of the United States (except where indicated as being another currency). The
  effect of significant differences between Canadian and United States accounting
  principles is disclosed in Note 16 of the consolidated financial statements.
  Additional information relating to the Company, including the Companys
  Annual Information Form, is on SEDAR at www.sedar.com.

Forward Looking Statements

This Managements Discussion and
  Analysis (MD&A) may include certain statements that may be deemed to be
  forward-looking statements within the meaning of the U.S. Private
  Securities Litigation Reform Act of 1995. All statements in this annual report,
  other than statements of historical facts, that address future production, reserve
  potential, exploration drilling, exploitation activities and events or developments
  that the Company expects, are forward-looking statements. Although TransGlobe
  believes the expectations expressed in such forward-looking statements are based
  on reasonable assumptions, such statements are not guarantees of future performance
  and actual results or developments may differ materially from those in the forward-looking
  statements. Factors that could cause actual results to differ materially from
  those in forward-looking statements include, but are not limited to, oil and
  gas prices, well production performance, exploitation and exploration successes,
  continued availability of capital and financing, and general economic, market
  or business conditions.

Non-GAAP Measures

This document contains the term cash
  flow from operations, which should not be considered an alternative to,
  or more meaningful than cash flow from operation activities as determined
  in accordance with Generally Accepted Accounting Principles (GAAP). Cash flow
  from operations is a non-GAAP measure that represents cash generated from operating
  activities before changes in non-cash working capital. We consider this a key
  measure as it demonstrates our ability to generate the cash flow necessary to
  fund future growth through capital investment. Cash flow from operations may
  not be comparable to similar measures used by other companies.

Net operating income is a non-GAAP measure
  that represents revenue net of royalties and operating expenses. Management
  believes that net operating income is a useful supplemental measure to analyse
  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. Net operating income may not be comparable to
  similar measures used by other companies.

Use of Boe Equivalents

The calculations of barrels of oil equivalent
  (Boe) are based on a conversion rate of six thousand cubic feet
  of natural gas to one barrel of crude oil. Boe may be misleading, particularly
  if used in isolation. A Boe conversion ratio of 6 Mcf:1 Bbl is based on an energy
  equivalency conversion method primarily applicable at the burner tip and does
  not represent a value equivalency at the wellhead.

25

TransGlobe Energy Corporation

---

|                                              | OVERVIEW
      TransGlobe is an independent, public company whose activities
        are concentrated in three main geographic segments: Republic of Yemen,
        Canada and Arab Republic of Egypt. Yemen includes the Companys exploration,
        development and production of crude oil. Canada includes the Companys
        exploration, development and production of natural gas, natural gas liquids
        and crude oil. Egypt includes the Companys exploration for natural
        gas, natural gas liquids and crude oil.
      Selected Annual Information
|--------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|($000s, except per share, price and          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|volume amounts and
      % change)            | 2006                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|Average production volumes (Boepd)*           | 5,093                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Average sales volumes (Boepd)*                | 5,077                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Average price ($/Boe)                         | 58.92                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|Oil and gas sales                             | 109,190                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|Oil and gas sales, net of royalties and other | 70,097                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|Cash flow from operations**                   | 46,763                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Cash flow from operations per share           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|- Basic                                       | 0.80                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|- Diluted                                     | 0.77                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|Net income                                    | 26,195                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Net income per share                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|- Basic                                       | 0.45                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|- Diluted                                     | 0.43                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|Total assets                                  | 116,473                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

* The differences in production and
  sales volumes result from inventory changes.** Cashflow from operations is a non-GAAP measure that represents
  cash generated from operating activities before changes in non-cash working
  capital.

Cash flow from operations increased
  by 23% in 2006 compared to 2005 mainly as a result of a 2% increase in sales
  volumes attributed to the pipeline completion and development drilling on Block
  S-1, Yemen, new wells in Canada and a 18% increase in commodity prices, which
  were offset in part by increases in royalties, operating costs and taxes associated
  with the increased volumes and prices, as displayed below:

|                                                                      |         |  |         | $ Per Share |          | % | 
|--------------------------------------------------------------------- | ------- |  | ------- | ----------- | -------- | - | 
|                                                                      | $000s  |  | Diluted |             | Variance |  
|2005 Cash flow from operations**                                      | 38,077  |  | 0.63    |             |          |  
|Volume variance                                                       | 2,197   |  | 0.04    |             | 6        |  
|Price variance                                                        | 16,643  |  | 0.27    |             | 44       |  
|Royalties                                                             | (7,654) |  | (0.13)  |             | (20)     |  
|Expenses:                                                             |         |  |         |             |          |  
|Operating                                                             | (854)   |  | (0.01)  |             | (2)      |  
|Cash general
      and administrative                                 | (797)   |  | (0.01)  |             | (2)      |  
|Current income taxes                                                  | (1,247) |  | (0.02)  |             | (3)      |  
|Realized
      foreign exchange gain (loss)                           | 54      |  | -       |             | -        |  
|Settlement of asset retirement obligations                            | 99      |  | -       |             | -        |  
|Other                                                                 | 245     |  | -       |             | -        |  
|Change in weighted
      average number of diluted shares outstanding | -       |  | -       |             | -        |  
|2006 Cash flow from operations**                                      | 46,763  |  | 0.77    |             | 23       |  

** Cashflow from operations
  is a non-GAAP measure that represents cash generated from operating activities
  before changes in non-cash working capital.

Net income for 2006 increased 32% mainly
  as a result of the above increases in cash flow from operations.

26

2006 Annual Report

---

Management Strategy and Business Environment

In 2007, the capital budget is focused
  on growing reserves and production in Yemen and in Canada. Also, a portion of
  the 2007 capital budget will be spent drilling two exploration wells on Nuqra
  Block 1 in Egypt.

The Companys financial results
  are significantly influenced by the oil industry business environment. Risks
  include, but are not limited to:

- Exploratory success.
- Crude oil and natural gas prices.
- The price differential and demand related to various crude oil qualities.
- Cost to find, develop, produce and deliver crude oil and natural gas.
- Availability of equipment and labour to conduct field activities.
- Availability of pipeline capacity.
- Foreign exchange and credit.
- Operational, safety and environmental.

Commodity Price and Foreign Exchange Benchmarks

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |        |        | %      |        | %      | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------ | ------ | ------ | ------ | ------ | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 2006   | Change | 2005   | Change | 2004  
|Dated Brent average oil price ($ per barrel)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 64.88  | 19     | 54.57  | 41     | 38.58 
|WTI average oil price ($ per barrel)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | 66.09  | 17     | 56.46  | 36     | 41.42 
|Edmonton Par average oil price (C$ per barrel)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | 73.30  | 6      | 69.29  | 31     | 52.91 
|AECO average gas price (C$ per MMBtu)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | 6.51   | (25)   | 8.73   | 33     | 6.54  
|U.S./Canadian Dollar Year End Exchange Rate                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | 1.1654 | -      | 1.1630 | (3)    | 1.2020
|U.S./Canadian Dollar
      Average Exchange Rate                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 1.1343 | (6)    | 1.2114 | (7)    | 1.3013
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|World
        crude oil prices continued to increase significantly in 2006. Oil prices
        continued to be volatile during 2006 since global demand for oil remained
        very strong and outpaced supply increases. Also, supply uncertainties
        continued due to geopolitical concerns mainly in the Middle East, West
        Africa and South America.
      In 2006, TransGlobe sold approximately:
      96% of its crude oil at dated Brent minus the selling price differentials.
            the remaining 4% at the Edmonton Par price less quality differentials.In 2005, natural gas prices increased
        with concern over North Americas ability to grow gas supply despite
        high drilling levels. A warm summer across North America and a cold December
        in the U.S. Northeast increased demand for power and two successive hurricanes
        damaged gas supply infrastructure in the U.S. Gulf Coast. Combined with
        high oil prices these factors caused the AECO gas price to average C$8.73/MMBtu
        in 2005, a 33% increase from 2004. In 2006 the weather in North America
        was extremely mild which reduced demand for natural gas. As a result,
        the 2006 average AECO natural gas price moderated to approximately C$6.51
        per MMBtu.
      In 2006, TransGlobe sold all of
        its natural gas at AECO Index based pricing.

27

TransGlobe Energy Corporation

---

OPERATING RESULTS

Daily Volumes, Working Interest Before Royalties and Other

|                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |              |       | 2006   | 2005  | % Change
|---------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------ | ----- | ------ | ----- | --------
|                                   | Yemen - Oil sales                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | Bopd         | 4,046 | 4,092  | (1)  
|                                   | Canada - Oil and liquids sales                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Bopd         | 331   | 220    | 50   
|                                   | - Gas sales                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | Mcfpd        | 4,204 | 3,880  | 8    
|                                   | Canada                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | Boepd        | 1,031 | 867    | 19   
|                                   | Total Company - daily sales volumes                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | Boepd        | 5,077 | 4,959  | 2    
|                                  
|Consolidated Net Operating Results
|                                  
|                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Consolidated
|                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | 2006         | 2005 
|                                   | (000s, except
      per Boe amounts)                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | $            | $/Boe | $      | $/Boe
|                                   | Oil and gas sales                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | 109,190      | 58.92 | 90,350 | 49.92
|                                   | Royalties and other                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 39,093       | 21.09 | 31,439 | 17.37
|                                   | Operating expenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | 11,107       | 5.99  | 10,253 | 5.67 
|                                   | Net operating income*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 58,990       | 31.84 | 48,658 | 26.88
|                                   | * Net operating income amounts do not reflect
      Yemen income tax expense which is paid through oil allocations with MOM
      in Yemen (2006 - $9,129,000, $4.93/Boe, 2005 - $7,882,000, $4.36/Boe)
      .                                                                                                                                                                                                                                                                                       
|                                  
|Segmented Net Operating Results   
|                                  
|                                   | In 2006 the Company had producing operations in two geographic
      areas, segmented as Yemen and Canada. Also, the Company had operations in
      a third geographic segment, Egypt. MD&A will follow under each of these
      segments.                                                                                                                                                                                                                                                          
|                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|Republic of Yemen                 
|                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                   | Yemen operating results are generated from two non-operated
      Blocks: Block 32 (13.81087% working interest) and Block S-1 (25% working
      interest).                                                                                                                                                                                                                                                                                                                                           
|                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | 2006         | 2005 
|                                   | (000s, except
      per Boe amounts)                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | $            | $/Boe | $      | $/Boe
|                                   | Oil sales                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 93,189       | 63.10 | 76,300 | 51.09
|                                   | Royalties and other                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 36,353       | 24.62 | 28,916 | 19.36
|                                   | Operating expenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | 8,108        | 5.49  | 8,219  | 5.50 
|                                   | Net operating income*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 48,728       | 32.99 | 39,165 | 26.23
|                                   | * Net operating income amounts do not reflect
      Yemen income tax expense which is paid through oil allocations with MOM
      in Yemen (2006 - $9,129,000, $6.18/Boe, 2005 - $7,882,000, $5.28/Boe)
      .                                                                                                                                                                                                                                                                                       
|                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                   | Net operating income in Yemen increased 24% in 2006 primarily
      as a result of the following:                                                                                                                                                                                                                                                                                                                                                                                                     
|                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                   | •Oil sales increased 22% mainly
      as a result of the following:            1.
      Oil prices increased by 24%.            2.
      Sales volumes decreased 1% in 2006 primarily as a result of:                       -
      Block 32 sales volumes decreased by 26% from 1,926 Bopd in 2005 to 1,429
      Bopd in 2006, due to natural declines in the Tasour field.                       -
      Block S-1 sales volumes increased 21% from 2,166 Bopd in 2005 to 2,617 Bopd
      in 2006.

28

2006 Annual Report

---

| | Daily Volumes, Working Interest |  | 12 Months Ended         |  |  | 12 Months Ended         |   |  |          |  
| | ------------------------------- |  | ----------------------- |  |  | ----------------------- | - |  | -------- | -
| | Before Royalties                |  | December
      31, 2006 |  |  | December
      31, 2005 |   |  |          |  
| |                                 |  | Bopd                    |  |  | Bopd                    |   |  | % Change |  
| | Block S-1 - production          |  | 2,592                   |  |  | 2,198                   |   |  | 18       |  
| | - inventory change              |  | 25                      |  |  | (32                     | ) |  | -        |  
| | Block S-1 - sales               |  | 2,617                   |  |  | 2,166                   |   |  | 21       |  
| | Block 32 - sales                |  | 1,429                   |  |  | 1,926                   |   |  | (26      | )
| | Total sales                     |  | 4,046                   |  |  | 4,092                   |   |  | (1       | )

| |  | Royalty costs increased 26%. Royalties as
        a percentage of revenue (royalty rate) increased to 39% in 2006 compared
        to 38% in 2005. Royalty rates fluctuate in Yemen due to changes in the
        amount of cost sharing oil, whereby the Block 32 and Block S-1 PSAs
        allow for the recovery of operating and capital costs through a reduction
        in MOM take of oil production as discussed below:
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | Operating expenses on a Boe basis were consistent
        at $5.49 in 2006 compared to $5.50 in 2005.                                                                                                                                                                                                                                                                                                                             

| | 1. | Block 32 operating expenses decreased to $5.18 per barrel
        in 2006 compared to $5.80 per barrel in 2005 primarily due to decreased
        diesel costs. A diesel topping plant was constructed in 2005 to manufacture
        diesel from produced crude oil which reduced diesel costs significantly
        on a go forward basis. The plant became operational in December 2005.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2. | Block S-1 operating costs increased to $5.66 per barrel
        in 2006 compared to $5.17 per barrel in 2005.                                                                                                                                                                                                                                                                              

Canada

|                                      |  |        | 2006 |  |       | 2005 | 
|------------------------------------- |  | ------ | ---- |  | ----- | ---- | 
|(000s, except
      per Boe amounts) |  | $      |      |  | $/Boe |      | 
|Oil sales                             |  | 3,178  |      |  | 58.45 |      | 
|Gas sales ($ per Mcf)                 |  | 9,478  |      |  | 6.18  |      | 
|NGL sales                             |  | 3,266  |      |  | 49.24 |      | 
|Other sales                           |  | 79     |      |  | -     |      | 
|                                      |  | 16,001 |      |  | 42.51 |      | 
|Royalties and other                   |  | 2,740  |      |  | 7.28  |      | 
|Operating expenses                    |  | 2,999  |      |  | 7.97  |      | 
|Net operating income                  |  | 10,262 |      |  | 27.26 |      | 
|                                      |  |        |      |  |       |      | 

TransGlobe Energy Corporation

---

Net operating income in Canada increased
  8% in 2006 primarily as a result of the following:

| |  | Sales increased 14% mainly due to:                                                                                                                                                                                                                                                                                                                                                                                   
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 1.                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | 2.                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | Royalty costs decreased 9% on a Boe basis.
        Royalties as a percentage of revenue were consistent at 17% in 2006 compared
        to 18% in 2005. During the third quarter of 2006, the Alberta government
        announced it is discontinuing the Alberta Royalty Tax Credit program effective
        January 1, 2007. As a result, the Companys royalties will be increased
        by C$500,000 in 2007.
| |  | Operating costs increased 24% on a Boe basis
        mainly as a result of five well workovers and overall general cost increases
        for all services resulting from a very active oil and gas industry in
        Canada.                                                                                                                                                                                      

UNREALIZED GAIN ON COMMODITY CONTRACTS

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). Through to the expiration of the contract, no realized gains or losses
  occurred.

GENERAL AND ADMINISTRATIVE EXPENSES

| |                                       | 2006   |   | 2005  |  
| | ------------------------------------- | ------ | - | ----- | -
| | (000s, except
      per Boe amounts) | $      |   | $/Boe |  
| | G&A (gross)                           | 5,914  |   | 3.19  |  
| | Stock based compensation              | 1,168  |   | 0.63  |  
| | Capitalized G&A                       | (1,999 | ) | (1.08 | )
| | Overhead recoveries                   | (409   | ) | (0.22 | )
| | G&A (net)                             | 4,674  |   | 2.52  |  

General and administrative expenses (G&A)
  increased 32% in 2006 (29% increase on a Boe basis) compared to 2005 as a result
  of the following:

- Personnel and office overhead costs increased due to additional staff
        in both the Calgary and Cairo offices.
- Public company costs increased mainly due to the Company preparing for
        the new Sarbanes Oxley compliance requirements.
- Capitalized general and administrative expenses increased mainly as
        a result of expansion in the Eqypt operations and overhead recoveries
        increased due to the increased capital activity in Canada.

DEPLETION, DEPRECIATION AND ACCRETION
  EXPENSE (DD&A)

| |                                       | 2006   |  | 2005  | 
| | ------------------------------------- | ------ |  | ----- | 
| | (000s, except
      per Boe amounts) | $      |  | $/Boe | 
| | Republic of Yemen                     | 11,623 |  | 7.87  | 
| | Canada                                | 7,281  |  | 19.34 | 
| | Arab Republic of Egypt                | 37     |  | -     | 
| |                                       | 18,941 |  | 10.22 | 

In Yemen, DD&A on a Boe basis decreased
  11% in 2006 compared to 2005 primarily as a result of decreased finding and
  development costs in Yemen.

In Yemen (Block 72, Block 75 and Block
  84) and Egypt (Nuqra Block 1) major development costs of $2,638,000 and $7,683,000
  respectively, were excluded from costs subject to depletion and depreciation.

In Canada, DD&A on a Boe basis increased
  60% in 2006 compared to 2005 primarily as a result of increased finding and
  development costs in Canada.

30

2006 Annual Report

---

INCOME TAXES

| | ($000s)           |  | 2006  |  |  | 2005  | 
| | ------------------ |  | ----- |  |  | ----- | 
| | Current income tax |  | 9,129 |  |  | 7,882 | 
| | Future income tax  |  | 263   |  |  | 471   | 
| |                    |  | 9,392 |  |  | 8,353 | 

|                     | Current income tax expense in 2006 of $9,129,000 (2005
        - $7,882,000) represents income taxes incurred and paid under the laws
        of Yemen pursuant to the PSAs on Block 32 and Block S-1. The increase
        in Yemen is primarily the result of increased revenue in Yemen. The income
        tax expense in Yemen as a percent of Yemen revenue was 10% in 2006 and
        2005. No income tax was paid in Canada in 2006 or in 2005. At December
        31, 2006, the Company has C$53 million in Canadian tax pools. It is estimated
        that C$24 million of these pools will be available to deduct against 2007
        taxable Canadian income.
      The future income expense was $263,000 in 2006 (2005 - $471,000) which
        relates to a non-cash expense for taxes to be incurred in the future as
        Canadian tax pools reverse.
      CAPITAL EXPENDITURES/DISPOSITIONS | 
|-------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|                    
|Capital Expenditures

| |                        |             |             | 2006        |            |       |        | 2005  
| | ---------------------- | ----------- | ----------- | ----------- | ---------- | ----- | ------ | ------
| |                        |             | Geological  | Drilling    | Facilities |       |        |       
| |                        | Land and    | and         | and         | and        |       |        |       
| | ($000s)               | Acquisition | Geophysical | Completions | Pipelines  | Other | Total  | Total 
| | Republic of Yemen      |             |             |             |            |       |        |       
| | Block S-1              | -           | 1,050       | 10,054      | 5,732      | 305   | 17,141 | 12,487
| | Block 32               | -           | 791         | 5,943       | 1,430      | 114   | 8,278  | 3,999 
| | Block 72               | -           | 419         | 365         | -          | 110   | 894    | 1,453 
| | Block 75               | 250         | -           | -           | -          | -     | 250    | -     
| | Block 84               | -           | -           | -           | -          | 15    | 15     | -     
| | Other                  | -           | -           | -           | -          | 7     | 7      | -     
| |                        | 250         | 2,260       | 16,362      | 7,162      | 551   | 26,585 | 17,939
| | Canada                 | 2,081       | 312         | 10,916      | 5,649      | 647   | 19,605 | 13,189
| | Arab Republic of Egypt | -           | 3,053       | 1,241       | -          | 1,071 | 5,365  | 1,526 
| |                        | 2,331       | 5,625       | 28,519      | 12,811     | 2,269 | 51,555 | 32,654

On Block S-1 in Yemen, the Company drilled
  six wells (An Nagyah #19, #20, #21, #22, Wadi Bayhan #2 and Osaylan #2), continued
  working on CPF construction and expansion and began shooting a 3-D seismic acquisition
  (which was postponed). On Block 32, the Company drilled eight wells (Godah #1,
  #2, #3, #4, Tasour #21, #22, #23 and #24), began work on the Godah tie-in and
  began seismic acquisition. On Block 72, the Company continued to define drilling
  leads through seismic acquisition and processing and began access construction
  and the rig move for the first exploration well.

In Canada, the Company drilled 26 wells
  (20.8 net) mainly in the Nevis, Morningside and Thorsby areas. Also, the Company
  carried out completion and testing work on 27 wells, tied-in 18 wells and added
  compression equipment, mainly in the Nevis area.

In Egypt, the Company completed the field
  seismic acquisition on Nuqra Block 1 on April 5, 2006. The processing of seismic
  was completed in July. Interpretation and mapping of the seismic were completed
  and drilling locations selected. Drilling preparation began by starting access
  construction and purchasing drilling materials.

31

TransGlobe Energy Corporation

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FINDING AND DEVELOPMENT COSTS

|Proved               |                                                      |  |        |   |  |        |  |  |       
|-------------------- | ---------------------------------------------------- |  | ------ | - |  | ------ |  |  | ------
|                     |                                                      |  |        |   |  |        |  |  |       
|                     | ($000s, except
      volumes and $/Boe amounts)     |  | 2006   |   |  | 2005   |  |  | 2004  
|                     | Total capital expenditure                            |  | 51,555 |   |  | 32,654 |  |  | 26,367
|                     | Net change from previous
      years future capital |  | (1,154 | ) |  | 8,418  |  |  | 8,796 
|                     |                                                      |  | 50,401 |   |  | 41,072 |  |  | 35,163
|                     | Reserve additions and revisions (MBoe)               |  | 3,371  |   |  | 2,987  |  |  | 4,332 
|                     | Average cost per Boe                                 |  | 14.95  |   |  | 13.75  |  |  | 8.12  
|                     | Three year average
      cost per Boe                |  | 11.85  |   |  | 9.57   |  |  | 7.42  
|                     |                                                      |  |        |   |  |        |  |  |       
|Proved Plus Probable |                                                      |  |        |   |  |        |  |  |       
|                     |                                                      |  |        |   |  |        |  |  |       
|                     | ($000s, except volumes and $/Boe amounts)           |  | 2006   |   |  | 2005   |  |  | 2004  
|                     | Total capital expenditure                            |  | 51,555 |   |  | 32,654 |  |  | 26,367
|                     | Net change from previous years future capital       |  | 3,943  |   |  | 9,449  |  |  | 597   
|                     |                                                      |  | 55,498 |   |  | 42,103 |  |  | 26,964
|                     | Reserve additions and revisions (MBoe)               |  | 3,025  |   |  | 1,879  |  |  | 4,804 
|                     | Average cost per Boe                                 |  | 18.35  |   |  | 22.41  |  |  | 5.61  
|                     | Three year average cost per Boe                      |  | 12.83  |   |  | 8.19   |  |  | 5.37  

The finding and development costs shown
  above have been calculated in accordance with Canadian National Instrument 51-101,
  Standards of Disclosure for Oil and Gas Activities.

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.

RECYCLE RATIO

|Proved               |                                                                  |   |            |  |   |       |  |   |       |  |   |      
|-------------------- | ---------------------------------------------------------------- | - | ---------- |  | - | ----- |  | - | ----- |  | - | -----
|                     |                                                                  |   | Three Year |  |   |       |  |   |       |  |   |      
|                     |                                                                  |   | Average    |  |   | 2006  |  |   | 2005  |  |   | 2004 
|                     | Netback ($/Boe)                                                  | $ | 20.22      |  | $ | 25.23 |  | $ | 21.04 |  | $ | 12.46
|                     | Proved finding and development costs ($/Boe)                     | $ | 11.85      |  | $ | 14.95 |  | $ | 13.75 |  | $ | 8.12 
|                     | Recycle ratio                                                    |   | 1.71       |  |   | 1.69  |  |   | 1.53  |  |   | 1.53 
|                     |                                                                  |   |            |  |   |       |  |   |       |  |   |      
|Proved Plus Probable |                                                                  |   |            |  |   |       |  |   |       |  |   |      
|                     |                                                                  |   | Three Year |  |   |       |  |   |       |  |   |      
|                     |                                                                  |   | Average    |  |   | 2006  |  |   | 2005  |  |   | 2004 
|                     | Netback ($/Boe)                                                  | $ | 20.22      |  | $ | 25.23 |  | $ | 21.04 |  | $ | 12.46
|                     | Proved plus Probable
      finding and development costs ($/Boe) | $ | 12.83      |  | $ | 18.35 |  | $ | 22.41 |  | $ | 5.61 
|                     | Recycle ratio                                                    |   | 1.58       |  |   | 1.38  |  |   | 0.94  |  |   | 2.22 

The 2006 proved recycle ratio increased
  to 1.69 compared to 1.53 in 2005 mainly as a result of an increase in commodity
  prices. The 2006 proved plus probable recycle ratio increased to 1.38 compared
  to 0.94 in 2005 mainly as a result of increased commodity prices and lower proved
  plus probable finding and development costs. The decrease in the 2005 proved
  plus probable recycle ratio to 0.94 compared to 2004 of 2.22 mainly relates
  to a higher finding and development cost.

32

2006 Annual Report

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The recycle ratio measures the efficiency
  of TransGlobes capital program by comparing the cost of finding and developing
  proved reserves with the netback from production. The ratio is calculated by
  dividing the netback by the proved finding and development cost on a Boe basis.
  Netback is defined as net sales less operating, general and administrative (excluding
  non-cash items), foreign exchange (gain) loss, interest and current income tax
  expense per Boe of production.

| | ($000s, except
      volumes and per Boe amounts)  |   | 2006      |   |   | 2005      |   |   | 2004      |  
| | --------------------------------------------------- | - | --------- | - | - | --------- | - | - | --------- | -
| | Net income                                          |   | 26,195    |   |   | 19,850    |   |   | 5,919     |  
| | Adjustments for non-cash items:                     |   |           |   |   |           |   |   |           |  
| | Depletion,
      depreciation and accretion         |   | 18,941    |   |   | 16,990    |   |   | 10,346    |  
| | Stock-based compensation                            |   | 1,168     |   |   | 723       |   |   | 1,310     |  
| | Future income
      taxes                           |   | 263       |   |   | 471       |   |   | (285      | )
| | Amortization of deferred
      financing costs      |   | 179       |   |   | 291       |   |   | 35        |  
| | Unrealized
      loss (gain) on commodity contracts |   | 83        |   |   | (83       | ) |   | -         |  
| | Settlement of asset
      retirement obligations    |   | (66       | ) |   | (165      | ) |   | -         |  
| | Netback                                             |   | 46,763    |   |   | 38,077    |   |   | 17,325    |  
| | Sales volumes                                       |   | 1,853,252 |   |   | 1,809,779 |   |   | 1,389,920 |  
| | Netback per Boe                                     | $ | 25.23     |   | $ | 21.04     |   | $ | 12.46     |  

OUTSTANDING SHARE DATA

Common Shares issued and outstanding
  as at March 7, 2007 are 59,542,439.

SELECTED QUARTERLY INFORMATION

| |                                     | 2006   | 2005  
| | ----------------------------------- | ------ | ------
| | ($000s, except per share,          |        |       
| | price and volume amounts)           | Q-4    | Q-3   
| | Average production volumes (Boepd)* | 5,475  | 4,952 
| | Average sales volumes (Boepd)*      | 5,313  | 4,952 
| | Average price ($/Boe)               | 55.30  | 61.88 
| |                                     |        |       
| | Oil and gas sales                   | 27,032 | 28,190
| |                                     |        |       
| | Oil and gas sales, net of royalties |        |       
| | and other                           | 17,647 | 18,542
| |                                     |        |       
| | Cash flow from operations**         | 10,448 | 12,662
| | Cash flow from operations per share |        |       
| | - Basic                             | 0.18   | 0.22  
| | - Diluted                           | 0.17   | 0.21  
| |                                     |        |       
| | Net income                          | 4,726  | 7,366 
| | Net income per share                |        |       
| | - Basic                             | 0.08   | 0.13  
| | - Diluted                           | 0.08   | 0.12  

* The differences in production and
  sales volumes result from inventory changes.** Cashflow from operations is a non-GAAP measure that
  represents cash generated from operating activities before changes in non-cash
  working capital.

In the first quarter of each calendar
  year the Companys royalty and income tax rate decreases at Block 32, Yemen
  due to the addition of the recovery of 50% of the capital costs from the prior
  year as well as 50% of the capital costs from the first quarter. This results
  in an increase to cash flow from operations and net income in the first quarter
  of each year. The second through fourth quarters recover 50% of the capital
  costs incurred with the balance recovered in the first quarter of the following
  year.

33

TransGlobe Energy Corporation

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Oil and gas sales decreased 8% in Q1-2006
  compared to Q4-2005; however, cash flow from operations and net income increased
  31% to $11,297,000 and 58% to $6,857,000, respectively, in the same period mainly
  as a result of royalty and income tax costs decreasing at Block 32, Yemen in
  Q1-2006 due to the recovery of 50% of the 2005 capital costs from oil production
  as part of the Block 32 PSA, as discussed above. This was partially offset by
  an inventory build-up at Block S-1 since a portion of the March 2006 lifting
  was deferred to April 1, 2006.

Fourth Quarter 2006

Cash flow from operations decreased in
  Q4-2006 by $2,214,000 (17%) compared to Q3-2006 mainly as a result of the following:

- An 11% decrease in average commodity prices.
- Increased operating costs in Yemen due to technical charges from the
        partner for Block S-1.
- This is partially offset by an 7% increase in sales volumes.

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 proved 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.

The following table illustrates TransGlobes
  sources and uses of cash during the years ended December 31, 2006 and 2005:

Sources and Uses of Cash

| | ($000s)                                       |  | 2006   |   |  | 2005   | 
| | ---------------------------------------------- |  | ------ | - |  | ------ | 
| | Cash sourced                                   |  |        |   |  |        | 
| | Cash flow
      from operations*               |  | 46,763 |   |  | 38,077 | 
| | Issue of common shares                         |  | 297    |   |  | 1,218  | 
| |                                                |  | 47,060 |   |  | 39,295 | 
| | Cash used                                      |  |        |   |  |        | 
| | Exploration
      and development expenditures |  | 51,555 |   |  | 32,654 | 
| | Other                                          |  | 545    |   |  | 155    | 
| |                                                |  | 52,100 |   |  | 32,809 | 
| | Net cash                                       |  | (5,040 | ) |  | 6,486  | 
| | Increase in non-cash working capital           |  | 1,655  |   |  | 747    | 
| | Change in cash and cash equivalents            |  | (3,385 | ) |  | 7,233  | 
| | Cash and cash equivalents - beginning of year  |  | 12,221 |   |  | 4,988  | 
| | Cash and cash equivalents
      - end of year  |  | 8,836  |   |  | 12,221 | 

* Cashflow from operations
  is a non-GAAP measure that represents cash generated from operating activities
  before changes in non-cash working capital.

Funding for the Companys capital
  expenditures in 2006 was provided mainly by cash flow from operations and working
  capital.

Working capital is the amount by which
  current assets exceed current liabilities. At December 31, 2006 the Company
  had working capital of $4,361,000 (2005 - $9,471,000), zero debt and an unutilized
  loan facility of $55,000,000. Accounts receivable increased due primarily to
  higher revenue receivables as a result of volume increases in Yemen and Canada,
  oil price increases in Yemen offset by gas price decreases in Canada. This was
  offset by increased accounts payable due primarily to higher operating costs
  in Yemen and increased drilling activity at year end in Yemen.

The Company expects to fund its approved
  2007 exploration and development program of $51 million through the use of working
  capital, cash flow and debt if necessary. The use of our credit facilities or
  equity financing during 2007 may also be utilized to accelerate existing projects
  or to finance new opportunities. Fluctuations in commodity prices, product demand,
  foreign exchange rates, interest rates and various other risks may impact capital
  resources.

34

2006 Annual Report

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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:

| | ($000s)                    | 2007 | 2008 | 2009 | 2010 | 2011
| | --------------------------- | ---- | ---- | ---- | ---- | ----
| | Office and equipment leases | 284  | 386  | 409  | 402  | 101 

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 Nuqra Concession Agreement
  in the Arab Republic of Egypt, the Company and its partners have entered into
  the first three year extension period which requires the completion of a two
  well drilling program with a minimum expenditure of $4.0 million over a period
  of three years. As part of this extension, the Company issued a $4.0 million
  letter of credit (expiring March 4, 2010) to guarantee the Companys performance
  under the extension period. This letter of credit was reduced to $1,225,699
  during 2006 and 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 (expiring January 12, 2008) for exploration work consisting of
  seismic acquisition (completed) and two exploration wells (planned completion
  in Q4-2007).

Pursuant to the bid awarded for Block
  75, Yemen, the Contractor (Joint Venture Partners) has a minimum financial commitment
  of $7 million ($1.75 million to TransGlobe) for the signature bonus and first
  exploration period work program consisting of seismic acquisition and one exploration
  well. The first 36 month exploration period will commence when the PSA has been
  approved and ratified by the government of Yemen, anticipated to occur during
  2007.

Pursuant to the bid awarded for Block
  84, Yemen, the Contractor (Joint Venture Partners) has a minimum financial commitment
  of $20.1 million ($6.63 million to TransGlobe) for the signature bonus and first
  exploration period work program consisting of seismic acquisition and four exploration
  wells. The first 42 month exploration period will commence when the PSA has
  been approved and ratified by the government of Yemen, anticipated to occur
  in 2007.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements
  in accordance with generally accepted accounting principles 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
  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 1 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. 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.

35

TransGlobe Energy Corporation

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Full Cost Accounting for Oil and Gas Activities

Depletion and Depreciation ExpenseTransGlobe follows the Canadian Institute of Chartered Accountants
  guideline on full cost accounting in the oil and gas industry to account for
  oil and gas properties. Under this method, all costs associated with the acquisition
  of, exploration for, and the development of natural gas and crude oil reserves
  are capitalized on a country-by-country cost centre basis and costs associated
  with production are expensed. The capitalized costs are depleted, depreciated
  and amortized using the unit-of-production method based on estimated proved
  reserves. Reserve estimates can have a significant impact on earnings, as they
  are a key component in the calculation of depletion, depreciation and amortization.
  A downward revision in a reserve estimate could result in a higher DD&A
  charge to earnings. In addition, if net capitalized costs are determined to
  be in excess of the calculated ceiling, which is based largely on reserve estimates
  (see asset impairment discussion below), the excess must be written off as an
  expense charged against earnings. In the event of a property disposition, proceeds
  are normally deducted from the full cost pool without recognition of a gain
  or loss unless there is a change in the DD&A rate of 20% or greater.

Unproved PropertiesCertain costs related to unproved properties and major development projects
  are excluded from costs subject to depletion and depreciation until the earliest
  of a portion of the property becomes capable of production, development activity
  ceases or impairment occurs. These properties are reviewed quarterly and any
  impairment is transferred to the costs being depleted or, if the properties
  are located in a cost centre where there is no reserve base, the impairment
  is charged directly to earnings.

Asset ImpairmentsUnder full cost accounting, a ceiling test is performed to ensure that
  unamortized capitalized costs in each cost centre do not exceed their fair value.
  An impairment loss is recognized in net earnings when the carrying amount of
  a 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
  loss is limited to an amount by which the carrying amount exceeds the sum of:

| | i)  | the fair value of reserves; and                                                               
| | --- | ----------------------------------------------------------------------------------------------
| | ii) | the costs of unproved properties that have been subject
        to a separate impairment test.

Income Tax Accounting

The Company has recorded a future income
  tax asset in 2006 and 2005. This future income tax asset is an estimate of the
  expected benefit that will be realized by the use of deductible temporary differences
  in excess of carrying value of the Companys Canadian property and equipment
  against future estimated taxable income. These estimates may change substantially
  as additional information from future production and other economic conditions
  such as oil and gas prices and costs become available.

The determination of the Companys
  income tax liabilities requires interpretation of complex laws and regulations
  often involving multiple jurisdictions. All tax filings are subject to audit
  and potential reassessment after the lapse of considerable time. Accordingly,
  the actual income tax liability may differ significantly from that estimated
  and recorded by management.

Currency Translation

The accounts of self-sustaining operations
  are translated using the current rate method, whereby assets and liabilities
  are translated at year-end exchange rates and revenues and expenses are translated
  using average annual exchange rates. Translation gains and losses relating to
  the self-sustaining 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 Statement of Income and Retained
  Earnings.

36

2006 Annual Report

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Derivative Financial Instruments

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

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 estimation of the fair value of certain derivative financial instruments
  requires considerable judgement. The estimation of the fair value of commodity
  price instruments requires sophisticated financial models that incorporate forward
  price and volatility data. The estimated fair value of all derivative instruments
  is based on quoted market prices and/or third party market indications and forecasts.

Asset Retirement Obligations

The fair value of estimated asset retirement
  obligations is recognized in the Consolidated Balance Sheet when identified
  and a reasonable estimate of the fair value can be made. Asset retirement obligations
  include those legal obligations where the Company will be required to retire
  tangible long-lived assets such as producing well sites. The asset retirement
  cost, equal to the initially estimated fair value of the asset retirement obligation,
  is capitalized as part of the cost of the related long-lived asset. Increases
  in the asset retirement obligation resulting from the passage of time are recorded
  as accretion in the Consolidated Statement of Income. Amounts recorded for asset
  retirement obligations are based on estimates of reserves and on retirement
  costs which will not be incurred for several years. Actual payment to settle
  the obligations may differ from estimated amounts.

NEW ACCOUNTING STANDARDS

Financial Instruments, Comprehensive Income and Hedges

The AcSB has issued new accounting standards
  for financial instruments standards that comprehensively address when an entity
  should recognize a financial instrument on its balance sheet, or how it should
  measure the financial instrument once recognized. The new standards comprise
  three handbook sections:

CICA Section 3855, Financial Instruments
  - Recognition and Measurement, establishes the criteria for recognizing
  and measuring financial assets, financial liabilities and non-financial derivatives.
  It also specifies how financial instrument gains and losses are to be presented.

CICA Section 3865, Hedges, provides
  optional alternative treatments to Section 3855 for entities which choose to
  designate qualifying transactions as hedges for accounting purposes. It will
  replace Accounting Guideline AcG-13, Hedging Relationships, and build
  on Section 1650, Foreign Currency Translation, by specifying how hedge
  accounting is applied and what disclosures are necessary when it is applied.

CICA Section 1530, Comprehensive Income,
  introduces a new requirement to temporarily present certain gains and losses
  as part of a new earnings measurement called comprehensive income.

All three standards are effective for
  annual and interim periods in fiscal years beginning on or after October 1,
  2006. The Company is currently assessing the impact of these new standards on
  the Consolidated Financial Statements.

37

TransGlobe Energy Corporation

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Financial Instruments Disclosures

The ASB issued CICA 3862, Financial
  Instruments Disclosures, to enhance the disclosure requirements in CICA
  3861, Financial Instruments and Disclosures. The main features of this
  section are to establish requirements for an entity to disclose the significance
  of financial instruments for its financial position and performance, revised
  from those of Section 3861. These requirements are less detailed than those
  of Section 3861 in certain areas and more so in others. There are also requirements
  for disclosures about fair value, revised but not substantially different from
  those of Section 3861. Lastly, there are requirements for an entity to disclose
  qualitative and quantitative information about exposure to risks arising from
  financial instruments, revised from, and more extensive than, those of Section
  3861. The new requirements are effective for annual and interim periods beginning
  on or after October 1, 2007, or may be adopted earlier in place of Section 3861.
  As the Company is adopting Financial Instruments Standards 3855, 3865 and 1530
  at January 1, 2007, Section 3862 will also be adopted at this time.

Financial Instruments Presentation

The ASB issued CICA 3863, Financial
  Instruments Presentation, which carries forward, unchanged from Section
  3861, standards for presentation of financial instruments and non-financial
  derivatives. The new requirements are effective for annual and interim periods
  beginning on or after October 1, 2007, or may be adopted earlier in place on
  Section 3861. As the Company is adopting Financial Instruments Standards 3855,
  3865, and 1530 at January 1, 2007, Section 3863 will also be adopted at this
  time.

Capital Disclosures

The Accounting Standards Board (AcSB)
  issued Canadian Institute of Chartered Accountants (CICA) Section 1535, Capital
  Disclosures. The main features of this section are to establish requirements
  for an entity to disclose qualitative information about its objectives, policies
  and processes for managing capital, quantitative data about what it regards
  as capital, and whether it has complied with any externally imposed capital
  requirements and, if not, the consequences of such non-compliance. The new requirements
  are effective for annual and interim periods beginning on or after October 1,
  2007, and, upon adoption, are not expected to materially impact the Consolidated
  Financial Statements.

Variable Interest Entities

The EIC issued EIC 163, determining
  the variability to be considered in applying AcG-15 (Variable Interest Entities).
  The EIC provides guidance on those arrangements where application of either
  the cash flow method or the fair value method does not result in a clear determination
  as to whether those arrangements are variable interests or creators of variability.
  The Committee reached a consensus that variability to be considered should be
  based on the design of the entity as determined through analyzing the nature
  of the risks in the entity and the purpose for which the entity was created,
  as well as the variability (created by the risks) the entity is designed to
  create and pass along to its interest holders. The EIC is applicable to the
  first interim period or annual fiscal period beginning after January 1, 2007,
  and, upon adoption, is not expected to materially impact the Consolidated Financial
  Statements.

Equity

The ASB issued CICA 3251, Equity,
  which replaces CICA 3250, Surplus. This section establishes standards
  for the presentation of equity and changes in equity during the reporting period.
  The main feature of this section is a requirement for an entity to present separately
  each of the changes in equity during the period, including comprehensive income,
  as well as components of equity at the end of the period. The new requirements
  are effective for annual and interim periods beginning on or after October 1,
  2007. This standard will have an effect on the Companys Financial Statements
  due to adoption of the new financial instruments standards on January 1, 2007.

RISKS

The Company is exposed to a variety of
  business risks and uncertainties in the international petroleum industry including
  commodity prices, exploration success, production risk, foreign exchange, interest
  rates, government regulation including the Kyoto Protocol, changes of laws affecting
  foreign ownership, political risk of operating in foreign jurisdictions, taxes,
  environmental preservation and safety concerns.

38

2006 Annual Report

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| | 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 factors:
      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 maintains a conservative approach to debt financing and
          currently has no long-term debt.
        The Company maintains insurance according to customary industry practice,
          but cannot fully insure against all risks.
        The Company conducts its operations to ensure compliance with government
          regulations and guidelines, including the Kyoto Protocol. At this time,
          it is not possible to predict either the nature of the Kyoto Protocol
          requirements or impact on the Company.
        The Company retains independent reserve evaluators to determine year-end
          Company reserves and estimated future net revenues.
        The Company manages commodity prices by entering physical fixed price
          sales contracts and other commodity price instruments when deemed appropriate.DISCLOSURE CONTROLS AND PROCEDURES
      As of December 31, 2006, 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, of 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 CONTROL OVER FINANCIAL REPORTING
      Management is responsible for establishing and maintaining
        adequate internal control over financial reporting for the Company. Management
        has designed such internal control over financial reporting to provide
        reasonable assurance regarding the reliability of financial reporting
        and the preparation of financial statements for external purposes in accordance
        with Canadian generally accepted accounting principles (GAAP), including
        a reconciliation to U.S. GAAP.
      Because of its inherent limitations, the Companys
        internal control over financial reporting may not prevent or detect all
        possible misstatements or frauds. Also, projections of any evaluation
        of effectiveness to future periods are subject to the risk that controls
        may become inadequate because of changes in conditions, or that the degree
        of compliance with policies or procedures may deteriorate.
      To evaluate the effectiveness of the Companys
        internal control over financial reporting, Management has used the Internal
        Control - Integrated Framework, which is a suitable, recognized control
        framework established by the Committee of Sponsoring Organizations of
        the Treadway Commission (COSO). Management has assessed the effectiveness
        of the Companys internal control over financial reporting for fiscal
        year ended December 31, 2006 and concluded that such internal control
        over financial reporting is effective.
      OUTLOOK
      2007 Production OutlookA number of projects are underway in Yemen and in Canada that
        are anticipated to increase oil and gas production during 2007. The majority
        of these projects will be completed during the first two quarters of 2007
        and therefore will not have an impact on production until the second half
        of the year. Therefore a Baseline forecast is currently estimated
        using only the existing production and planned development in Canada.
        The Baseline forecast will be updated quarterly or when the facilities
        and development projects are completed.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

39

TransGlobe Energy Corporation

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| | Baseline Production Forecast                |       |             |       |           
| | ------------------------------------------- | ----- | ----------- | ----- | ----------
| |                                             |       | 2007        | 2006  | Change (*)
| |                                             |       |             |       |           
| | Barrels of oil equivalent per day           | Boepd | 5,300-5,400 | 5,093 | 5%        
| | (*) % growth based on mid point of guidance

2007 Cash Flow From Operations
  OutlookThe 2007 Cash Flow From Operations Outlook was developed using the above
  Baseline Production Forecast, a dated Brent oil price of $55.00/Bbl and a gas
  price of C$7.50/Mcf. The prices used for the Outlook are 15% lower for oil and
  6% higher for gas than the actual realized prices during 2006. The lower forecasted
  oil price has resulted in a decrease in the estimated 2007 Cash Flow From Operations.
  In addition, the Block S-1 Production Sharing Agreement has reached payout on
  the exploration expenditures and is quickly paying out the development expenditures
  which will result in a lower cost oil allocation during 2007, reducing 2007
  Cash Flow From Operations.

2007 Cash Flow From Operations Outlook

| | ($000s)                                                                                                                                                                                                      | 2007(**)      | 2006   | Change (*)
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------- | ------ | ----------
| | Cash flow from operations                                                                                                                                                                                     | 39,000-41,000 | 46,763 | (14)%     
| | *(*) % growth based on mid point of guidance
      (**) Based on a dated Brent oil price of $55.00/Bbl and a gas price of C$7.50/Mcf,
      from existing fields in Yemen and planned development in Canada.*

Variations in production and commodity
  prices during 2007 could significantly change this Outlook. An estimate of the
  price sensitivity on the Baseline Production Forecast is shown below. During
  January and February 2007 the dated Brent oil price averaged $55.55 per barrel
  and the gas price averaged approximately C$7.50 per Mcf.

| | Sensitivity                            | 2007             
| | -------------------------------------- | -----------------
| |                                        | Cash Flow from   
| |                                        | Operations       
| | ($000s)                               | Increase/Decrease
| | $1.00 per barrel change in dated Brent | 537              
| | C$1.00 per Mcf change
      in AECO    | 1,633            
| |                                        |                  
| | 2007 Capital Budget                    |                  
| |                                        |                  
| | ($000s)                               | 2007             
| | Canada                                 | 15,400           
| | Yemen - Block S1                       | 12,600           
| | - Block 32                             | 5,900            
| | - Block
      72                       | 4,600            
| | - Block 75                             | 1,000            
| | - Block
      84                       | 2,000            
| | Egypt                                  | 4,700            
| | Total                                  | 46,200           

TransGlobe plans to continue increasing
  crude oil production in Yemen and natural gas production in Canada to deliver
  near term growth. Potential production growth could come from Block 72, in Yemen,
  in the medium term. In the long term, production growth could come from Blocks
  75 and 84 in Yemen and Nuqra Block 1 in Egypt. For the near term growth, the
  Company expects to drill 12 wells in Yemen during 2007 of which six wells will
  be development wells and six wells will be exploration wells. In Canada, the
  Company plans on drilling 10 to 12 wells during 2007 which are mainly development
  wells. The Company plans on drilling two exploratory wells in Egypt in 2007.
  The Company attaches a significantly higher risk to the exploratory wells. The
  2007 capital budget of $46.2 million is expected to be funded from cash flow,
  working capital and debt as required. The use of our credit facilities or equity
  financing during 2007 may be utilized in the future to accelerate existing projects
  or to finance new opportunities.

40

2006 Annual Report

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