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R E P O R T  O F 
  I N D E P E N D E N T  R E G I S T E R E D 
  C H A R T E R E D  A C C O U N T A N T S



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

We have audited the accompanying consolidated balance sheets
  of TransGlobe Energy Corporation (the Company) as of December 31,
  2007 and 2006 and the related consolidated statements of income, retained earnings,
  comprehensive income and cash flows for the years then ended. These financial
  statements are the responsibility of the Companys management. Our responsibility
  is to express an opinion on these financial statements based on our audits.

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

In our opinion, these consolidated financial statements present
  fairly, in all material respects, the financial position of TransGlobe Energy
  Corporation as of December 31, 2007 and 2006, and the results of its operations
  and its cash flows for the years then ended in accordance with Canadian generally
  accepted accounting principles.

We have also audited, in accordance with the standards of the
  Public Company Accounting Oversight Board (United States), the Companys
  internal control over financial reporting as of December 31, 2007, based on
  the criteria established in Internal Control-Integrated Framework issued by
  the Committee of Sponsoring Organizations of the Treadway Commission and our
  report dated February 29, 2008 expressed an unqualified opinion on the Companys
  internal control over financial reporting.

Independent Registered Chartered Accountants 
  Calgary, Canada 
  February 29, 2008



C O M M E N T S  B
  Y  I N D E P E N D E N T  R E G I S T E R E DC H A R T E R E D  A C C O U N T A N T S  O N 
  C A N A D A - U N I T E D 
  S TAT E S  O F  A M E R I C A  R E P O R T I N G  D I F
  F E R E N C E S



The standards of the Public Company Accounting Oversight Board
  (United States) require the addition of an explanatory paragraph (following
  the opinion paragraph) when there are changes in accounting principles that
  have a material effect on the comparability of the Companys financial
  statements, such as the changes described in Notes 2 and 16 to the financial
  statements. Although we conducted our audits in accordance with both Canadian
  generally accepted auditing standards and the standards of the Public Company
  Accounting Oversight Board (United States), our report to the Board of Directors
  and Shareholders on the consolidated financial statements of TransGlobe Energy
  Corporation, dated February 29, 2008, is expressed in accordance with Canadian
  reporting standards which do not require a reference to such changes in accounting
  principles in the auditors report when the change is properly accounted
  for and adequately disclosed in the financial statements.

Independent Registered Chartered Accountants 
  Calgary, Canada 
  February 29, 2008



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R E P O R T  O F  I
  N D E P E N D E N T  R E G I S T E R E DC H A R T E R E D  A C C O U N TA N T S

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

We have audited the internal control over financial reporting
  of TransGlobe Energy Corporation (the Company) as of December 31,
  2007, based on the criteria established in Internal Control-Integrated Framework
  issued by the Committee of Sponsoring Organizations of the Treadway Commission.
  The Companys management is responsible for maintining effective internal
  control over financial reporting and for its assessment of the effectiveness
  of internal control over financial reporting, included in the accompanying Management
  Report on Internal Control Over Financial Reporting. Our responsibility is to
  express an opinion on the Companys internal control over financial reporting
  based on our audit. As described in the Management Report, management excluded
  from its assessment the internal control over financial reporting at Dublin
  International Petroleum (Egypt) Limited and Drucker Petroleum Inc., which was
  acquired on September 25, 2007 and whose financial statements constitute 55
  percent and 35 percent of net and total assets, respectively, 8 percent of revenues,
  and 9 percent of net income of the consolidated financial statement amounts
  as of and for the year ended December 31, 2007. Accordingly, our audit did not
  include the internal control over financial reporting at Dublin International
  Petroleum (Egypt) Limited and Drucker Petroleum Inc.

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

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

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

In our opinion, the Company maintained, in all material respects,
  effective internal control over financial reporting as of December 31, 2007,
  based on the criteria established in Internal Control-Integrated Framework issued
  by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with Canadian generally accepted
  auditing standards and the standards of the Public Company Accounting Oversight
  Board (United States), the consolidated financial statements as at and for the
  year ended December 31, 2007 of the Company and our report dated February 29,
  2008 expressed an unqualified opinion on those financial statements and included
  a separate report titled Comments by Independent Registered Chartered Accountants
  on Canada-United States of America Reporting Differences referring to changes
  in accounting principles.

Independent Registered Chartered Accountants 
  Calgary, Canada 
  February 29, 2008

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C O N S O L I D AT E D  S
  TAT E M E N T S  O F  I N C O M E 
  A N D  R E T A I N E D  E A R N I N G S

|(Expressed in thousands of U.S. Dollars)                      |   | Year Ended        |       |   | Year Ended        |  
|------------------------------------------------------------- | - | ----------------- | ----- | - | ----------------- | -
|                                                              |   | December 31, 2007 |       |   | December 31, 2006 |  
|                                                              |   |                   |       |   |                   |  
|R E V E N U E                                                 |   |                   |       |   |                   |  
|Oil and gas
      sales, net of royalties and other           | $ | 87,911            |       | $ | 70,097            |  
|Derivative loss on commodity
      contracts (Note 14)        |   | (7,979            | **)** |   | (83               | )
|Other income                                                  |   | 183               |       |   | 283               |  
|                                                              |   | 80,115            |       |   | 70,297            |  
|                                                              |   |                   |       |   |                   |  
|E X P E N S E S                                               |   |                   |       |   |                   |  
|Operating                                                     |   | 15,268            |       |   | 11,107            |  
|General and administrative                                    |   | 6,743             |       |   | 4,674             |  
|Foreign exchange
      loss (gain)                            |   | 5                 |       |   | (12               | )
|Interest on long-term debt                                    |   | 1,450             |       |   | -                 |  
|Depletion, depreciation
      and accretion                   |   | 31,172            |       |   | 18,941            |  
|                                                              |   | 54,638            |       |   | 34,710            |  
|                                                              |   |                   |       |   |                   |  
|Income before income taxes                                    |   | 25,477            |       |   | 35,587            |  
|                                                              |   |                   |       |   |                   |  
|I N C O M E  TA X E S  (Note 8)                               |   |                   |       |   |                   |  
|Current                                                       |   | 12,630            |       |   | 9,129             |  
|Future                                                        |   | 45                |       |   | 263               |  
|                                                              |   | 12,675            |       |   | 9,392             |  
|                                                              |   |                   |       |   |                   |  
|N E T  I N C O M E                                            |   | 12,802            |       |   | 26,195            |  
|                                                              |   |                   |       |   |                   |  
|Purchase of common shares (Note 7b)                           |   | (375              | **)** |   | -                 |  
|Retained earnings,
      beginning of year                    |   | 45,360            |       |   | 19,165            |  
|                                                              |   |                   |       |   |                   |  
|R E T A I N E D 
      E A R N I N G S ,  E N D  O F  Y E A R | $ | 57,787            |       | $ | 45,360            |  
|                                                              |   |                   |       |   |                   |  
|Net income per share(Note 11)                                 |   |                   |       |   |                   |  
|Basic                                                         | $ | 0.21              |       | $ | 0.45              |  
|Diluted                                                       | $ | 0.21              |       | $ | 0.43              |  

C O N S O L I D A T E D 
  S T A T E M E N T S  O F  
  C O M P R E H E N S I V E  I N C O M E

|(Expressed in thousands of U.S. Dollars)      |   | Year Ended        |  |   | Year Ended        |  
|--------------------------------------------- | - | ----------------- |  | - | ----------------- | -
|                                              |   | December 31, 2007 |  |   | December 31, 2006 |  
|Net income                                    | $ | 12,802            |  | $ | 26,195            |  
|Other comprehensive income:                   |   |                   |  |   |                   |  
|Foreign currency translation
      adjustment |   | 8,554             |  |   | (430              | )
|C O M P R E H E N
      S I V E  I N C O M E  | $ | 21,356            |  | $ | 25,765            |  

See accompanying notes.



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C O N S O L I D A T E D 
  B A L A N C E  S H E E T S

|(Expressed in thousands of U.S. Dollars)                  |   |                   |  |   |                   | 
|--------------------------------------------------------- | - | ----------------- |  | - | ----------------- | 
|                                                          |   | December 31, 2007 |  |   | December 31, 2006 | 
|                                                          |   |                   |  |   |                   | 
|A S S E T S                                               |   |                   |  |   |                   | 
|Current                                                   |   |                   |  |   |                   | 
|Cash and
      cash equivalents                           | $ | 12,729            |  | $ | 8,836             | 
|Accounts receivable                                       |   | 17,902            |  |   | 7,742             | 
|Product inventory                                         |   | -                 |  |   | 508               | 
|Prepaid expenses                                          |   | 1,126             |  |   | 782               | 
|                                                          |   | 31,757            |  |   | 17,868            | 
|                                                          |   |                   |  |   |                   | 
|Property and equipment (Note 4, 12)                       |   | 166,286           |  |   | 96,608            | 
|                                                          |   |                   |  |   |                   | 
|Future income tax asset (Note 8)                          |   | 1,863             |  |   | 1,626             | 
|Deferred financing costs (Note 5)                         |   | -                 |  |   | 371               | 
|Goodwill (Note 3)                                         |   | 4,313             |  |   | -                 | 
|                                                          |   |                   |  |   |                   | 
|                                                          | $ | 204,219           |  | $ | 116,473           | 
|                                                          |   |                   |  |   |                   | 
|L I A B I L I T I E S                                     |   |                   |  |   |                   | 
|Current                                                   |   |                   |  |   |                   | 
|Accounts
      payable and accrued liabilities            | $ | 14,438            |  | $ | 13,507            | 
|Derivative commodity contracts
      (Note 14)            |   | 7,098             |  |   | -                 | 
|Current portion of long-term
      debt (Note 5)          |   | 4,727             |  |   | -                 | 
|                                                          |   | 26,263            |  |   | 13,507            | 
|                                                          |   |                   |  |   |                   | 
|Long-term debt (Note 5)                                   |   | 51,958            |  |   | -                 | 
|Asset retirement obligations (Note 6)                     |   | 2,755             |  |   | 2,171             | 
|                                                          |   | 80,976            |  |   | 15,678            | 
|                                                          |   |                   |  |   |                   | 
|Commitments and contingencies (Note 13)                   |   |                   |  |   |                   | 
|                                                          |   |                   |  |   |                   | 
|S H A R E H O L D E R S   E Q U I T Y                    |   |                   |  |   |                   | 
|Share capital (Note 7)                                    |   | 50,128            |  |   | 49,360            | 
|Contributed surplus (Note 7d)                             |   | 3,562             |  |   | 2,863             | 
|Accumulated other comprehensive income (Note
      2, 10) |   | 11,766            |  |   | 3,212             | 
|Retained earnings                                         |   | 57,787            |  |   | 45,360            | 
|                                                          |   | 123,243           |  |   | 100,795           | 
|                                                          |   |                   |  |   |                   | 
|                                                          | $ | 204,219           |  | $ | 116,473           | 

See accompanying notes.

A P P R O V E D  O N  B E H A L F  O F  T
  H E  B O A R D

|                           |                         
|-------------------------- | ------------------------
|Ross G. Clarkson, Director | Fred J. Dyment, Director

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C O N S O L I D A T E D 
  S T A T E M E N T S  O F  C A S H  F L O W S

|(Expressed in thousands of U.S. Dollars)                                         |   | Year Ended        |       |   | Year Ended        |  
|-------------------------------------------------------------------------------- | - | ----------------- | ----- | - | ----------------- | -
|                                                                                 |   | December 31, 2007 |       |   | December 31, 2006 |  
|                                                                                 |   |                   |       |   |                   |  
|                                                                                 |   |                   |       |   |                   |  
|C A S H  F L O W S  R E L AT E D 
      T O  T H E                               |   |                   |       |   |                   |  
|F O L L O W I N G  A C T I V I T I E S :                                         |   |                   |       |   |                   |  
|                                                                                 |   |                   |       |   |                   |  
|O P E R AT I N G                                                                 |   |                   |       |   |                   |  
|Net income                                                                       | $ | 12,802            |       | $ | 26,195            |  
|Adjustments for:                                                                 |   |                   |       |   |                   |  
|Depletion, depreciation and accretion                                            |   | 31,172            |       |   | 18,941            |  
|Amortization of deferred financing costs                                         |   | 153               |       |   | 179               |  
|Future income taxes                                                              |   | 45                |       |   | 263               |  
|Stock-based compensation (Note 7d)                                               |   | 1,086             |       |   | 1,168             |  
|Unrealized loss on commodity contracts                                           |   | 7,098             |       |   | 83                |  
|Settlement of asset retirement obligations                                       |   | (215              | **)** |   | (66               | )
|Changes in
      non-cash working capital, net of the                            |   |                   |       |   |                   |  
|effect of acquisitions (Note
      9)                                            |   | 1,477             |       |   | 620               |  
|                                                                                 |   | 53,618            |       |   | 47,383            |  
|                                                                                 |   |                   |       |   |                   |  
|F I N A N C I N G                                                                |   |                   |       |   |                   |  
|Increase in long-term debt                                                       |   | 63,000            |       |   | -                 |  
|Repayment
      of long-term debt                                                |   | (5,000            | **)** |   | -                 |  
|Purchase of common shares                                                        |   | (472              | **)** |   | -                 |  
|Issue of
      common shares for cash                                            |   | 605               |       |   | 297               |  
|Deferred financing costs                                                         |   | (1,097            | **)** |   | (438              | )
|                                                                                 |   | 57,036            |       |   | (141              | )
|                                                                                 |   |                   |       |   |                   |  
|I N V E S T I N G                                                                |   |                   |       |   |                   |  
|Exploration and development
      expenditures                                   |   | (37,015           | **)** |   | (51,555           | )
|Acquisition
      (Note 3)                                                       |   | (68,001           | **)** |   | -                 |  
|Changes in non-cash working capital (Note 9)                                     |   | (1,963            | **)** |   | 1,035             |  
|                                                                                 |   | (106,979          | **)** |   | (50,520           | )
|                                                                                 |   |                   |       |   |                   |  
|Effect of exchange rate changes on cash and                                      |   |                   |       |   |                   |  
|cash equivalents                                                                 |   | 218               |       |   | (107              | )
|                                                                                 |   |                   |       |   |                   |  
|N E T  I N C R E A S E  I N  C A S H  A
      N D  C A S H  E Q U I VA L E N T S |   | 3,893             |       |   | (3,385            | )
|                                                                                 |   |                   |       |   |                   |  
|CASH AND CASH EQUIVALENTS,
      BEGINNING OF YEAR                               |   | 8,836             |       |   | 12,221            |  
|                                                                                 |   |                   |       |   |                   |  
|C A S H  A N
      D  C A S H  E Q U I VA L E N T S ,  E N D  O F 
      Y E A R | $ | 12,729            |       | $ | 8,836             |  
|                                                                                 |   |                   |       |   |                   |  
|Supplemental Disclosure of Cash Flow Information                                 |   |                   |       |   |                   |  
|Cash interest
      paid                                                         | $ | 1,384             |       | $ | -                 |  
|Cash taxes paid                                                                  | $ | 12,630            |       | $ | 9,129             |  
|Cash and
      cash equivalents is comprised of cash on hand and                 |   |                   |       |   |                   |  
|balances with banks                                                              | $ | 12,729            |       | $ | 8,836             |  

See accompanying notes.



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N O T E S  T O  T
  H E  C O N S O L I D A T E DF I N A N C I A L  S T A T E M E N T S

Y E A R S  E N D E D  D E C
  E M B E R  3 1 , 2 0 0 7  A N D  D E C E M B E R  3 1 ,
   2 0 0 6

(Expressed in thousands of U.S. Dollars, unless otherwise
  stated)

1 . S U M M A RY  O
  F  S I G N I F I C A N T  A C C O U N T I N G  P O L I C I E
  S

The Consolidated Financial Statements include the accounts of
  TransGlobe Energy Corporation and subsidiaries (TransGlobe or the
  Company), and are presented in accordance with Canadian generally
  accepted accounting principles (information prepared in accordance with generally
  accepted accounting principles in the United States is included in Note 16).
  In these Consolidated Financial Statements, unless otherwise indicated, all
  dollar amounts are expressed in United States (U.S.) dollars. All references
  to US$ or to $ are to United States dollars and references to C$ are to Canadian
  dollars.

N AT U R E  O F  B U S I N
  E S S  A N D  P R I N C I P L E S  O F  C O N S O L I D
  A T I O N

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

- Nuqra Block 1 and West Gharib area within the Arab Republic of Egypt (Egypt).
- Block 32, Block S-1, Block 72, Block 75 and Block 84 within the Republic
    of Yemen (Yemen).
- The Western Canadian Sedimentary Basin within Canada.

J O I N T  V E N T U R E S

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

C U R R E N C Y  T R A N S L A T
  I O N

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

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

R E V E N U E  R E C O G N I T I
  O N

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

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

45

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I N C O M E  TA X E S

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

F L O W- T H R O U G H  S H A R
  E S

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

N E T  I N C O M E  P E R 
  S H A R E

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

C A S H  A N D  C A S H 
  E Q U I V A L E N T S

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

I N V E N T O R I E S

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

P R O P E RT Y  A N D  E Q
  U I P M E N T

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

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

D E P R E C I AT I O N ,  D E P
  L E T I O N ,  A M O R T I Z AT I O N  A N D  I M P A I R M E
  N T

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

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

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

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

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

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



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A S S E T  R E T I R E M E N T 
  O B L I G AT I O N S

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

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

S T O C K - B A S E D  C O M P E
  N S AT I O N

The Company records compensation expense in the Consolidated
  Financial Statements for stock options granted to employees and directors using
  the fair value method. Fair values are determined using the lattice-based binomial
  option pricing model in 2007 and 2006 and the Black-Scholes option pricing model
  in 2005 and prior years. Compensation costs are recognized over the vesting
  period.

D E R I V A T I V E  F I N A N C
  I A L  I N S T R U M E N T S

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 revenues
  as they occur. Unrealized gains and losses are recognized in revenues at the
  end of each respective reporting period. The estimated fair value of all derivative
  instruments is based on quoted market prices and/or third party market indications
  and forecasts.

G O O D W I L L

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

M E A S U R E M E N T  U N C E R T
  A I N T Y

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

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

2 .  C H A N G E S 
  I N  A C C O U N T I N G  P O L I C I E S

F I N A N C I A L  I
  N S T R U M E N T S ,  C O M P R E H E N S I V E  I N C O M E ,H E D G E S  A N D  E Q U I T
  Y

Effective January 1, 2007, the Company adopted the new recommendations
  of the Canadian Institute of Chartered Accountants (CICA) under CICA Handbook
  Section 1530, Comprehensive Income, Section 1651, Foreign Currency
  Translation, Section 3251, Equity, Section 3855, Financial Instruments
  - Recognition and Measurement, Section 3861, Financial Instruments Disclosure
  and Presentationand Section 3865, Hedges. These new Handbook Sections
  provide requirements for the recognition and measurement of financial instruments
  in the balance sheet, reporting gains or losses in the financial statements
  and the use of hedge accounting.

47

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Under Section 3855, all financial instruments are initially measured
  in the balance sheet at fair value. Subsequent measurement of the financial
  instruments is based on their classification. The Company has classified each
  financial instrument into one of these five categories: held-for-trading, held-to-maturity
  investments, loans and receivables, available-for-sale financial assets or other
  financial liabilities. Loans and receivables, held-to-maturity investments and
  other financial liabilities are measured at amortized cost using the effective
  interest rate method. For all financial assets and financial liabilities that
  are not classified as held-for-trading, the transaction costs that are directly
  attributable to the acquisition or issue of a financial asset or liability are
  adjusted to the fair value initially recognized for that financial instrument.
  These costs are expensed using the effective interest rate method and are recorded
  within interest expense. Held-for-trading financial assets are measured at fair
  value and changes in fair value are recognized in net income. Available-for-sale
  financial instruments are measured at fair value with changes in fair value
  recorded in other comprehensive income until the instrument is derecognized
  or impaired. All derivative instruments are recorded in the balance sheet at
  fair value unless they qualify for the expected purchase, sale and usage exemption.
  All changes in their fair value are recorded in income unless cash flow hedge
  accounting is used, in which case changes in fair value are recorded in other
  comprehensive income.

As a result of the adoption of these new standards, the Company
  has classified its derivative commodity contracts and cash and cash equivalents
  as held-for-trading, which are measured at fair value with changes being recognized
  in net income. Accounts receivable are classified as loans and receivables;
  operating bank loans, accounts payable and accrued liabilities, and long-term
  debt, including interest payable, are classified as other liabilities, all of
  which are measured at amortized cost. The classification of all financial instruments
  is the same at inception and at December 31, 2007. The Company has elected to
  classify all derivatives and embedded derivatives as held-for trading, which
  are measured at fair value with changes being recognized in net income, and
  the Company has maintained its policy not to use hedge accounting. The Company
  elected January 1, 2003 as the transition date for embedded derivatives.

Carrying value and fair value of financial assets and liabilities
  as at December 31, 2007 are summarized as follows:

|Classification ($000s) |   | Carrying Value |  |   | Fair
      Value | 
|---------------------- | - | -------------- |  | - | ---------------- | 
|Held-for-trading       | $ | 5,631          |  | $ | 5,631            | 
|Loans and receivables  |   | 17,902         |  |   | 17,902           | 
|Held-to-maturity       |   | -              |  |   | -                | 
|Available-for-sale     |   | -              |  |   | -                | 
|Other liabilities      |   | 70,880         |  |   | 72,195           | 

Section 1530 establishes standards for reporting and presenting
  comprehensive income which is defined as the change in equity from transactions
  and other events from non-owner sources. Other comprehensive income refers to
  items recognized in comprehensive income but that are excluded from net income
  calculated in accordance with generally accepted accounting principles. Due
  to the issuance of Section 1530, Section 1650 has been replaced by Section 1651
  which establishes new standards for presentation of exchange gains and losses
  arising from the translation of self-sustaining foreign operation in Other Comprehensive
  Income. Therefore, the Company has restated prior periods to include cumulative
  translation adjustment on self-sustaining operations as Other Comprehensive
  Income.

Section 3251, Equity, which replaces Section 3250, Surplus,
  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.

VA R I A B L E  I N T E R E S T 
  E N T I T I E S

Effective January 1, 2007, the Company adopted 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 adoption of EIC 163 had no
  effect on the Companys Consolidated Financial Statements.

R E C E N T  A C C O U N T I N G
   P R O N O U N C E M E N T S

C A P I TA L  D I S C L O S U R
  E S

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.



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A C C O U N T I N G  C H A N G E
  S

Effective January 1, 2007, the Company adopted the revised recommendations
  of Section 1506, Accounting Changes. The new recommendations permit voluntary
  changes in accounting policy only if they result in financial statements which
  provide more reliable and relevant information. Accounting policy changes are
  applied retrospectively unless it is impractical to determine the period or
  cumulative impact of the change. Corrections of prior period errors are applied
  retrospectively and changes in accounting estimates are applied prospectively
  by including these changes in earnings. The guidance was effective for all changes
  in accounting policies, changes in accounting estimates and corrections of prior
  period errors initiated in periods beginning on or after January 1, 2007.

The only impact of adopting this section is to provide disclosure
  of when an entity has not applied a new source of GAAP that has been issued
  but is not yet effective. This is the case with Section 3862, Financial Instruments
  Disclosures, and Section 3863, Financial Instruments Presentations,
  which are required to be adopted for fiscal years beginning on or after October
  1, 2007. The Company will adopt these standards on January 1, 2008 and it is
  expected the only effect on the Company will be incremental disclosures regarding
  the significance of financial instruments for the entitys financial position
  and performance; and the nature, extent and management of risks arising from
  financial instruments to which the entity is exposed.

G O O D W I L L  A N D  I N
  T A N G I B L E  A S S E T S

In February 2008, the Canadian Institute of Chartered Accountants
  (CICA) issued Section 3064, Goodwill and intangible assets,
  replacing Section 3062, Goodwill and other intangible assetsand Section
  3450, Research and development costs. Various changes have been made
  to other sections of the CICA Handbook for consistency purposes. The new Section
  will be applicable to financial statements relating to fiscal years beginning
  on or after October 1, 2008. Accordingly, the Company will adopt the new standards
  for its fiscal year beginning January 1, 2009. It establishes standards for
  the recognition, measurement, presentation and disclosure of goodwill subsequent
  to its initial recognition and of intangible assets by profit-oriented enterprises.
  Standards concerning goodwill are unchanged from the standards included in the
  previous Section 3062. The Company is currently evaluating the impact of the
  adoption of this new Section on its Consolidated Financial Statements.

I N T E R N A T I O N A L  F I N
  A N C I A L  R E P O R T I N G  S T A N D A R D S

In January 2006, the AcSB adopted a strategic plan for the direction
  of accounting standards in Canada. On February 13, 2008, the AcSB has confirmed
  that effective for interim and annual financial statements related to fiscal
  years beginning on or after January 1, 2011, International Financial Reporting
  Standards will replace Canadas current Generally Accepted Accounting Principles
  (GAAP) for all publicly accountable profit-oriented enterprises.
  The Company is currently evaluating the impact of this changeover on its Consolidated
  Financial Statements.

3 . B U S I N E S S  C
  O M B I N A T I O N

On September 25, 2007, TransGlobe acquired all of the common
  shares of two private companies, Dublin International Petroleum (Egypt) Limited
  (Dublin) and Drucker Petroleum Inc., (Drucker) for cash
  consideration of $67.7 million. The results of Dublins and Druckers
  operations have been included in the consolidated financial statements since
  that date. Dublin and Drucker hold interests in eight development leases and
  associated infrastructure in the West Gharib Concession area in Egypt (Dublin
  is the operator of this Concession). TransGlobe funded the acquisition from
  cash on hand and bank debt of $63.0 million.

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

|Cost of acquisition
      (000s)      |   |        |  |  |  | 
|------------------------------------- | - | ------ |  |  |  | 
|Cash paid, net of cash acquired       | $ | 67,684 |  |  |  | 
|Transactions costs                    |   | 317    |  |  |  | 
|                                      | $ | 68,001 |  |  |  | 
|                                      |   |        |  |  |  | 
|Allocation of purchase price (000s)   |   |        |  |  |  | 
|Property and equipment                | $ | 54,823 |  |  |  | 
|Goodwill                              |   | 4,313  |  |  |  | 
|Working capital, net of cash acquired |   | 8,865  |  |  |  | 
|                                      | $ | 68,001 |  |  |  | 

In December 2007, TransGlobe adjusted its estimate of acquisition
  costs and settlement of the post-closing adjustments relating to the acquisition.
  This resulted in a decrease to goodwill of $0.2 million.

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4 .  P R O P E R T
  Y  A N D  E Q U I P M E N T

E G Y P T

|(000s)                            |   | 2007   |       |   | 2006  |  
|--------------------------------- | - | ------ | ----- | - | ----- | -
|Oil and gas properties            | $ | 68,460 |       | $ | 7,683 |  
|Furniture and fixtures            |   | 1,144  |       |   | 199   |  
|Accumulated depreciation          |   | (3,177 | **)** |   | (43   | )
|Write-off of dry hole
      costs |   | (4,111 | **)** |   | -     |  
|                                  | $ | 62,316 |       | $ | 7,839 |  

During the year, the Company acquired all the shares of Dublin
  and Drucker who together hold a 70% working interest in the West Gharib Production
  Sharing Concession (PSC). TransGlobe has assumed operatorship of
  the West Gharib Concession Agreement. The eight approved West Gharib development
  leases are valid for 20 years, expiring between 2019 and 2026. One additional
  development lease at East Hoshia was subsequently approved by Egyptian Petroleum
  Minister on January 31, 2008. Eight of the nine development leases (excluding
  the Hana development lease) are encumbered with a 25% financial interest through
  an investment agreement between Dublin and a private company. The 25% financial
  interest is non-voting but otherwise is treated as a 25% participating interest
  partner.

The Contractor is in the first three year extension period of
  the Nuqra Concession Agreement which expires in July 2009. One additional extension
  period of three years is available to the Contractor at its option.

The Company capitalized general and administrative costs relating
  to exploration and development activities of $0.8 million (2006 - $1.1 million).
  The remaining costs related to drilling preparation and geological and geophysical
  activity. Unproven property costs in the amount of $13.3 million of which $4.1
  million of dry hole costs were considered impaired during the year and written
  off to depletion, depreciation and accretion, leaving $9.2 million in 2007 (2006
  - $7.7 million) of unproven property costs that were excluded from costs subject
  to depletion and depreciation.

Y E M E N

|(000s)                                       |   | 2007    |       |   | 2006    |  
|-------------------------------------------- | - | ------- | ----- | - | ------- | -
|Oil and gas properties                       |   |         |       |   |         |  
|- Block S-1                                  | $ | 63,909  |       | $ | 54,410  |  
|- Block 32                                   |   | 40,449  |       |   | 34,060  |  
|- Block 72                                   |   | 5,301   |       |   | 2,373   |  
|- Block 75                                   |   | 571     |       |   | 250     |  
|- Block 84                                   |   | 41      |       |   | 15      |  
|- Other                                      |   | 129     |       |   | 96      |  
|Accumulated depletion
      and depreciation |   | (57,237 | **)** |   | (45,080 | )
|                                             | $ | 53,163  |       | $ | 46,124  |  

The Company has working interests in five blocks in Yemen: Block
  32, Block S-1, Block 72, Block 75 and Block 84. The Block 32 (13.81087%) Production
  Sharing Agreement (PSA) continues to 2020, with provision for a
  five year extension. The Block S-1 (25%) PSA continues to 2023, with provision
  for a five year extension. The Contractor (Joint Venture Partners) is in the
  first exploration period of the Block 72 (33%) PSA which has been extended to
  January 2009, at which time the Contractor can elect to proceed to the second
  exploration period. The Block 84 (33%) and Block 75 (25%) PSAs are in the ratification
  process with the Republic of Yemen.

During the year the Company capitalized overhead costs relating
  to exploration and development activities of $0.7 million (2006 - $0.4 million).
  Unproven property costs in the amount of $5.0 million in 2007 ($2.6 million
  in 2006) were excluded in the costs subject to depletion and depreciation representing
  some of the costs incurred at Block 72, Block 75 and Block 84.

C A N A D A

|(000s)                                 |   | 2007    |       |   | 2006    |  
|-------------------------------------- | - | ------- | ----- | - | ------- | -
|Oil and gas properties                 | $ | 80,570  |       | $ | 57,624  |  
|Furniture and fixtures                 |   | 1,260   |       |   | 1,004   |  
|Accumulated depletion and depreciation |   | (31,023 | **)** |   | (15,983 | )
|                                       | $ | 50,807  |       | $ | 42,645  |  



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During the year the Company capitalized overhead costs relating
  to exploration and development activities of $0.5 million (2006 - $0.5 million).
  Unproven property costs in the amount of $3.9 million in 2007 (2006 - $nil)
  were excluded in the costs subject to depletion and depreciation.

C E I L I N G  T E S T

An impairment test calculation was performed on property and
  equipment at December 31, 2007 in which the estimated undiscounted future net
  cash flows based on estimated future prices associated with the proved reserves
  exceed the carrying amount of oil and gas property and equipment for each cost
  centre.

The following table outlines prices used in the impairment test
  at December 31, 2007:

Oil
      
      Gas
      CondensateYear
      Egypt
      Yemen
      Canada
      Canada
      Canada2008
      $ 64.86
      $ 88.12
      $ 83.25
      $ 7.34
      $ 92.812009
      62.29
      84.80
      80.62
      8.04
      87.412010
      61.08
      83.23
      78.94
      7.93
      85.472011
      59.93
      81.83
      77.30
      7.89
      83.642012
      59.53
      81.30
      76.58
      7.99
      83.01Thereafter(1)
      2%
      2%
      2%
      2%
      2%


(1) Percentage change represents the increase in each year after
  2012 to the end of the reserve life.

5 .  L O N G - T E
  R M  D E B T

|(000s)                              |   | 2007   |       |   | 2006 | 
|----------------------------------- | - | ------ | ----- | - | ---- | 
|Revolving Credit Agreement          | $ | 50,000 |       | $ | -    | 
|Term Loan Agreement                 |   | 8,000  |       |   |      | 
|                                    |   | 58,000 |       |   | -    | 
|Unamortized transaction
      costs |   | (1,315 | **)** |   | -    | 
|                                    |   | 56,685 |       |   | -    | 
|                                    |   |        |       |   |      | 
|Current portion of long-term debt   |   | 4,727  |       |   |      | 
|                                    | $ | 51,958 |       | $ | -    | 

In September 2007, the Company increased its initial borrowing
  base of $25.0 million to $50.0 million under the Revolving Credit Agreement
  and established a new Term Loan Agreement of $13.0 million, which both expire
  on September 19, 2010. Both borrowing facilities are secured by a first floating
  charge debenture over all assets of the Company, a general assignment of book
  debts, security pledge of the Companys subsidiaries and certain covenants.
  The Revolving Credit Agreement and the Term Loan Agreement bear interest at
  the Eurodollar Rate plus three percent and plus six percent, respectively. The
  Company incurred fees of $1.1 million to establish the long-term debt and reclassified
  previously unamortized financing costs in the amount of $0.3 million.

The future debt payments on long-term debt, as of December 31,
  2007, are as follows:

|(000s) |   |        | 
|------ | - | ------ | 
|2008   | $ | 4,727  | 
|2009   | $ | 3,273  | 
|2010   | $ | 50,000 | 

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6 .  A S S E T  R
  E T I R E M E N T  O B L I G AT I O N S

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

|(000s)                                                |   | 2007  |       |   | 2006  |  
|----------------------------------------------------- | - | ----- | ----- | - | ----- | -
|Asset retirement obligations, beginning of
      year | $ | 2,171 |       | $ | 1,503 |  
|Liabilities incurred                                  |   | 238   |       |   | 632   |  
|Liabilities settled                                   |   | (215  | **)** |   | (66   | )
|Accretion                                             |   | 164   |       |   | 124   |  
|Foreign exchange (gain) loss                          |   | 397   |       |   | (22   | )
|Asset retirement obligations,
      end of year       | $ | 2,755 |       | $ | 2,171 |  

At December 31, 2007, the estimated total undiscounted amount
  required to settle the asset retirement obligations was $3.6 million (2006 -
  $3.0 million). These obligations will be settled at the end of the useful lives
  of the underlying assets, which currently extend up to 9 years into the future.
  This amount has been discounted using a credit-adjusted risk-free interest rate
  of 6.5% .

7 . S H A R E  C A
  P I TA L

A )  A U T H O R I Z E D

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

B )  I S S U E D

|                                     |  | 2007   |       |   | 2006   |      
|------------------------------------ |  | ------ | ----- | - | ------ | -----
|                                     |  | No. of |       |   |        |      
|(000s)                               |  | Shares |       |   | Amount |      
|Balance, beginning of year           |  | 58,883 |       | $ | 49,360 |      
|Stock options exercised (c)          |  | 860    |       |   | 605    |      
|Stock based compensation on exercise |  | -      |       |   | 260    |      
|Purchase of common
      shares      |  | (116   | **)** |   | (97    | **)**
|Balance, end of year                 |  | 59,627 |       | $ | 50,128 |      

During the year ended December 31, 2007, TransGlobe repurchased
  115,900 common shares of the Company pursuant to a Normal Course Issuer Bid
  for a total of $0.5 million. The cost to repurchase common shares in excess
  of their average book value has been charged to retained earnings.

C )  S T O C K  O P T I O N
  S

The Company adopted a stock option plan in May 2007 (the Plan).
  The maximum number of common shares to be issued upon the exercise of options
  granted under the Plan is 5,888,300 common shares. All incentive stock options
  granted under the Plan have a per-share exercise price not less than the trading
  market value of the common shares at the date of grant. Stock options granted
  prior to February 1, 2005 vest as to 50% of the options, six months after the
  grant date, and as to the remaining 50%, one year from the grant date. Effective
  February 1, 2005 all new grants of stock options vest one-third on each of the
  first, second and third anniversaries of the grant date.



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The following tables summarize information about the stock options
  outstanding and exercisable at December 31, 2007:

|                                         |  | 2007    |   |  | 2006           | 
|---------------------------------------- |  | ------- | - |  | -------------- | 
|                                         |  | Number  |   |  | Weighted-      | 
|                                         |  | of      |   |  | Average        | 
|(000s except per share
      amounts)    |  | Options |   |  | Exercise Price | 
|Options outstanding at beginning of year |  | 3,110   |   |  | $ 3.12         | 
|Granted                                  |  | 1,091   |   |  | $ 4.44         | 
|Exercised                                |  | (860    | ) |  | $ 0.53         | 
|Forfeited                                |  | (405    | ) |  | $ 5.01         | 
|Options outstanding                      |  |         |   |  |                | 
|at end of year                           |  | 2,936   |   |  | $ 4.11         | 
|Options exercisable                      |  |         |   |  |                | 
|at end of year                           |  | 1,602   |   |  | $ 3.69         | 

Options
        Outstanding
      Options
        ExercisableWeighted-
      
      
      Weighted-Number
      Average
      
      
      AverageOutstanding
      Remaining
      Weighted-
      Number
      Remaining
      Weighted-at Dec. 31,
      Contractual
      Average
      Exercisable at
      Contractual
      Average2007
      Life
      Exercise
      Dec. 31, 2007
      Life
      ExerciseExercise Prices
      (000s)
      (Years)
      Price
      (000s)
      (Years)
      PriceC$0.63
      20
      0.5
      C$0.63
      20
      0.5
      C$0.63C$3.26-C$4.91
      1,647
      2.7
      C$3.82
      875
      1.2
      C$3.32C$6.03-C$7.74
      975
      2.8
      C$6.20
      667
      2.8
      C$6.20C$5.19-C$5.31
      294
      4.5
      C$5.24
      -
      -
      -2,936
      2.9
      C$4.73
      1,562
      1.9
      C$4.51


D )  S T O C K - B A S E D 
  C O M P E N S AT I O N

Compensation expense of $1.1 million has been recorded in general
  and administrative expenses in the Consolidated Statements of Income and Retained
  Earnings in 2007 (2006- $1.2 million). The fair value of all common stock options
  granted is estimated on the date of grant using the lattice-based binomial option
  pricing model. The weighted average fair value of options granted during the
  year and the assumptions used in their determination are as noted below:

|                                   | 2007               | 2006              
|---------------------------------- | ------------------ | ------------------
|Weighted average fair market value |                    |                   
|per option (C$)                    | $ 1.94             | $ 2.23            
|Risk free interest rate (%)        | 4.60               | 4.09              
|Expected lives (years)             | 5.00               | 5.00              
|Expected volatility (%)            | 45.92              | 48.79             
|Dividend per share                 | 0.00               | 0.00              
|Early exercise (Year 1/Year 2/Year |                    |                   
|3/Year 4/Year 5)                   | 0%/10%/20%/30%/40% | 0%/10%/20%/30%/40%

During the year, employees exercised 860,000 stock options. In
  accordance with Canadian generally accepted accounting principles, the fair
  value related to these options was $0.3 million at time of grant and has been
  transferred from contributed surplus to common shares.

|(000s)                                                       |   | 2007  |   |   | 2006  |  
|------------------------------------------------------------ | - | ----- | - | - | ----- | -
|Contributed surplus, beginning of year                       | $ | 2,863 |   | $ | 1,908 |  
|Stock-based compensation expense                             |   | 959   |   |   | 1,096 |  
|Transfer of stock-based compensation expense
      to common |   |       |   |   |       |  
|shares related to stock options exercised                    |   | (260  | ) |   | (141  | )
|Contributed surplus, end of year                             | $ | 3,562 |   | $ | 2,863 |  

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8 .  I N C O M E 
  TA X E S

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

|(000s)                                   |   | 2007  |  |   | 2006  | 
|---------------------------------------- | - | ----- |  | - | ----- | 
|Temporary differences related to:        |   |       |  |   |       | 
|Oil and gas properties                   | $ | 1,727 |  | $ | 1,292 | 
|Non-capital
      losses carried forward |   | -     |  |   | 214   | 
|Share issue expenses                     |   | 136   |  |   | 120   | 
|                                         | $ | 1,863 |  | $ | 1,626 | 

The Company has deductible temporary differences of C$0.5 million
  related to share issuance expenses and C$6.1 million related to income tax pools
  in excess of the carrying value of the Companys Canadian property and
  equipment. The Company also has $12.8 million of income tax losses in the United
  States of America. The United States of America losses carried forward expire
  between 2008 and 2020.

Current income taxes in the amount of $12.6 million (2006 - $9.1
  million) represents income taxes incurred and paid under the laws of Yemen pursuant
  to the PSA on Block 32 and Block S-1 and Egypt pursuant to the PSC on the West
  Gharib Concession.

Income taxes vary from the amount that would be computed by applying
  the Canadian statutory income tax rate of 32.12% (2006 - 34.5%) to income before
  taxes as follows:

|(000s)                                                                 |   | 2007   |  |   | 2006   |  
|---------------------------------------------------------------------- | - | ------ |  | - | ------ | -
|Income taxes calculated at the Canadian statutory
      rate           | $ | 8,184  |  | $ | 12,276 |  
|Increases (decreases) in income taxes resulting from:                  |   |        |  |   |        |  
|Non-deductible
      Crown charges (net of Alberta Royalty Tax Credit) |   | -      |  |   | 196    |  
|Resource allowance                                                     |   | -      |  |   | (239   | )
|Non-deductible
      stock-based compensation expense                  |   | 349    |  |   | 403    |  
|Different tax rates in Yemen
      and Egypt                           |   | 4,014  |  |   | (3,523 | )
|Other differences                                                      |   | 128    |  |   | 279    |  
|                                                                       | $ | 12,675 |  | $ | 9,392  |  

9 .  S U P P L E M
  E N TA L  C A S H  F L O W  I N F O R M AT I O N

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

|(000s)                                           |   | 2007    |       |   | 2006  |  
|------------------------------------------------ | - | ------- | ----- | - | ----- | -
|Operating activities                             |   |         |       |   |       |  
|Decrease (increase) in current
      assets      |   |         |       |   |       |  
|Accounts receivable                              | $ | (10,530 | **)** | $ | (556  | )
|Prepaid expenses                                 |   | (525    | **)** |   | 61    |  
|Product inventory                                |   | 199     |       |   | (60   | )
|Working capital acquired                         |   | 9,108   |       |   | -     |  
|Increase
      in current liabilities            |   |         |       |   |       |  
|Accounts payable and accrued
      liabilities   |   | 3,225   |       |   | 1,175 |  
|                                                 | $ | 1,477   |       | $ | 620   |  
|Investing activities                             |   |         |       |   |       |  
|Decrease
      (increase) in current assets      |   |         |       |   |       |  
|Accounts receivable                              | $ | 369     |       | $ | 228   |  
|Prepaid expenses                                 |   | 180     |       |   | (379  | )
|                                                 |   |         |       |   |       |  
|Increase
      (decrease) in current liabilities |   |         |       |   |       |  
|Accounts payable and accrued
      liabilities   |   | (2,512  | **)** |   | 1,186 |  
|                                                 | $ | (1,963  | **)** | $ | 1,035 |  



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10 .  AC C U M U L
  AT E D  OT H E R  C O M P R E H E N S I V E  I N C O M E

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

|(000s)                                                          |   | 2007   |  |   | 2006  |  
|--------------------------------------------------------------- | - | ------ |  | - | ----- | -
|Accumulated other comprehensive income, beginning
      of year | $ | 3,212  |  | $ | 3,642 |  
|Other comprehensive income:                                     |   |        |  |   |       |  
|Foreign currency translation
      adjustment                   |   | 8,554  |  |   | (430  | )
|Accumulated other
      comprehensive income, end of year       | $ | 11,766 |  | $ | 3,212 |  

11 .  N E T  I
  N C O M E  P E R  S H A R E

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

|(000s)                                                      |  | 2007   |       |  | 2006   |  
|----------------------------------------------------------- |  | ------ | ----- |  | ------ | -
|Weighted average number of shares outstanding               |  | 59,595 |       |  | 58,663 |  
|Shares issuable pursuant to stock options                   |  | 1,941  |       |  | 2,662  |  
|Shares to be purchased from proceeds of stock
      options |  |        |       |  |        |  
|under treasury stock method                                 |  | (1,011 | **)** |  | (763   | )
|Weighted average number of diluted shares outstanding       |  | 60,525 |       |  | 60,562 |  

The treasury stock method assumes that the proceeds received
  from the exercise of in-the-money stock options are used to repurchase
  common shares at the average market price. In calculating the weighted average
  number of diluted common shares outstanding for the year ended December 31,
  2007, the Company excluded 2,187,000 options (2006 - 1,109,000) because their
  exercise price was greater than the annual average common share market price
  in this period.

55

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12 .  S E G M E N T
  E D  I N F O R M A T I O N

In 2007, the Company had oil and natural gas production in three
  geographic segments, Egypt, Yemen and Canada.

The results of operations for the year ended December 31, 2007
  and December 31, 2006 are comprised of the following:

(000s)
      
      Egypt
      
      
      Yemen
      
      
      Canada
      
      
      Total2007
      
      
      2006
      
      
      2007
      
      
      2006
      
      
      2007
      
      
      2006
      
      
      2007
      
      
      2006Oil and gas sales, net ofroyalties and other
      $
      6,529
      
      $
      -
      
      $
      61,099
      
      $
      56,836
      
      $
      20,283
      
      $
      13,261
      
      $
      87,911
      
      $
      70,097Other income
      
      61
      
      
      -
      
      
      39
      
      
      210
      
      
      45
      
      
      39
      
      
      145
      
      
      2496,590
      
      
      -
      
      
      61,138
      
      
      57,046
      
      
      20,328
      
      
      13,300
      
      
      88,056
      
      
      70,346Segmented expensesOperating expenses
      
      722
      
      
      -
      
      
      10,334
      
      
      8,108
      
      
      4,212
      
      
      2,999
      
      
      15,268
      
      
      11,107Depletion,
        depreciationand
        accretion
      
      7,255
      
      
      37
      
      
      12,157
      
      
      11,623
      
      
      11,760
      
      
      7,281
      
      
      31,172
      
      
      18,941Income taxes
      
      1,735
      
      
      -
      
      
      10,895
      
      
      9,129
      
      
      45
      
      
      263
      
      
      12,675
      
      
      9,392Total segmented
        expenses
      
      9,712
      
      
      37
      
      
      33,386
      
      
      28,860
      
      
      16,017
      
      
      10,543
      
      
      59,115
      
      
      39,440Segmented income
      $
      (3,122
      **)**
      $
      (37
      )
      $
      27,752
      
      $
      28,186
      
      $
      4,311
      
      $
      2,757
      
      
      28,941
      
      
      30,906Non-segmented expensesDerivative loss on commoditycontracts
        (Note 14)
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      7,979
      
      
      83General and administrative
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      6,743
      
      
      4,674Interest
        on long-term debt
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      1,450
      
      
      -Foreign exchange loss (gain)
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      5
      
      
      (12
      )Other income
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      (38
      **)**
      
      (34
      )Total non-segmented
        expenses
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      16,139
      
      
      4,711Net income
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      $
      12,802
      
      $
      26,195Capital expenditures
      $
      6,904
      
      $
      5,365
      
      $
      18,437
      
      $
      26,585
      
      $
      11,674
      
      $
      19,605
      
      $
      37,015
      
      $
      51,555Acquisition
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      68,001
      
      
      -$
      6,904
      
      $
      5,365
      
      $
      18,437
      
      $
      26,585
      
      $
      11,674
      
      $
      19,605
      
      $
      105,016
      
      $
      51,555Property and equipment
      $
      62,316
      
      $
      7,839
      
      $
      53,163
      
      $
      46,124
      
      $
      50,807
      
      $
      42,645
      
      $
      166,286
      
      $
      96,608Goodwill
      
      4,313
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      4,313
      
      
      -Other
      
      13,464
      
      
      357
      
      
      5,906
      
      
      7,453
      
      
      8,765
      
      
      7,584
      
      
      28,135
      
      
      15,394Segmented assets
      $
      80,093
      
      $
      8,196
      
      $
      59,069
      
      $
      53,577
      
      $
      59,572
      
      $
      50,229
      
      
      198,734
      
      
      112,002Non-segmented assets
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      5,485
      
      
      4,471Total assets
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      $
      204,219
      
      $
      116,473






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13 .  C O M M I T M
  E N T S  A N D  C O N T I N G E N C I E S

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

|($000s) |     | 
|------- | --- | 
|2008    | 372 | 
|2009    | 355 | 
|2010    | 301 | 
|2011    | 140 | 
|2012    | 21  | 

Pursuant to the Nuqra Concession Agreement in Egypt, TransGlobe
  had a letter of credit in the amount of $0.3 million outstanding at December
  31, 2007. As of January 9, 2008 the letter of credit has been cancelled.

Pursuant to the East Hoshia Development Lease in Egypt, the Company
  and its partners have committed to drilling three exploration wells and submitted
  a letter of production guarantee for $4.0 million as security (expiring June
  1, 2009).

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 $0.3 million.

Pursuant to the PSA for Block 72, Yemen, the Contractor (Joint
  Venture Partners) has a minimum financial commitment of $4.0 million ($1.3 million
  to TransGlobe) during the first exploration period which has been extended to
  January 12, 2009, for exploration work consisting of seismic acquisition (completed)
  and one remaining exploration well.

Pursuant to the bid awarded for Block 75, Yemen, the Contractor
  (Joint Venture Partners) has a minimum financial commitment of $7.0 million
  ($1.8 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 2008. The
  Company issued a $1.5 million letter of credit (expiring November 15, 2011)
  to guarantee the Companys performance under the first exploration period.
  The letter is secured by a guarantee granted by Export Development Canada.

Pursuant to the bid awarded for Block 84, Yemen, the Contractor
  (Joint Venture Partners) has a minimum financial commitment of $20.1 million
  ($6.6 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 2008.

14 .  F I N A N C I
  A L  I N S T R U M E N T S  A N D  R I S K  M A N A G E
  M E N T

C A R R Y I N G  V A L U E S 
  A N D  E S T I M A T E D  F A I R  VA L U E S  O F 
  
  F I N A N C I A L  A S S E T S  A N D  L I A B I L I T I E S

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

C R E D I T  R I S K

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

In Egypt, the Company sold all of its 2007 production to one
  purchaser. In Yemen, the Company sold all of its 2007 Block 32 production to
  one purchaser and all of its 2007 Block S-1 production to one purchaser. In
  Canada, the Company sold primarily all of its 2007 gas production to one purchaser
  and primarily all of its 2007 oil production to another single purchaser.

57

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C O M M O D I T Y  P R I C E 
  R I S K  M A N A G E M E N T

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

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

|                                         |                   |                  | Dated Brent  
|---------------------------------------- | ----------------- | ---------------- | -------------
|                                         |                   |                  | Pricing      
|Period                                   | Volume            | Type             | Put Call     
|Crude Oil                                |                   |                  |              
|September
      1, 2007-August 31, 2008  | 15,000 Bbls/month | Financial Collar | $60.00-$78.55
|January 1, 2008-December
      31, 2008  | 12,000 Bbls/month | Financial Collar | $60.00-$81.20
|January 1,
      2009-December 31, 2009  | 12,000 Bbls/month | Financial Collar | $60.00-$82.10
|November 1, 2007-March 31,
      2008    | 5,000 Bbls/month  | Financial Collar | $65.00-$89.35
|September
      1, 2008-January 31, 2009 | 11,000 Bbls/month | Financial Collar | $60.00-$88.80
|February 1, 2009-December
      31, 2009 | 6,000 Bbls/month  | Financial Collar | $60.00-$86.10
|January 1, 2010-August
      31, 2010    | 12,000 Bbls/month | Financial Collar | $60.00-$84.25

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

F O R E I G N  C U R R E N C Y 
  E X C H A N G E  A N D  I N T E R E S T  R AT E  R I S K

The Companys operations are exposed to fluctuations in
  the foreign currency exchange rates. Variations in the foreign currency exchange
  rate could have a significant positive or negative impact. The Company manages
  its foreign currency exchange risk by maintaining foreign currency bank accounts
  and receivable accounts to offset foreign currency payable and planned expenditures.

Fluctuations in interest rates could result in a significant
  change in the amount the Company pays to service variable interest U.S. dollar-denominated
  debt. No derivative contracts were entered into during 2007 to mitigate this
  risk.

15 . S U B S E Q U E N T
   E V E N T S

On February 1, 2008, the Company announced that it had engaged
  a financial advisor to assist in the sale of its Canadian assets. While it is
  likely that this process will lead to the disposition of all or a portion of
  the Canadian assets, there is no assurance that this will be the case, nor is
  any forecast given as to the form of action that will be taken. Any proceeds
  from a potential sale of the Canadian assets will be applied to reduce debt.

On February 5, 2008, TransGlobe Energy Corporation announced
  the closing of the acquisition of privately-held GHP Exploration (West Gharib)
  Ltd. (GHP). TransGlobe acquired all the shares of GHP for $40.2
  million, plus working capital adjustments, effective September 30, 2007. The
  acquisition is funded from bank debt and cash on hand. GHP holds a 30% interest
  in the West Gharib Concession area in Egypt.

On February 5, 2008, the Company increased its Term Loan Agreement
  of $8.0 million to $48.0 million. The Term Loan repayment terms increased to
  $4.8 million per quarter, commencing June 30, 2008.

16 .  D I F F E R E
  N C E S  B E T W E E N  G E N E R A L LY  A C C E P T E D A C C O U N T I N G 
  P R I N C I P L E S  I N  C A N A D A  A N DT H E  U N I T
  E D  S TAT E S  O F  A M E R I C A

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



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CONSOLIDATED STATEMENTS OF INCOME AND
  RETAINED EARNINGS

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

|(000s, except per
      share amounts)                              |   | 2007    |   |   | 2006   | 
|------------------------------------------------------------------- | - | ------- | - | - | ------ | 
|Net income for the year under Canadian GAAP                         | $ | 12,802  |   | $ | 26,195 | 
|Adjustments:                                                        |   |         |   |   |        | 
|Impairment of Property
      and equipment and goodwill - Egypt (a) |   | (10,615 | ) |   | -      | 
|Net income for the period under U.S. GAAP                           |   | 2,187   |   |   | 26,195 | 
|Purchase of common shares                                           |   | (375    | ) |   | -      | 
|Retained earnings,
      beginning of year - U.S. GAAP              |   | 45,565  |   |   | 19,370 | 
|Retained earnings, end of year - U.S. GAAP                          | $ | 47,377  |   | $ | 45,565 | 
|                                                                    |   |         |   |   |        | 
|Net income per share under U.S. GAAP                                |   |         |   |   |        | 
|- Basic                                                             | $ | 0.04    |   | $ | 0.45   | 
|- Diluted                                                           | $ | 0.04    |   | $ | 0.43   | 

S TAT E M E N T  O F  O T H
  E R  C O M P R E H E N S I V E  I N C O M E

|(000s)                                    |   | 2007   |  |   | 2006   |  
|----------------------------------------- | - | ------ |  | - | ------ | -
|Net income - U.S. GAAP                    | $ | 2,187  |  | $ | 26,195 |  
|Currency translation
      adjustment (d) |   | 8,554  |  |   | (430   | )
|Other comprehensive income                | $ | 10,741 |  | $ | 25,765 |  

C O N S O L I D AT E D  B A L A
  N C E  S H E E T S

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

|(000s)                                          |   | 2007      |  |   | 2006      | 
|----------------------------------------------- | - | --------- |  | - | --------- | 
|                                                |   | Cdn. GAAP |  |   | U.S. GAAP | 
|Current assets                                  | $ | 31,757    |  | $ | 31,757    | 
|Property and equipment       
      - Egypt (a) |   | 62,316    |  |   | 56,014    | 
|- Yemen                                         |   | 53,163    |  |   | 53,163    | 
|- Canada                                        |   | 50,807    |  |   | 50,807    | 
|                                                |   |           |  |   |           | 
|Future income tax asset                         |   | 1,863     |  |   | 1,863     | 
|Deferred financing costs (f)                    |   | -         |  |   | 1,315     | 
|Goodwill (a)                                    |   | 4,313     |  |   | -0        | 
|                                                | $ | 204,219   |  | $ | 194,919   | 
|                                                |   |           |  |   |           | 
|Current liabilities                             | $ | 26,263    |  | $ | 26,263    | 
|Long-term debt (f)                              |   | 51,958    |  |   | 53,273    | 
|Asset retirement obligation                     |   | 2,755     |  |   | 2,755     | 
|                                                |   | 80,976    |  |   | 82,291    | 
|                                                |   |           |  |   |           | 
|Share capital (b, c)                            |   | 50,128    |  |   | 51,831    | 
|Contributed surplus (b)                         |   | 3,562     |  |   | 1,654     | 
|Accumulated other comprehensive income (d)      |   | 11,766    |  |   | 11,766    | 
|Retained earnings (b, c)                        |   | 57,787    |  |   | 47,377    | 
|                                                |   | 123,243   |  |   | 112,628   | 
|                                                | $ | 204,219   |  | $ | 194,919   | 

The reconciling items between share capital and retained earnings
  for Canadian and U.S. GAAP are $0.8 million related to escrowed shares, and
  $1.3 million related to flow through shares. The reconciling items between contributed
  surplus and deficit for Canadian and U.S. GAAP are $0.3 million for the adoption
  of stock-based compensation under Canadian GAAP and $2.0 million for the 2005
  and 2004 stock-based compensation expense under Canadian GAAP, which was not
  expensed in 2005 under U.S. GAAP APB Opinion No. 25 as interpreted by FASB Interpretation
  No. 44. The reconciling item between share capital and contributed surplus is
  $0.4 million for the transfer of compensation expense related to options exercised
  in 2005 and prior.

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A)  F U L L  C O S T 
  A C C O U N T I N G

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

There are no impairment charges under Canadian GAAP as at December
  31, 2007. Under U.S. GAAP, the unamortized capitalized cost of the Companys
  Egyptian oil and gas properties and goodwill exceeded the full cost ceiling
  limitation by $10.6 million, net of taxes, which was written off for U.S. GAAP
  purposes. Because of the volatility of oil and natural gas prices, no assurance
  can be given that the Company will not experience a writedown in future periods.

B)  S T O C K - B A S E D 
  C O M P E N S AT I O N

The Company has a stock-based compensation plan as more fully
  described in Note 7. Under Canadian GAAP, compensation costs have been recognized
  in the financial statements for stock options granted to employees and directors
  since January 1, 2002. For U.S. GAAP, the Company has adopted SFAS No. 123R
  effective January 1, 2006. As permitted by SFAS No. 123R, the Company has applied
  this change using modified prospective application for new awards granted after
  January 1, 2006 and for the compensation cost of awards that were not vested
  at December 31, 2005. In 2005 and prior periods, the Company used the intrinsic
  value method of accounting for stock options granted to employees and directors
  whereby no costs were recognized in the financial statements, per APB Opinion
  No. 25 as interpreted by FASB Interpretation No. 44.

The effect of applying APB Opinion No. 25 in 2005 and prior years
  to the Companys U.S. GAAP financial statements resulted in a decrease
  to stock-based compensation in 2005 by $0.7 million (2004 - $1.3 million) and
  a corresponding decrease to the contributed surplus account. Also, the deficit
  would decrease by $0.3 million in 2004 with a corresponding decrease to the
  contributed surplus account relating to the 2004 adoption entry for Canadian
  GAAP that is not required for U.S. GAAP. Also, the share capital would decrease
  by $0.4 million for options exercised since the compensation expense was transferred
  into common shares for Canadian GAAP, this is not required for U.S. GAAP.

C)  F U T U R E  I N C O M
  E  TA X E S

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

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

D)  E S C R O W E D  S H A
  R E S

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



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E)  A C C O U N T I N G   F
  O R   U N C E R T A I N T Y   I N   I N C O M
  E   TA X E S

Effective January 1, 2007, the Company adopted FASB Interpretation
  48, Accounting For Uncertainty in Income Taxes (the Interpretation
  or FIN 48), which clarifies the accounting for uncertainty in income
  taxes recognized in an enterprises financial statements in accordance
  with SFAS 109, Accounting for Income Taxes. The interpretation prescribes
  a recognition threshold and measurement attribute for the financial statement
  recognition and measurement of a tax position taken or expected to be taken
  in a tax return.

Under FIN 48, a company recognizes a tax benefit in the financial
  statements for an uncertain tax position only if managements assessment
  is that the position is more likely than not (i.e., a likelihood
  greater than 50 percent) to be allowed by the tax jurisdiction based solely
  on the technical merits of the position. The term tax position in
  FIN 48 refers to a position in a previously filed tax return or a position expected
  to be taken in a future tax return that is reflected in measuring current or
  deferred income tax assets and liabilities for interim or annual periods. The
  Interpretation also provides guidance on measurement methodology, derecognition
  thresholds, financial statement classification and disclosures, recognition
  of interest and penalties, and accounting for the cumulative-effect adjustment
  at the date of adoption. Upon adoption, it was determined that there was no
  effect to TransGlobe.

Tax positions for TransGlobe and its subsidiaries are subject
  to income tax audits by tax jurisdictions throughout the world. For the Companys
  major tax jurisdictions, examinations of tax returns for certain prior tax periods
  had not been completed as of December 31, 2007. In this regard, examinations
  had not been finalized for years beginning after 2003 for the Companys
  Canadian federal income taxes. The Canadian Revenue Agency had commenced an
  examination of the Companys Canadian income tax returns for 2005 to 2006
  that is anticipated to be completed in 2008. For other tax jurisdictions, the
  earliest years for which income tax examinations had not been finalized were
  as follows: Egypt - 2007 and Yemen - 2007.

F)  D E F E R R E D  F I N
  A N C I N G  C O S T S

The Company has accounted for transaction costs different for
  Canadian and U.S. GAAP. Under Canadian GAAP, transaction costs are included
  with the associated financial instrument whereas under U.S. GAAP transaction
  costs are presented separately.

G)  R E C E N T  A C C O U
  N T I N G  P R O N O U N C E M E N T S

THE FAIR VALUE OPTION FOR FINANCIAL ASSETS
  AND FINANCIAL LIABILITIES

The FASB issued SFAS 159, The Fair Value Option for Financial
  Assets and Financial Liabilities. The Statement permits entities to choose
  to measure many financial instruments and certain other items at fair value.
  The objective is to improve financial reporting by providing entities with the
  opportunity to mitigate volatility in reported earnings caused by measuring
  related assets and liabilities differently without having to apply complex hedge
  accounting provisions. This Statement is expected to expand the use of fair
  value measurement, which is consistent with the Boards long-term measurement
  objectives for accounting for financial instruments.

The Statement is effective as of the beginning of an entitys
  first fiscal year that begins after November 15, 2007. The Company is currently
  assessing the impact of these new requirements on the Consolidated Financial
  Statements.

F A I R  V A L U E  M E A S
  U R E M E N T S

The FASB issued SFAS 157, Fair Value Measurements, which
  defines fair value, establishes a framework for measuring fair value in generally
  accepted accounting principles (GAAP), and expands disclosures about fair value
  measurements. This Statement applies under other accounting pronouncements that
  require or permit fair value measurements, the Board having previously concluded
  in those accounting pronouncements that fair value is the relevant measurement
  attribute. Accordingly, this Statement does not require any new fair value measurements.
  However, for some entities, the application of this Statement will change current
  practice.

The Statement is effective for financial statements issued for
  fiscal years beginning after November 15, 2007, and interim periods within those
  fiscal years. The Company is currently assessing the impact of these new requirements
  on the Consolidated Financial Statements.

O F F S E T T I N G  A M O U N T
  S  R E L A T E D  T O  C E R T A I N  C O N T R A C
  T S

The FASB issued an amendment to FIN 39, Offsetting Amounts
  Related to Certain Contracts to permit a reporting entity to offset fair
  value amounts recognized for the right to reclaim cash collateral (a receivable)
  or the obligation to return cash collateral (a payable) against fair value amounts
  recognized for derivative instruments executed with the same counterparty under
  the same master netting arrangement that have been offset in accordance with
  this Interpretation.

The Amendment is effected for fiscal years beginning after November
  15, 2007. The Company is currently assessing the impact of these new requirements
  on the Consolidated Financial Statements.

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B U S I N E S S  C O M B I N AT
  I O N S

In December 2007, the Financial Accounting Standards Board released
  FASB 141-R, Business Combinations. This Statement applies prospectively
  to business combinations for which the acquisition date is on or after the beginning
  of the first annual reporting period beginning on or after December 15, 2008,
  which is business combinations in the year ending December 31, 2009 for the
  Company. The objective of this Statement is to improve the relevance, representational
  faithfulness, and comparability of the information that a reporting entity provides
  in its financial reports about a business combination and its effects. The Company
  will assess the impact of this standard for Business Combinations occurring
  after January 1, 2009.

N O N  C O N T R O L L I N G  I
  N T E R E S T S  I N  C O N S O L I D A T E D  F I N A N C I
  A L  S T A T E M E N T S

In December 2007, the Financial Accounting Standards Board released
  FASB 160, Noncontrolling Interests in Consolidated Financial Statements -
  an amendment of ARB No. 51. This Statement is effective for fiscal years,
  and interim periods within those fiscal years, beginning on or after December
  15, 2008, which for the Company is the year ending December 31, 2009 and the
  interim periods within that fiscal year. The objective of this Statement is
  to improve the relevance, comparability, and transparency of the financial information
  that a reporting entity provides in its consolidated financial statements. This
  standard currently does not impact the Company as it has full controlling interest
  of all of its subsidiaries.



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