GRAPHIC

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Management's Discussion and Analysis

February 28, 2011

This Management's Discussion and Analysis (MD&A) should be read in conjunction with the Consolidated Financial Statements of Talisman Energy Inc.
(Talisman or the Company). The Company's Consolidated Financial Statements and the financial data included in the MD&A have been prepared in accordance with accounting principles generally accepted in
Canada (Canadian GAAP). A summary of the differences between accounting principles generally accepted in Canada and those generally accepted in the United States of America (US) is contained in
note 25 to the Consolidated Financial Statements.

Unless
otherwise stated, references to production and reserves represent Talisman's working interest share (including Talisman's share of volumes of royalty interest) before deduction of royalties.
Throughout this MD&A, the calculation of barrels of oil equivalent (boe) is calculated at a conversion rate of six thousand cubic feet (mcf) of natural gas to one barrel (bbl) of oil. The boe
measure may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf:1 bbl is based on an energy equivalence conversion method primarily applicable at the burner
tip and does not necessarily represent a value equivalence at the wellhead.

Dollar
amounts included in the MD&A are expressed in Canadian dollars (C$), unless otherwise indicated. All comparative percentages are between the years ended December 31, 2010 and
December 31, 2009, unless stated otherwise. Abbreviations used in this MD&A are listed in the section titled 'Abbreviations and Definitions'.

Additional
information relating to the Company, including the Company's Annual Information Form (AIF), can be found on the Canadian System for Electronic Document Analysis and Retrieval (SEDAR) at
www.sedar.com. The Company's Annual Report on Form 40-F may be found in the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) database at www.sec.gov.

Company Overview

Talisman Energy Inc. is a global, diversified, upstream oil and gas company, headquartered in Canada. Talisman's three main operating areas are North America, the North
Sea and Southeast Asia. The Company also has a portfolio of international exploration opportunities. Talisman is committed to conducting business safely, in a socially and environmentally responsible
manner, and is included in the Dow Jones Sustainability (North America) Index. Talisman is listed on the Toronto and New York Stock Exchanges under the symbol TLM.

Unless
the context indicates otherwise, reference in this MD&A to "Talisman" or the "Company" is intended to include the direct or indirect subsidiaries of Talisman Energy Inc. and partnership
interests held by Talisman Energy Inc. and its subsidiaries. Such use of "Talisman" or the "Company" does not constitute a waiver by Talisman Energy Inc., of their separate legal status,
for any purpose.

Talisman's
financial statements are prepared on a consolidated basis and include the accounts of Talisman and its subsidiaries. Substantially all of Talisman's activities are conducted jointly with
others, and the Consolidated Financial Statements reflect only the Company's proportionate interest in such activities.

Note 24
to the Consolidated Financial Statements provides segmented financial information that forms the basis for much of the following discussion and analysis. The Company's operations
in 2010 were conducted in five geographic segments: North America, United Kingdom (UK), Scandinavia, Southeast Asia, and Other. The North America segment includes operations in Canada and the
US. The Southeast Asia segment includes operations in Indonesia, Malaysia, Vietnam and Australia and exploration activities in Papua New Guinea. The Other segment includes operations in Algeria
and exploration activities in Peru, Colombia, Poland and the Kurdistan region of northern Iraq.

Talisman's
business strategy is focused on:

TALISMAN ENERGYMANAGEMENT'S DISCUSSION &
ANALYSIS1

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Talisman
views safe operations as its top priority and has set the objective of being a top quartile performer in this area. For additional information on Talisman's commitment to safety, communities
and the environment, please see the Company's Corporate Responsibility Report available on the Company's website at www.talisman-energy.com.

2010 Performance Highlights

2TALISMAN ENERGYMANAGEMENT'S DISCUSSION &
ANALYSIS

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Financial and Operating Highlights

|(millions of C$, unless otherwise stated)                                                      |                                          | 2010   |      | 20091  |       | 20081  |       | 
|---------------------------------------------------------------------------------------------- | ---------------------------------------- | ------ | ---- | ------ | ----- | ------ | ----- | 
|                                                                                              
|Cash provided by operating activities                                                          |                                          | 3,460  |      | 3,599  |       | 6,154  |       | 
|                                                                                               |                                          |       
|Cash provided by continuing operations                                                         |                                          | 3,270  |      | 3,214  |       | 5,122  |       | 
|                                                                                               |                                          |       
|Net income                                                                                     |                                          | 648    |      | 437    |       | 3,519  |       | 
|                                                                                               |                                          |       
|                                                                                               | Income (loss) from continuing operations |        | 408  |        | (658  | )      | 2,879 | 
|                                                                                               |                                          |       
|                                                                                               | Income from discontinued operations      |        | 240  |        | 1,095 |        | 640   | 
|                                                                                               |                                          |       
|Common share dividends                                                                         |                                          | 254    |      | 229    |       | 204    |       | 
|                                                                                               |                                          |       
|Per share ($)                                                                                  |                                          |        |      |        |       |        |       | 
|                                                                                               |                                          |       
|                                                                                               | Net income                               |        | 0.64 |        | 0.43  |        | 3.46  | 
|                                                                                               |                                          |       
|                                                                                               | Diluted net income                       |        | 0.62 |        | 0.43  |        | 3.40  | 
|                                                                                               |                                          |       
|                                                                                               | Income (loss) from continuing operations |        | 0.40 |        | (0.65 | )      | 2.83  | 
|                                                                                               |                                          |       
|                                                                                               | Income from discontinued operations      |        | 0.24 |        | 1.08  |        | 0.63  | 
|                                                                                               |                                          |       
|                                                                                               | Common share dividends                   |        | 0.25 |        | 0.225 |        | 0.20  | 
|                                                                                               |                                          |       
|Production (mboe/d)                                                                            |                                          | 417    |      | 425    |       | 432    |       | 
|                                                                                               |                                          |       
|Production from continuing operations (mboe/d)                                                 |                                          | 390    |      | 365    |       | 355    |       | 
|                                                                                               |                                          |       
|Average sales price ($/boe)                                                                    |                                          | 55.37  |      | 49.40  |       | 76.03  |       | 
|                                                                                               |                                          |       
|Gross sales2                                                                                   |                                          | 8,076  |      | 7,011  |       | 10,269 |       | 
|                                                                                               |                                          |       
|Total revenue2                                                                                 |                                          | 6,912  |      | 6,061  |       | 8,554  |       | 
|                                                                                               |                                          |       
|Operating costs ($/boe)                                                                        |                                          | 12.80  |      | 12.91  |       | 13.57  |       | 
|                                                                                               |                                          |       
|Depreciation, depletion and amortization (DD&A) expense, exploration and dry hole expense2     |                                          | 2,671  |      | 3,200  |       | 3,477  |       | 
|                                                                                               |                                          |       
|Total exploration and development spending2                                                    |                                          | 3,935  |      | 3,784  |       | 4,395  |       | 
|                                                                                               |                                          |       
|Total assets                                                                                   |                                          | 24,193 |      | 23,618 |       | 24,275 |       | 
|                                                                                               |                                          |       
|Total long-term debt (including current portion)                                               |                                          | 4,181  |      | 3,780  |       | 3,961  |       | 
|                                                                                               |                                          |       
|Cash and cash equivalents, net of bank indebtedness2                                           |                                          | 1,644  |      | 1,654  |       | 10     |       | 
|                                                                                               |                                          |       
|Total long-term liabilities                                                                    |                                          | 10,313 |      | 9,906  |       | 10,307 |       | 
|                                                                                               |                                          |       
|Proved reserves additions, net of revisions (before acquisitions and divestitures) (mmboe)     |                                          | 271    |      | 251    |       | (41    | )     | 
|                                                                                               |                                          |       
|Reserves replacement ratio (before acquisitions and dispositions)  including price revisions3 |                                          | 178%   |      | 162%   |       | (26%   | )     | 
|                                                                                               |                                          |       
|Proved reserves (mmboe)                                                                        |                                          | 1,383  |      | 1,411  |       | 1,434  |       | 
|                                                                                               |                                          |       
|Reserves replacement ratio (before acquisitions and dispositions)  excluding price revisions3 |                                          | 164%   |      | 112%   |       | 75%    |       | 
|                                                                                              

TALISMAN ENERGYMANAGEMENT'S DISCUSSION &
ANALYSIS3

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2010 Net Income Variances

|(millions of C$)                                      |  |      |   | 
|----------------------------------------------------- |  | ---- | - | 
|                                                     
|2009 net income                                       |  | 437  |   | 
|                                                     
|Favourable (unfavourable) variances:                  |  |      |   | 
|                                                      |  |     
|Commodity prices                                      |  | 991  |   | 
|                                                      |  |     
|Production volumes                                    |  | 196  |   | 
|                                                      |  |     
|Unlifted oil                                          |  | (122 | ) | 
|                                                      |  |     
|Royalties                                             |  | (209 | ) | 
|                                                      |  |     
|Operating expenses                                    |  | (6   | ) | 
|                                                      |  |     
|G&A                                                   |  | (58  | ) | 
|                                                      |  |     
|DD&A expense                                          |  | 196  |   | 
|                                                      |  |     
|Dry hole expense                                      |  | 416  |   | 
|                                                      |  |     
|Exploration expense                                   |  | (83  | ) | 
|                                                      |  |     
|Interest on long-term debt                            |  | 29   |   | 
|                                                      |  |     
|Stock-based compensation expense                      |  | 89   |   | 
|                                                      |  |     
|Gain/Loss on held-for-trading financial instruments   |  | 514  |   | 
|                                                      |  |     
|Current taxes (including Petroleum Revenue Tax (PRT)) |  | (363 | ) | 
|                                                      |  |     
|Future taxes (including PRT)                          |  | (367 | ) | 
|                                                      |  |     
|Discontinued operations                               |  | (855 | ) | 
|                                                      |  |     
|Other                                                 |  | (157 | ) | 
|                                                     
|Total variances                                       |  | 211  |   | 
|                                                     
|2010 net income                                       |  | 648  |   | 
|                                                     

The significant variances from 2009 as summarized in the net income variances table are:

Continuing Operations Review

Results Summary

Gross sales of oil, liquids and natural gas in 2010 were $8.1 billion, an increase of 15% from 2009. Oil and liquids revenue increased
$597 million and natural gas revenue increased $590 million due to higher prices and increased production. Reported amounts were impacted by the strengthening C$.

4TALISMAN ENERGYMANAGEMENT'S DISCUSSION &
ANALYSIS

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During
2010, North America pre-tax segmented income was $270 million, compared to a loss of $76 million in 2009. Gross sales in North America increased 18% to
$1.7 billion due to higher commodity prices and increased shale activity.

In
the UK, pre-tax segmented income was $746 million, up 98% from $377 million in 2009 due to lower DD&A expense and the weakening of the UK£ relative to the C$.
UK gross sales remained relatively consistent with 2009 at $2.2 billion.

In
Scandinavia, pre-tax segmented income increased 159% to $409 million, up from $158 million in 2009. Scandinavia gross sales increased 41% to $1.4 billion as a
result of higher oil prices and increased production.

Southeast
Asia pre-tax segmented income increased 135% to $685 million, up from $291 million in 2009. Gross sales of $2.4 billion were 19% higher than 2009 due to the
impact of higher commodity prices and increased gas production.

Daily Average Production, Before Royalties

|Continuing operations            |                | 2010  |     | 2010 vs 2009
(%) |      | 2009  |     | 2009 vs 2008
(%) |      | 2008 |    
|-------------------------------- | -------------- | ----- | --- | ---------------- | ---- | ----- | --- | ---------------- | ---- | ---- | ---
|                                
|Oil and liquids (mbbls/d)        |                |       |     |                  |      |       |     |                  |      |      |    
|                                 |                |      
|                                 | North America  |       | 20  |                  | (5   | )     | 21  |                  | (5   | )    | 22 
|                                 |                |      
|                                 | UK             |       | 74  |                  | (14  | )     | 86  |                  | (8   | )    | 93 
|                                 |                |      
|                                 | Scandinavia    |       | 39  |                  | 15   |       | 34  |                  | 6    |      | 32 
|                                 |                |      
|                                 | Southeast Asia |       | 39  |                  | (5   | )     | 41  |                  | 14   |      | 36 
|                                 |                |      
|                                 | Other          |       | 14  |                  |     |       | 14  |                  | (7   | )    | 15 
|                                
|                                 |                | 186   |     | (5               | )    | 196   |     | (1               | )    | 198  |    
|                                
|Natural gas (mmcf/d)             |                |       |     |                  |      |       |     |                  |      |      |    
|                                 |                |      
|                                 | North America  |       | 636 |                  | 19   |       | 536 |                  | (6   | )    | 573
|                                 |                |      
|                                 | UK             |       | 16  |                  | (16  | )     | 19  |                  | 6    |      | 18 
|                                 |                |      
|                                 | Scandinavia    |       | 88  |                  | 52   |       | 58  |                  | 205  |      | 19 
|                                 |                |      
|                                 | Southeast Asia |       | 485 |                  | 20   |       | 403 |                  | 21   |      | 334
|                                
|                                 |                | 1,225 |     | 21               |      | 1,016 |     | 8                |      | 944  |    
|                                
|Continuing operations (mboe/d)   |                | 390   |     | 7                |      | 365   |     | 3                |      | 355  |    
|                                
|Discontinued operations          |                |       |     |                  |      |       |     |                  |      |      |    
|                                 |                |      
|                                 | North America  |       | 27  |                  | (53  | )     | 58  |                  | (12  | )    | 66 
|                                 |                |      
|                                 | UK             |       |    |                  |     |       |    |                  | (100 | )    | 4  
|                                 |                |      
|                                 | Scandinavia    |       |    |                  |     |       |    |                  | (100 | )    | 1  
|                                 |                |      
|                                 | Other          |       |    |                  | (100 | )     | 2   |                  | (67  | )    | 6  
|                                
|Discontinued operations (mboe/d) |                | 27    |     | (55              | )    | 60    |     | (22              | )    | 77   |    
|                                
|Total (mboe/d)                   |                | 417   |     | (2               | )    | 425   |     | (2               | )    | 432  |    
|                                

For the full year 2010, production from continuing operations increased by 7% over 2009. Production from continuing operations in the fourth quarter of 2010 was
10% higher than the same quarter last year and 5% higher than the third quarter of 2010.

North
American natural gas production increased by 19% due principally to successful development in the Pennsylvania Marcellus shale and Montney shale, partially offset by natural declines and plant
turnarounds in conventional areas. Production from the Pennsylvania Marcellus shale play was 315 mmcf/d at the end of 2010.

Oil
and liquids production in the UK was lower than 2009 as a result of maintenance and repair work, unplanned shutdowns and natural declines, partially offset by improved production efficiency at
Claymore and first production at Auk North and Burghley.

TALISMAN ENERGYMANAGEMENT'S DISCUSSION &
ANALYSIS5

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In
Scandinavia, production increased from 2009 due to the successful development drilling at Varg, as well as the ramp up of production and improved uptimes at Rev.

Southeast
Asia natural gas production increased by 20% due to Indonesia, where natural gas production averaged 387 mmcf/d with higher contract takes at Corridor and better plant efficiency.
Tangguh, which commenced production in mid 2009, produced 23 mmcf/d in 2010. In Malaysia, natural gas production was 34% higher than 2009, averaging 98 mmcf/d due to increased gas
production from the Northern Fields.

Southeast
Asia oil and liquids production decreased by 5% due to natural declines in Song Doc and Australia, partially offset by the increase in the Company's working interest in a unitized field in
PM305, which resulted in a one time increase of 1,600 boe/d in volumes for the year.

For
details of production from discontinued operations, see the 'Discontinued Operations' section of this MD&A.

Volumes Produced Into (Sold Out of) Inventory1

|                                                     |  | 2010 |   | 2009   |   | 2008   |   | 
|---------------------------------------------------- |  | ---- | - | ------ | - | ------ | - | 
|                                                    
|UK                                                   |  | (327 | ) | (1,661 | ) | (2,001 | ) | 
|                                                     |  |     
|Scandinavia                                          |  | 153  |   | (924   | ) | 674    |   | 
|                                                     |  |     
|Southeast Asia                                       |  | 108  |   | (2,277 | ) | 2,851  |   | 
|                                                     |  |     
|Other                                                |  | 237  |   | (4,694 | ) | 3,955  |   | 
|                                                    
|Total produced into (sold out of) inventory  bbls/d |  | 171  |   | (9,556 | ) | 5,479  |   | 
|                                                    
|Total produced into (sold out of) inventory  mmbbls |  | 0.1  |   | (3.5   | ) | 2.0    |   | 
|                                                    
|Inventory at December 31  mmbbls                    |  | 1.6  |   | 1.6    |   | 5.1    |   | 
|                                                    

In the Company's international operations, produced oil is frequently stored in tanks until there is sufficient volume to be lifted. The Company recognizes
revenue and the related expenses on crude oil production when liftings have occurred. Volumes presented in the 'Daily Average Production, Before Royalties' table represent production volumes in the
year, which include oil volumes produced into inventory and exclude volumes sold out of inventory.

6TALISMAN ENERGYMANAGEMENT'S DISCUSSION &
ANALYSIS

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Company Netbacks1,2

|December 31             |                               | 2010            |  | 2009  |  | 2008  |  |      
|----------------------- | ----------------------------- | --------------- |  | ----- |  | ----- |  | -----
|                       
|Oil and liquids ($/bbl) |                               |                 |  |       |  |       |  |      
|                        |                               |                
|                        |                               | Sale price      |  | 80.52 |  | 67.36 |  | 96.43
|                        |                               |                
|                        |                               | Hedging loss    |  |      |  |      |  | (0.34
|                        |                               |                
|                        |                               | Royalties       |  | 12.35 |  | 9.48  |  | 15.78
|                        |                               |                
|                        |                               | Transportation  |  | 1.18  |  | 1.15  |  | 1.09 
|                        |                               |                
|                        |                               | Operating costs |  | 20.70 |  | 19.24 |  | 20.21
|                       
|                        |                               | 46.29           |  | 37.49 |  | 59.01 |  |      
|                       
|                        | Natural gas ($/mcf)           |                 |  |       |  |       |  |      
|                        |                               |                
|                        |                               | Sale price      |  | 5.76  |  | 5.29  |  | 9.01 
|                        |                               |                
|                        |                               | Royalties       |  | 0.96  |  | 0.87  |  | 1.89 
|                        |                               |                
|                        |                               | Transportation  |  | 0.29  |  | 0.29  |  | 0.27 
|                        |                               |                
|                        |                               | Operating costs |  | 1.04  |  | 1.11  |  | 1.07 
|                       
|                        |                               | 3.47            |  | 3.02  |  | 5.78  |  |      
|                       
|                        | Total ($/boe) (6 mcf = 1 boe) |                 |  |       |  |       |  |      
|                        |                               |                
|                        |                               | Sale price      |  | 55.37 |  | 49.40 |  | 76.03
|                        |                               |                
|                        |                               | Hedging loss    |  |      |  |      |  | (0.17
|                        |                               |                
|                        |                               | Royalties       |  | 8.74  |  | 7.34  |  | 13.62
|                        |                               |                
|                        |                               | Transportation  |  | 1.50  |  | 1.43  |  | 1.34 
|                        |                               |                
|                        |                               | Operating costs |  | 12.80 |  | 12.91 |  | 13.57
|                       
|                        |                               | 32.33           |  | 27.72 |  | 47.33 |  |      
|                       

During 2010, the Company's average netback was $32.33/boe, 17% higher than in 2009 due principally to higher commodity prices in 2010, partially offset by the
strengthening of the C$ relative to the US$.

TALISMAN ENERGYMANAGEMENT'S DISCUSSION &
ANALYSIS7

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Commodity Prices and Exchange Rates1

|                                            |                         | 2010  |       | 2010 vs 2009
(%) |    | 2009  |       | 2009 vs 2008
(%) |     | 2008  |        |  
|------------------------------------------- | ----------------------- | ----- | ----- | ---------------- | -- | ----- | ----- | ---------------- | --- | ----- | ------ | -
|                                           
|Oil and liquids ($/bbl)                     |                         |       |       |                  |    |       |       |                  |     |       |        |  
|                                            |                         |      
|                                            | North America           |       | 64.47 |                  | 17 |       | 54.96 |                  | (36 | )     | 85.52  |  
|                                            |                         |      
|                                            | UK                      |       | 81.71 |                  | 20 |       | 68.36 |                  | (30 | )     | 98.35  |  
|                                            |                         |      
|                                            | Scandinavia             |       | 83.75 |                  | 20 |       | 69.73 |                  | (30 | )     | 99.23  |  
|                                            |                         |      
|                                            | Southeast Asia          |       | 82.95 |                  | 17 |       | 71.17 |                  | (27 | )     | 97.63  |  
|                                            |                         |      
|                                            | Other                   |       | 85.17 |                  | 15 |       | 74.03 |                  | (28 | )     | 102.51 |  
|                                           
|                                            |                         | 80.52 |       | 20               |    | 67.36 |       | (30              | )   | 96.43 |        |  
|                                           
|Natural gas ($/mcf)                         |                         |       |       |                  |    |       |       |                  |     |       |        |  
|                                            |                         |      
|                                            | North America           |       | 4.93  |                  | 5  |       | 4.70  |                  | (46 | )     | 8.66   |  
|                                            |                         |      
|                                            | UK                      |       | 4.72  |                  |   |       | 4.73  |                  | (52 | )     | 9.78   |  
|                                            |                         |      
|                                            | Scandinavia             |       | 6.86  |                  | 17 |       | 5.86  |                  | (18 | )     | 7.16   |  
|                                            |                         |      
|                                            | Southeast Asia          |       | 6.92  |                  | 8  |       | 6.40  |                  | (36 | )     | 9.94   |  
|                                           
|                                            |                         | 5.76  |       | 9                |    | 5.29  |       | (41              | )   | 9.01  |        |  
|                                           
|Total ($/boe)                               |                         | 55.37 |       | 12               |    | 49.40 |       | (35              | )   | 76.03 |        |  
|                                           
|Hedging loss excluded from the above prices |                         |       |       |                  |    |       |       |                  |     |       |        |  
|                                            |                         |      
|                                            | Oil and liquids ($/bbl) |       |      |                  |    |       |      |                  |     |       | (0.34  | )
|                                            |                         |      
|                                            | Natural gas ($/mcf)     |       |      |                  |    |       |      |                  |     |       |       |  
|                                           
|                                            | Total $/boe             |       |      |                  |    |       |      |                  |     |       | (0.17  | )
|                                           
|Benchmark prices                            |                         |       |       |                  |    |       |       |                  |     |       |        |  
|                                            |                         |      
|                                            | WTI (US$/bbl)           |       | 79.53 |                  | 29 |       | 61.79 |                  | (38 | )     | 99.65  |  
|                                            |                         |      
|                                            | Dated Brent (US$/bbl)   |       | 79.47 |                  | 29 |       | 61.51 |                  | (37 | )     | 96.99  |  
|                                            |                         |      
|                                            | Tapis (US$/bbl)         |       | 80.81 |                  | 27 |       | 63.57 |                  | (36 | )     | 98.95  |  
|                                            |                         |      
|                                            | NYMEX (US$/mmbtu)       |       | 4.39  |                  | 8  |       | 4.05  |                  | (55 | )     | 8.95   |  
|                                            |                         |      
|                                            | AECO ($/GJ)             |       | 3.82  |                  | 2  |       | 3.75  |                  | (51 | )     | 7.71   |  
|                                           
|US$/C$ exchange rate                        |                         | 0.97  |       | 10               |    | 0.88  |       | (6               | )   | 0.94  |        |  
|                                           
|C$/UK£ exchange rate                        |                         | 1.59  |       | (11              | )  | 1.78  |       | (9               | )   | 1.96  |        |  
|                                           

Talisman's realized price of $55.37/boe was 12% higher than 2009. WTI averaged US$79.53/bbl, up 29% from 2009. North America natural gas prices also increased,
with NYMEX and AECO up 8% and 2%, respectively.

The
changes in the Company's reported oil and liquids price is consistent with the relevant benchmark prices, however, the Company's reported prices reflect the strengthening of the C$ relative to the
US$ in 2010. Talisman's average natural gas price in North America increased by 5%. Corridor gas prices averaged $7.80/mcf, where 60% of sales are referenced to Duri crude oil and High Sulphur
Fuel Oil on an energy equivalent basis.

The
physical and financial commodity price contracts outstanding at the balance sheet date are described in the 'Risk Management' section of this MD&A.

More
than 96% of the Company's revenues are either received in US$ or are closely referenced to US$. The Company converts these revenues into C$ for reporting purposes.

8TALISMAN ENERGYMANAGEMENT'S DISCUSSION &
ANALYSIS

---



Royalties1

|               |  | 2010      |  | 2009       |  | 2008      | 
|-------------- |  | --------- |  | ---------- |  | --------- | 
|               |  | Rates (%) |  | $ millions |  | Rates (%) | 
|              
|North America  |  | 11        |  | 188        |  | 11        | 
|               |  |          
|UK             |  |          |  | 7          |  |          | 
|               |  |          
|Scandinavia    |  |          |  |           |  |          | 
|               |  |          
|Southeast Asia |  | 36        |  | 858        |  | 34        | 
|               |  |          
|Other          |  | 53        |  | 221        |  | 51        | 
|              
|Total          |  | 16        |  | 1,274      |  | 15        | 
|              

The Company's royalty expense in 2010 was $1,274 million, an increase of $209 million (20%) from 2009, reflecting increased commodity prices.

Unit Operating Expenses1

|($/boe)        |  | 2010  |  | 2010 vs 2009
(%) |   | 2009  |  | 2009 vs 2008
(%) |   | 2008  | 
|-------------- |  | ----- |  | ---------------- | - | ----- |  | ---------------- | - | ----- | 
|              
|North America  |  | 8.91  |  | (5               | ) | 9.40  |  | 6                |   | 8.86  | 
|               |  |      
|UK             |  | 29.15 |  | 10               |   | 26.47 |  | (4               | ) | 27.66 | 
|               |  |      
|Scandinavia    |  | 15.67 |  | (12              | ) | 17.83 |  | (17              | ) | 21.48 | 
|               |  |      
|Southeast Asia |  | 6.85  |  | 10               |   | 6.23  |  |                 |   | 6.24  | 
|               |  |      
|Other          |  | 5.53  |  | (14              | ) | 6.45  |  | 10               |   | 5.84  | 
|              
|               |  | 12.80 |  | (1               | ) | 12.91 |  | (5               | ) | 13.57 | 
|              

Total Operating Expenses

|(millions of C$) |  | 2010  |  | 2009  |  | 2008  | 
|---------------- |  | ----- |  | ----- |  | ----- | 
|                
|North America    |  | 424   |  | 403   |  | 389   | 
|                 |  |      
|UK               |  | 824   |  | 878   |  | 942   | 
|                 |  |      
|Scandinavia      |  | 304   |  | 285   |  | 276   | 
|                 |  |      
|Southeast Asia   |  | 288   |  | 255   |  | 195   | 
|                 |  |      
|Other            |  | 27    |  | 40    |  | 20    | 
|                
|Total            |  | 1,867 |  | 1,861 |  | 1,822 | 
|                

Total operating expenses for the Company during 2010 were $1.9 billion, relatively consistent with 2009. On a per unit basis, operating costs decreased
by 1% to $12.80/boe, due to higher production.

In
North America, total operating expenses increased by $21 million or 5% over 2009 due principally to higher gas production. Unit operating expenses benefited from increased shale production,
which has lower unit rates.

In
the UK, total operating expenses were lower due principally to the weakening of the UK£ relative to the C$, despite higher well intervention work.

In
Scandinavia, total operating expenses increased due to higher production from the Rev field, increased well workover costs and Yme pre-operating costs.

TALISMAN ENERGYMANAGEMENT'S DISCUSSION &
ANALYSIS9

---



In
Southeast Asia, total operating expenses increased due to a full year of production in Northern Fields and higher maintenance and repair costs in Malaysia and Indonesia.

Unit Depreciation, Depletion and Amortization (DD&A) Expense1

|($/boe)        |  | 2010  |  | 2010 vs 2009
(%) |   | 2009  |  | 2009 vs 2008
(%) |   | 2008  | 
|-------------- |  | ----- |  | ---------------- | - | ----- |  | ---------------- | - | ----- | 
|              
|North America  |  | 16.75 |  | (10              | ) | 18.65 |  | 7                |   | 17.46 | 
|               |  |      
|UK1            |  | 20.70 |  | (13              | ) | 23.69 |  | 15               |   | 20.54 | 
|               |  |      
|Scandinavia1   |  | 24.11 |  | (4               | ) | 25.17 |  | (3               | ) | 25.99 | 
|               |  |      
|Southeast Asia |  | 7.12  |  | (24              | ) | 9.33  |  | 21               |   | 7.69  | 
|               |  |      
|Other          |  | 5.83  |  | (7               | ) | 6.28  |  | 10               |   | 5.71  | 
|              
|               |  | 15.21 |  | (12              | ) | 17.28 |  | 5                |   | 16.44 | 
|              

Total DD&A Expense

|(millions of C$) |  | 2010  |  | 2009  |  | 2008  | 
|---------------- |  | ----- |  | ----- |  | ----- | 
|                
|North America    |  | 764   |  | 748   |  | 768   | 
|                 |  |      
|UK               |  | 582   |  | 781   |  | 1,144 | 
|                 |  |      
|Scandinavia      |  | 471   |  | 406   |  | 416   | 
|                 |  |      
|Southeast Asia   |  | 318   |  | 382   |  | 254   | 
|                 |  |      
|Other            |  | 29    |  | 43    |  | 24    | 
|                
|                 |  | 2,164 |  | 2,360 |  | 2,606 | 
|                

The Company's 2010 DD&A expense decreased by $196 million, or 8%, to $2.2 billion due to higher reserves, the strengthening of the C$, and the
impact of the timing of liftings.

In
North America, DD&A expense increased from 2009 due principally to increased production in 2010. Unit DD&A decreased from the prior year due to increased shale gas production, which has a lower
DD&A expense per unit.

In
the UK, DD&A expense decreased from 2009 due to lower production and the weakening of the UK£ relative to the C$.

In
Scandinavia, DD&A expense increased from 2009 due to an increase in production.

In
Southeast Asia, DD&A expense decreased as a result of lower DD&A from Song Doc field.

For
additional information relating to DD&A, refer to the 'Application of Critical Accounting Policies and the Use of Estimates' section of this MD&A.

Dry Hole Expense

|(millions of C$) |  | 2010 |   | 2009 |  | 2008 | 
|---------------- |  | ---- | - | ---- |  | ---- | 
|                
|North America    |  | (4   | ) | 134  |  | 219  | 
|                 |  |     
|UK               |  | 62   |   | 30   |  | 93   | 
|                 |  |     
|Scandinavia      |  | 11   |   | 69   |  | 90   | 
|                 |  |     
|Southeast Asia   |  | 31   |   | 253  |  | 13   | 
|                 |  |     
|Other            |  | 23   |   | 53   |  | 27   | 
|                
|                 |  | 123  |   | 539  |  | 442  | 
|                

10TALISMAN ENERGYMANAGEMENT'S DISCUSSION &
ANALYSIS

---



During 2010, the Company incurred dry hole expense of $123 million, which includes the write-off of exploration wells in the UK, Peru,
Indonesia and Australia.

Under
the successful efforts method of accounting for oil and gas activities, the costs of unsuccessful and non-commercial exploration wells are written off to dry hole expense in the year
a determination on success or commerciality is made. Until such determination is made, the costs are included in non-depleted capital. At December 31, 2010, $1 billion of
costs relating to exploration wells were included in non-depleted capital and not subject to DD&A, pending final determination
(2009  $798 million).

Exploration Expense

|(millions of C$) |  | 2010 |  | 2009 |  | 2008 | 
|---------------- |  | ---- |  | ---- |  | ---- | 
|                
|North America    |  | 40   |  | 84   |  | 165  | 
|                 |  |     
|UK               |  | 16   |  | 18   |  | 54   | 
|                 |  |     
|Scandinavia      |  | 32   |  | 22   |  | 50   | 
|                 |  |     
|Southeast Asia   |  | 118  |  | 75   |  | 84   | 
|                 |  |     
|Other            |  | 178  |  | 102  |  | 76   | 
|                
|                 |  | 384  |  | 301  |  | 429  | 
|                

Exploration expense consists of geological and geophysical costs, seismic, non-producing land lease rentals and indirect exploration expenses. These
costs are expensed as incurred under the successful efforts method of accounting.

Corporate and Other

|(millions of C$)                                      |  | 2010 |   | 2009 |  | 2008   |   | 
|----------------------------------------------------- |  | ---- | - | ---- |  | ------ | - | 
|                                                     
|General and administrative (G&A) expense              |  | 392  |   | 334  |  | 294    |   | 
|                                                      |  |     
|Interest on long-term debt                            |  | 163  |   | 192  |  | 168    |   | 
|                                                      |  |     
|Stock-based compensation expense (recovery)           |  | 201  |   | 290  |  | (73    | ) | 
|                                                      |  |     
|(Gain) loss on held-for-trading financial instruments |  | (102 | ) | 412  |  | (1,664 | ) | 
|                                                      |  |     
|Other revenue                                         |  | 110  |   | 115  |  | 112    |   | 
|                                                      |  |     
|Other expenses, net                                   |  | 194  |   | 47   |  | (179   | ) | 
|                                                     

G&A expense increased by $58 million relative to 2009 and includes costs associated with establishing offices in Pittsburgh and Houston, US and Brisbane,
Australia to service the Pennsylvania Marcellus, Eagle Ford and Papua New Guinea operations respectively.

Interest
expense on long-term debt decreased relative to 2009, capitalized interest having increased by $40 million as a result of increased capital expenditures on the Yme
development. Total interest charges on long-term debt, including amounts expensed and capitalized, was $246 million, up marginally from 2009, due to the issuance of
US$600 million of 3.75% notes due in 2021 in the US under its shelf prospectus.

The
Company's stock option plans provide employees and directors with the choice upon exercise to purchase a share of the Company at the stated exercise price or to receive cash. The cash payment is
equal to the difference between the option's exercise price and the share price at the time of surrender. See the 'Income Taxes' section of this MD&A for further details concerning the change to the
taxation of stock options.

The
Company's stock-based compensation expense is based on the difference between the Company's share price and the exercise price of its stock options or cash units. In 2010, stock-based compensation
expense of $201 million (2009  $290 million expense; 2008  $73 million recovery) was incurred, due
principally to the rising share price. The Company paid cash of $55 million (2009  $52 million;
2008  $211 million) to employees for options exercised.

TALISMAN ENERGYMANAGEMENT'S DISCUSSION &
ANALYSIS11

---





The gain on held-for-trading financial instruments of $102 million related principally to commodity price derivatives that are not designated as hedges for accounting
purposes. See the 'Risk Management' section of this MD&A for further details concerning the Company's financial instruments.

Other
revenue includes pipeline and custom treating tariffs of $77 million in 2010 (2009  $85 million;
2008  $90 million).

Other
expense of $194 million includes property impairments of $118 million in North America, Scandinavia, and the rest of the world for $27 million, $66 million and
$25 million, respectively, a net gain on minor asset disposals of $59 million, a foreign exchange loss of $92 million and miscellaneous interest of $24 million.

Income Taxes

|(millions of C$)                                      |         | 2010  |       | 2009 |      | 2008  |      
|----------------------------------------------------- | ------- | ----- | ----- | ---- | ---- | ----- | -----
|                                                     
|Income (loss) from continuing operations before taxes |         | 1,299 |       | (497 | )    | 4,502 |      
|                                                      |         |      
|Less PRT                                              |         |       |       |      |      |       |      
|                                                      |         |      
|                                                      | Current |       | 127   |      | 65   |       | 83   
|                                                      |         |      
|                                                      | Future  |       | 4     |      | 43   |       | 93   
|                                                     
|                                                      |         | 131   |       | 108  |      | 176   |      
|                                                     
|                                                      |         | 1,168 |       | (605 | )    | 4,326 |      
|                                                     
|Income tax expense (recovery)                         |         |       |       |      |      |       |      
|                                                      |         |      
|                                                      | Current |       | 1,032 |      | 731  |       | 1,282
|                                                      |         |      
|                                                      | Future  |       | (272  | )    | (678 | )     | 165  
|                                                     
|                                                      |         | 760   |       | 53   |      | 1,447 |      
|                                                     
|Effective income tax rate (%)                         |         | 65    |       | (9   | )    | 33    |      
|                                                     

The Company's effective income tax rate for 2010, after deducting PRT, was 65% (2009  (9)%;
2008  33%). A number of events in the past three years have affected the Company's effective tax rates, including the proportion of income in higher rate
jurisdictions and losses in lower rate jurisdictions, tax rate reductions in Canada and the level of capital expenditure in the North Sea.

In
March 2010, the federal budget included significant changes to the taxation of cash-settled stock-based compensation to prevent stock option deductions being claimed by both
employer and employee in relation to the same employment benefit. The legislation took effect in the fourth quarter of 2010 and was applied retrospectively. As a result of this legislative change,
Talisman will lose its tax benefit resulting from its stock option liability and, accordingly, recorded a future income tax expense of $83 million during the fourth quarter of 2010.

The
UK government levies PRT on North Sea fields that received development approval before April 1993, based on gross profit after allowable deductions, including capital and operating
expenditures. PRT, which is deductible for purposes of calculating corporate income tax, increased as a result of higher revenue on fields in the UK subject to PRT.

12TALISMAN ENERGYMANAGEMENT'S DISCUSSION &
ANALYSIS

---



Capital Expenditures1

|(millions of C$)                                  |                         | 2010  |        | 2010 vs 2009
(%) |     | 2009  |        | 2009 vs 2008
(%) |     | 2008  |      |  
|------------------------------------------------- | ----------------------- | ----- | ------ | ---------------- | --- | ----- | ------ | ---------------- | --- | ----- | ---- | -
|                                                 
|North America                                     |                         | 1,794 |        | 21               |     | 1,479 |        | (22              | )   | 1,903 |      |  
|                                                  |                         |      
|UK                                                |                         | 603   |        | (11              | )   | 680   |        | (7               | )   | 733   |      |  
|                                                  |                         |      
|Scandinavia                                       |                         | 590   |        | (14              | )   | 685   |        | (17              | )   | 825   |      |  
|                                                  |                         |      
|Southeast Asia                                    |                         | 566   |        | (16              | )   | 677   |        | (13              | )   | 777   |      |  
|                                                  |                         |      
|Other2                                            |                         | 382   |        | 45               |     | 263   |        | 68               |     | 157   |      |  
|                                                 
|Exploration and development                       |                         | 3,935 |        | 4                |     | 3,784 |        | (14              | )   | 4,395 |      |  
|                                                  |                         |      
|Corporate, Information Systems and Administrative |                         | 80    |        | 70               |     | 47    |        | (27              | )   | 64    |      |  
|                                                  |                         |      
|Acquisitions                                      |                         | 1,562 |        | 257              |     | 438   |        | (3               | )   | 452   |      |  
|                                                  |                         |      
|Dispositions                                      |                         | (393  | )      | 22               |     | (323  | )      | 223              |     | (100  | )    |  
|                                                  |                         |      
|Discontinued operations                           |                         |       |        |                  |     |       |        |                  |     |       |      |  
|                                                  |                         |      
|                                                  | Proceeds on disposition |       | (1,954 | )                | (20 | )     | (2,451 | )                | 617 |       | (342 | )
|                                                  |                         |      
|                                                  | Capital expenditures    |       | 18     |                  | (96 | )     | 461    |                  | (35 | )     | 711  |  
|                                                 
|                                                  |                         | 3,248 |        | 66               |     | 1,956 |        | (62              | )   | 5,180 |      |  
|                                                 

During 2010, shale properties were the focus of the Company's capital investment activities in North America. Of the $1.8 billion of capital expenditures
in North America, $1.6 billion related to shale activity with the majority spent on progressing development of the Pennsylvania Marcellus and Montney shale programs.

In
North America, 200 gross (181 net) shale wells were drilled with 152 gross (145 net) in the Pennsylvania Marcellus shale play and 37 gross (30 net) wells
in the Montney shale play.

Total
capital expenditures in the UK decreased by $77 million to $603 million, with $96 million spent on exploration and $507 million on development. Major areas of
development activity included the Auk South development project and the start-up of Auk North and Burghley fields in 2010. A total of three development wells, one exploration well, and one
appraisal well were drilled in 2010. One exploration well was drilling over the year-end.

In
Scandinavia, total expenditures decreased by $95 million to $590 million, with $89 million spent on exploration and $501 million on development. The majority of
exploration spending related to the drilling of the Grevling appraisal well. Development spending included drilling in the Yme, Gyda, and Brage fields. A total of 11 development wells, three
exploration wells and two appraisal wells were drilled during 2010. Two development wells and one exploration well were drilling over the year-end.

In
Southeast Asia, capital expenditures of $566 million included $242 million for exploration and $324 million for development. The exploration expenditure related principally to
the drilling of exploration wells in Papua New Guinea, Indonesia, and Block PM-3 CAA in Malaysia, and seismic programs in Papua New Guinea and Sabah (Malaysia).
Development spending focused on Northern Fields development drilling, PM3 CAA Mercury Removal Unit and the Southern Fields Improved Oil Recovery program in Malaysia, on the Kitan development in
Australia and on the Jambi Merang development in Indonesia. In 2010, Talisman participated in 46 oil and gas development wells, seven exploration wells, two appraisal wells, and two exploration
wells were drilling over year end.

Capital
expenditures in Algeria included $97 million for development, with Talisman participating in 15 development wells, with a further two wells drilling over the
year-end. Talisman spent $285 million on exploration activities in the rest of the world, including $64 million in Colombia, $73 million in Peru and
$100 million in the Kurdistan region of northern Iraq. The Company participated in three exploration and four stratigraphic wells in Colombia, one exploration and one appraisal well in Peru,
and one exploration well in the Kurdistan region of northern Iraq.

Information
related to details and funding of the planned 2011 capital expenditures program is included in the 'Outlook for 2011' section of this MD&A.

TALISMAN ENERGYMANAGEMENT'S DISCUSSION &
ANALYSIS13

---



Acquisitions

In 2010, Talisman entered into an agreement to acquire a 49% interest in BP Exploration Company (Colombia) Limited, which builds on the Company's acreage position in Colombia.
A cash deposit of US$613 million was paid in connection with this transaction, which has been included within other long-term assets. The transaction closed in January 2011,
at which time a further cash payment of US$192 million was made.

In
May 2010, Talisman completed the acquisition of 37,000 net acres of land in the Eagle Ford shale play in south Texas for $364 million in cash. In a subsequent transaction which
closed in December 2010, Talisman and a subsidiary of Statoil entered into an agreement to acquire an additional 97,000 net acres of liquids
rich properties in the Eagle Ford shale play as well as an equity interest in a gas processing facility for cash consideration to Talisman of $684 million. In a related transaction Statoil
purchased a 50% working interest in Talisman's existing 37,000 net acres in the Eagle Ford for $186 million, which was recorded as a disposition at cost. Talisman and Statoil have
created a joint-venture across the Eagle Ford shale play in which Talisman has a 50% interest, and with Talisman as the initial operator. As a result of these transactions, Talisman holds
approximately 78,000 net acres, predominantly in the liquids-rich area of the play. This transaction is consistent with Talisman's intent to become a leading, returns-focused shale producer in
North America.

In
2010, Talisman acquired 100% of the share capital of Hess (Indonesia-Jambi Merang) Limited, a company which owns a 25% interest in the Jambi Merang Production Sharing Contract, for cash
consideration of $189 million.

In
2010, Talisman acquired a 35% working interest in the PL378 Grosbeak discovery and a 20% interest in the PL375 Beta discovery in Norway for cash consideration of $196 million.

Discontinued Operations

In accordance with Canadian GAAP, Talisman reports the results of continuing and discontinued operations. Discontinued operations include the results from assets the Company
expects to sell and the results, to the closing date, of assets that have been sold. Comparative results have been restated to reflect the impact of operations that have been classified as
discontinued during 2010. See note 3 to the Consolidated Financial Statements.

In
2010, Talisman completed the sale of oil and gas producing properties in North America for proceeds of $2 billion, resulting in a gain of $173 million, net of a tax recovery of
$105 million. The net investment in the Company's Canadian self-sustaining operations has been reduced as a result of these disposal transactions and a capital distribution to the
parent from the entity that held the assets and, accordingly, $465 million of non-taxable foreign exchange gains previously accumulated in other comprehensive loss were included in
the carrying value of the assets used to determine the gain on disposal.

Also
in 2010, Talisman completed the sale of assets in Tunisia for proceeds of $23 million, resulting in a loss of $5 million, net of tax of $nil. An after tax writedown of
$3 million had previously been recorded in 2009.

In
2009, Talisman:

14TALISMAN ENERGYMANAGEMENT'S DISCUSSION &
ANALYSIS

---



In
2008, Talisman sold oil and gas producing assets in Western Canada and Denmark for proceeds of $247 million and $95 million, respectively, resulting in an after tax gain of
$119 million and an after tax writedown of $46 million, respectively. In the UK, the Company recorded a positive after tax closing adjustment of $36 million, and an after tax
write-down of $32 million in respect of oil and gas properties sold in 2007 and 2006.

Talisman
has approximately $218 million of abandonment letters of credit in place from January 1, 2011 until December 31, 2011 in respect of asset retirement obligations relating
to UK assets sold in 2008.

Results of Discontinued Operations

|                                                       | Years ended December 31 | 
|------------------------------------------------------ | ----------------------- | 
|                                                       |                        
|                                                       | North America           | 
|(millions of C$)                                       | 2010                    | 
|                                                      
|Income (loss) from discontinued operations, net of tax | 73                      | 
|                                                       |                        
|Gain (loss) on disposition of assets, net of tax       | 173                     | 
|                                                      
|Income (loss) from discontinued operations             | 246                     | 
|                                                      

Daily Average Production Volumes of Discontinued Operations

|                                       |                             | 2010 |     | 2010 vs 2009
(% | )    | 2009 |     | 2009 vs 2008
(% | )    | 2008 |    
|-------------------------------------- | --------------------------- | ---- | --- | --------------- | ---- | ---- | --- | --------------- | ---- | ---- | ---
|                                      
|North America                          |                             |      |     |                 |      |      |     |                 |      |      |    
|                                       |                             |     
|                                       |  oil and liquids (mbbls/d) |      | 3   |                 | (77  | )    | 13  |                 | (28  | )    | 18 
|                                       |                             |     
|                                       |  natural gas (mmcf/d)      |      | 142 |                 | (47  | )    | 267 |                 | (6   | )    | 283
|                                       |                             |     
|UK                                     |                             |      |     |                 |      |      |     |                 |      |      |    
|                                       |                             |     
|                                       |  oil and liquids (mbbls/d) |      |    |                 |     |      |    |                 | (100 | )    | 1  
|                                       |                             |     
|                                       |  natural gas (mmcf/d)      |      |    |                 |     |      |    |                 | (100 | )    | 20 
|                                       |                             |     
|Scandinavia                            |                             |      |     |                 |      |      |     |                 |      |      |    
|                                       |                             |     
|                                       |  oil and liquids (mbbls/d) |      |    |                 |     |      |    |                 | (100 | )    | 1  
|                                       |                             |     
|Other                                  |                             |      |     |                 |      |      |     |                 |      |      |    
|                                       |                             |     
|                                       |  oil and liquids (mbbls/d) |      |    |                 | (100 | )    | 2   |                 | (67  | )    | 6  
|                                      
|Total discontinued operations (mboe/d) |                             | 27   |     | (55             | )    | 60   |     | (22             | )    | 77   |    
|                                      

All 27 mboe/d of production from discontinued operations in 2010 represents production from asset sales that closed in the year.

Reserves Replacement

Disclosure Requirements

As a Canadian public company, Talisman is subject to the oil and gas disclosure requirements of National Instrument 51-101
(NI 51-101) of the Canadian Securities Administrators. In prior years, Talisman has relied upon a discretionary exemption from certain of the requirements of
NI 51-101 granted by the Canadian securities regulatory authorities which allowed Talisman to provide disclosure in accordance with the disclosure standards of the US
Securities and Exchange Commission (SEC) in order to provide disclosure comparable to US and international peers. As a result of the expiry of that exemption, Talisman is providing oil and gas
disclosure in accordance with both the SEC and NI 51-101 requirements.

TALISMAN ENERGYMANAGEMENT'S DISCUSSION &
ANALYSIS15

---



SEC Reserves

Talisman's gross proved reserves, compiled in accordance with the SEC disclosure requirements using average annual prices, are estimated
as follows:

|Total gross proved                    |  | Oil & natural
gas liquids
(mmbbls) |   | Natural gas
(bcf) |   | boe
(mm) |   | 
|------------------------------------- |  | ---------------------------------- | - | ----------------- | - | -------- | - | 
|                                     
|At December 31, 2009                  |  | 531.9                              |   | 5,272.7           |   | 1,410.7  |   | 
|                                      |  |                                   
|Discoveries, extensions and additions |  | 33.5                               |   | 1,151.7           |   | 225.5    |   | 
|                                      |  |                                   
|Net dispositions                      |  | (14.7                              | ) | (792.7            | ) | (146.9   | ) | 
|                                      |  |                                   
|Price revisions                       |  | 20.3                               |   | 8.1               |   | 21.7     |   | 
|                                      |  |                                   
|Other revisions                       |  | 7.5                                |   | 96.2              |   | 23.5     |   | 
|                                      |  |                                   
|Production                            |  | (68.8                              | ) | (499.1            | ) | (152.0   | ) | 
|                                     
|At December 31, 2010                  |  | 509.7                              |   | 5,236.9           |   | 1,382.5  |   | 
|                                     

Talisman's 2010 SEC reserves data has been compiled in accordance with the SEC's reserves disclosure requirements adopted in 2009, which include an average
annual pricing methodology. In addition, Talisman has adopted the FASB accounting standardExtractive Industries  Oil and
Gasfor both Canadian and US reporting purposes. See the 'New US Accounting Pronouncements' section of this MD&A.

Talisman
added 249.0 mmboe of gross proved reserves (excluding price revisions) compared to production of 152.0 mmboe for a replacement of 164% of 2010 production. North America accounts
for the largest increase in reserves as a result of the successful drilling programs in both the Pennsylvania Marcellus and Montney shale plays. Price-related revisions increased gross proved reserves
by 21.7 mmboe, principally related to the Company's UK operations. At December 31, 2010, North America, Southeast Asia and the UK accounted for 42%, 31% and 19% respectively of the
Company's gross total proved reserves. Proved undeveloped reserves accounted for 33% of the Company total and 34% in North America at the end of 2010.

At
the year-end, gross proved shale reserves (1.8 tcf) accounted for 61% of gross proved North American natural gas reserves.

The
Company uses reserves replacement ratios as an indicator of its ability to replenish annual production volumes and grow its reserves. It should be noted that a reserves replacement ratio is a
statistical indicator that has limitations. As an annual measure, the ratio is limited because it typically varies widely based on
the extent and timing of new discoveries, project sanctioning, property acquisitions and average prices. Its predictive and comparative value is also limited for the same reasons. In addition, since
the ratio does not take into account the cost, value or timing of future production of new reserves, it cannot be used as a measure of value creation.

The
proved reserves replacement ratios noted in the 'Financial and Operating Highlights' section of this MD&A were calculated as follows: 178% was calculated by dividing the sum of changes
(discoveries, extensions and additions, price revisions and other revisions) to gross proved oil and gas reserves during 2010 by the Company's 2010 gross production; and 164% was calculated by
excluding price revisions from changes to gross proved oil and gas reserves.

16TALISMAN ENERGYMANAGEMENT'S DISCUSSION &
ANALYSIS

---





NI 51-101 Reserves

Talisman's gross proved and probable reserves, compiled in accordance with the NI 51-101 disclosure requirements, using
forecast prices, are estimated as follows:

|Total gross                    |  | Light Oil
(mmbbls) |  | Heavy Oil
(mmbbls) |  | Shale Gas
(bcf) |  | Non-Shale
Natural Gas
(bcf) |  | NGL
(mmbbls) |  | boe
(mm) | 
|------------------------------ |  | ------------------ |  | ------------------ |  | --------------- |  | --------------------------- |  | ------------ |  | -------- | 
|                              
|Proved Developed Producing     |  | 286.9              |  | 49.3               |  | 610.9           |  | 2,288.0                     |  | 34.8         |  | 854.2    | 
|                               |  |                   
|Proved Developed Non-Producing |  | 5.1                |  | 1.5                |  | 141.2           |  | 245.9                       |  | 3.3          |  | 74.4     | 
|                               |  |                   
|Proved Undeveloped             |  | 106.6              |  | 1.8                |  | 1,072.1         |  | 963.1                       |  | 22.3         |  | 469.9    | 
|                              
|Total Proved                   |  | 398.6              |  | 52.6               |  | 1,824.2         |  | 3,497.0                     |  | 60.4         |  | 1,398.5  | 
|                               |  |                   
|Total Probable                 |  | 287.0              |  | 9.3                |  | 1,014.8         |  | 1,532.2                     |  | 23.4         |  | 744.2    | 
|                              
|Total Proved Plus Probable     |  | 685.6              |  | 61.9               |  | 2,839.0         |  | 5,029.2                     |  | 83.8         |  | 2,142.7  | 
|                              

Information regarding the pricing assumptions used in the preparation of the estimates of NI 51-101 reserves is set forth under the heading
'Note Regarding Reserves Data and Other Oil and Gas Information' in Talisman's most recent Annual Information Form.

Liquidity and Capital Resources

Talisman's long-term debt at December 31, 2010 was $4.2 billion ($2.5 billion, net of cash and cash equivalents and bank indebtedness), up from
$3.8 billion ($2.1 billion, net of cash and cash equivalents and bank indebtedness) at December 31, 2009. During 2010, the Company generated $3.5 billion of cash provided
by operating activities, incurred capital expenditures of $5.6 billion (including acquisitions), received proceeds of $2.3 billion from the disposition of non-core assets and
paid $176 million to settle held-for-trading commodity and non-commodity derivatives.

On
an ongoing basis, Talisman plans to fund its capital program and acquisitions with cash provided by operating activities, cash on hand and cash proceeds from its strategic partnership with
Sasol Limited.

The
Company has an active hedging program that will partially protect 2011 cash flow from the effect of declining commodity prices. At December 31, 2010, the fair value of the Company's
commodity price derivatives was a net liability of $57 million, which can be settled from cash on hand. See the 'Risk Management' section of this MD&A.

The
majority of the Company's debt matures subsequent to 2014, with $357 million maturing in 2011. The Company enhanced its liquidity during 2010 with the issuance of US$600 million of
public debt notes.

The
Company is in compliance with all of its debt covenants. The Company's principal financial covenant under its primary facility is a debt-to-cash flow ratio of 3.5:1,
calculated quarterly on a trailing twelve month basis.

At
December 31, 2010, the Company had not drawn against its available $4 billion of bank lines of credit, $3.85 billion of which is committed through 2014. These maturity dates
may be extended from time to time by agreement between the Company and the respective lenders.

Talisman
manages its balance sheet with reference to its liquidity and a debt-to-cash flow ratio. The main factors in assessing the Company's liquidity are cash flow (defined
as cash provided by operating activities plus changes in non-cash working capital), cash provided by and used in investing activities and available bank credit facilities. The
debt-to-cash flow ratio is calculated using gross debt divided by cash flow for the year. For the year ended December 31, 2010, the debt-to-cash
flow ratio was 1.38:1.

The
Company routinely assesses the financial strength of its joint venture participants and customers, in accordance with its credit risk guidelines. At this time, Talisman expects that the
counterparties will be able to meet their obligations when they become due.

TALISMAN ENERGYMANAGEMENT'S DISCUSSION &
ANALYSIS17

---



A
significant proportion of Talisman's accounts receivable balance is with customers in the oil and gas industry and is subject to normal industry credit risks. At December 31, 2010,
approximately 87% of the Company's trade accounts receivable were current. Talisman had no customers with individually significant balances outstanding at December 31, 2010. Concentration of
credit risk is mitigated by having a broad domestic and international customer base. The maximum credit exposure associated with accounts receivable is the carrying value.

The
Company utilizes letters of credit largely pursuant to uncommitted letter of credit facilities. Letters of credit are issued by banks under these uncommitted facilities and most are renewed
annually. The balance of outstanding letters of credit was $1.3 billion at both December 31, 2010 and January 1, 2011 relating largely to asset retirement and pension obligations.

In
March 2010, the Company filed, as part of a registration statement, a shelf prospectus in the US under the Multi-Jurisdictional Disclosure System pursuant to which it may issue up to
US$3.5 billion of various types of securities, including debt securities, in the US public market. The Company simultaneously filed a medium term note shelf prospectus in Canada pursuant to
which it may issue up to $1 billion of medium term notes in the Canadian public debt market. In November 2010, the Company issued US$600 million of 3.75% notes due in 2021 in the
US under its shelf prospectus.

In
December 2010, Talisman renewed its normal course issuer bid (NCIB), pursuant to which the Company may repurchase through the facilities of the Toronto Stock Exchange and New York
Stock Exchange up to 51,068,705 of its common shares (representing 5% of the common shares outstanding at November 29, 2010) during the 12-month period commencing
December 15, 2010 and ending December 14, 2011. Shareholders may obtain a copy of the Company's notice of intention to make an NCIB, free of charge by emailing the Company at
tlm@talisman-energy.com. During the year ended December 31, 2010, Talisman did not repurchase any common shares of the Company under its NCIB.

Common
share dividends of $254 million were paid in 2010 (2009  $229 million; 2008  $204 million) at
an aggregate of $0.25 per share (2009  $0.225 per share; 2008  $0.20 per share). The Company's dividend is determined
semi-annually by the Board of Directors.

At
December 31, 2010, there were 1,019,290,939 common shares outstanding (2009  1,014,876,564). Subsequent to December 31, 2010,
3,186,294 stock options were exercised for shares.

At
December 31, 2010, there were 62,959,223 stock options, 10,112,792 cash units and 8,173,762 long-term Performance Share Units (PSUs) outstanding. Subsequent
to December 31, 2010, 157,486 stock options were surrendered for cash, 3,186,294 were exercised for shares, none were granted, and 182,081 were cancelled, with
59,433,362 outstanding at February 22, 2011. Subsequent to December 31, 2010, 537,030 cash units were exercised, none were granted and 72,832 were cancelled with
9,502,930 outstanding at February 22, 2011. Subsequent to December 31, 2010, no PSUs were granted and 47,156 were forfeited with 8,126,606 outstanding at
February 22, 2011.

The
Company may purchase shares on the open market to satisfy its obligation to deliver common shares to settle long-term PSUs. During 2010, 4,482,681 common shares were purchased
on the open market for $82 million and placed in a trust having an arm's length third party trustee. Subsequent to December 31, 2010, a further 368,000 shares were purchased for
$8 million. The Company is not exposed to fluctuations in the stock price in respect of the shares held in trust. Additional purchases of common shares to satisfy the Company's obligations are
contemplated.

Talisman
continually monitors its portfolio of assets and investigates business opportunities in the oil and gas sector. The Company may make acquisitions, investments or dispositions, some of which
may be material. In connection with any acquisition or investment, Talisman may incur debt or issue equity.

For
additional information regarding the Company's liquidity and capital resources, refer to notes 10 and 13 to the Consolidated Financial Statements.

18TALISMAN ENERGYMANAGEMENT'S DISCUSSION &
ANALYSIS

---



Sensitivities

Talisman's financial performance is affected by factors such as changes in production volumes, commodity prices and exchange rates. The estimated annual impact of these factors
for 2011 (excluding the effect of derivative contracts) is summarized in the following table, based on a WTI oil price of approximately US$75/bbl, a NYMEX natural gas price of approximately US$4/mmbtu
and exchange rates of US$0.90=C$1 and UK£1=US$1.60. See the 'Changes in Reporting Conventions' section of this MD&A for further details concerning the Company's reporting currency.

|(millions of US$)     |                                             | Net Income |     | Cash Provided
by Operating
Activities |    |  
|--------------------- | ------------------------------------------- | ---------- | --- | ------------------------------------- | -- | -
|                     
|Volume changes        |                                             |            |     |                                       |    |  
|                      |                                             |           
|                      | Oil  10,000 bbls/d                         |            | 55  |                                       | 95 |  
|                      |                                             |           
|                      | Natural gas  60 mmcf/d                     |            | 15  |                                       | 50 |  
|                     
|Price changes1        |                                             |            |     |                                       |    |  
|                      |                                             |           
|                      | Oil  US$1/bbl                              |            | 30  |                                       | 35 |  
|                      |                                             |           
|                      | Natural gas: (North America)2  US$0.10/mcf |            | 15  |                                       | 25 |  
|                     
|Exchange rate changes |                                             |            |     |                                       |    |  
|                      |                                             |           
|                      | US$/C$ decrease by US$0.01                  |            | (10 | )                                     | (5 | )
|                      |                                             |           
|                      | US$/UK£ increase by US$0.02                 |            | 10  |                                       |   |  
|                     

Commitments and Off-Balance Sheet Arrangements

As part of its normal business, the Company has entered into arrangements and incurred obligations that will impact the Company's future operations and liquidity, some of which
are reflected as liabilities in the Consolidated Financial Statements at year-end. The principal commitments of the Company are in the form of debt repayments; abandonment obligations;
lease commitments relating to corporate offices and ocean-going vessels; firm commitments for gathering, processing and transmission services; minimum work commitments under various international
agreements; other service contracts and fixed price commodity sales contracts.

Additional
disclosure of the Company's abandonment obligations, debt repayment obligations and significant commitments can be found in notes 9, 10 and 16, respectively, to the
Consolidated Financial Statements. A discussion of the Company's derivative financial instruments and commodity sales contracts can be found in the 'Risk Management' section of this MD&A.

TALISMAN ENERGYMANAGEMENT'S DISCUSSION &
ANALYSIS19

---



The
following table includes the Company's gross long-term debt, abandonment obligations, stock-based compensation, operating and capital leases and other expected future payment
commitments as at December 31, 2010 and estimated timing of such payments:

|                                           |  |                                       |  |        |  | Payments due by period1,2 (millions of C$) | 
|------------------------------------------ |  | ------------------------------------- |  | ------ |  | ------------------------------------------ | 
|                                           |  |                                      
|Commitments                                |  | Liability recognized
in balance sheet |  | Total  |  | Less than
1 year                           | 
|                                          
|Gross long-term debt                       |  | Yes  Liability                       |  | 4,225  |  | 357                                        | 
|                                           |  |                                      
|Abandonment obligations3                   |  | Yes  Partially accrued               |  | 4,476  |  | 18                                         | 
|                                           |  |                                      
|Office leases                              |  | No                                    |  | 204    |  | 43                                         | 
|                                           |  |                                      
|Vessel leases                              |  | No                                    |  | 635    |  | 251                                        | 
|                                           |  |                                      
|Capital lease obligations                  |  | Yes  Partially accrued               |  | 131    |  | 18                                         | 
|                                           |  |                                      
|Transportation and processing commitments4 |  | No                                    |  | 1,341  |  | 158                                        | 
|                                           |  |                                      
|Minimum work commitments                   |  | No                                    |  | 866    |  | 442                                        | 
|                                           |  |                                      
|Other service contracts5                   |  | No                                    |  | 853    |  | 525                                        | 
|                                           |  |                                      
|Stock-based compensation6                  |  | Yes  Liability                       |  | 404    |  | 360                                        | 
|                                          
|Total                                      |  |                                       |  | 13,135 |  | 2,172                                      | 
|                                          

There have been no significant changes in the Company's expected future payment commitments, and the timing of those payments, since
December 31, 2010.

Risk Management

Talisman monitors its exposure to variations in commodity prices, interest rates and foreign exchange rates. The Company periodically enters into physical delivery transactions
for commodities at fixed or collared prices and into derivative financial instruments to reduce exposure to unfavourable movements in commodity prices, interest rates and foreign exchange rates. These
contracts or instruments may limit the benefit of favourable changes in commodity prices, interest rates and currency values, and may result in financial or opportunity loss due to delivery
commitments, royalty rates and counterparty risks associated with contracts.

The
Company has established a system of internal controls to minimize risks associated with its derivatives program and credit risk associated with derivatives counterparties.

The
accounting policy with respect to derivative financial instruments and commodity sales contracts is set out in note 1(l) to the Consolidated Financial Statements. Derivative
financial instruments and commodity sales contracts outstanding at December 31, 2010, including their respective fair values, are detailed in notes 15 and 16 to the Consolidated
Financial Statements.

20TALISMAN ENERGYMANAGEMENT'S DISCUSSION &
ANALYSIS

---



The
Company has elected not to designate as hedges any commodity price derivative contracts entered into. In 2008, the Company no longer designated its interest rate swap as a fair value hedge. These
derivatives are classified as held-for-trading financial instruments and are measured at fair value with changes in fair value recognized in net income quarterly. This can
potentially increase the volatility of net income.

Commodity Price Derivative Financial Instruments

The Company had the following commodity price derivative contracts outstanding at December 31, 2010, none of which were designated as
a hedge:

|Contract    |                           | Term |              | Average volume |               | Average price
or floor/ceiling |               
|----------- | ------------------------- | ---- | ------------ | -------------- | ------------- | ------------------------------ | --------------
|           
|Oil         |                           |      |              |                |               |                                |               
|            |                           |     
|            | Dated Brent oil collars   |      | Jan-Jun 2011 |                | 20,000 bbls/d |                                | US$80.00/92.41
|            |                           |     
|            | Dated Brent oil collars   |      | Jan-Dec 2011 |                | 21,000 bbls/d |                                | US$80.00/91.27
|            |                           |     
|            | Dated Brent oil collars   |      | Jan-Dec 2011 |                | 20,000 bbls/d |                                | US$84.00/97.57
|            |                           |     
|            | WTI oil collars           |      | Jan-Dec 2011 |                | 9,000 bbls/d  |                                | US$80.00/92.00
|            |                           |     
|Natural Gas |                           |      |              |                |               |                                |               
|            |                           |     
|            | NYMEX natural gas collars |      | Jan-Jun 2011 |                | 95,000 mcf/d  |                                | US$5.27/6.66  
|            |                           |     
|            | NYMEX natural gas collars |      | Jan-Dec 2011 |                | 71,200 mcf/d  |                                | US$6.14/6.59  
|            |                           |     
|            | NYMEX natural gas swaps   |      | Jan-Dec 2011 |                | 23,734 mcf/d  |                                | US$6.12       
|            |                           |     
|            | ICE natural gas swaps     |      | Jan-Jun 2011 |                | 17,355 mcf/d  |                                | C$6.18        
|           

Further details of contracts outstanding are presented in note 15 to the Consolidated Financial Statements.

The
Company entered into the following commodity price derivative contracts during the period from January 1, 2011 to February 22, 2011:

|Contract             |  | Term         |  | bbls/d |  | US$/bbl | 
|-------------------- |  | ------------ |  | ------ |  | ------- | 
|                    
|Dated Brent oil puts |  | Jul-Dec 2011 |  | 20,000 |  | 90.00   | 
|                    

Physical Commodity Contracts

The Company enters into fixed price sales contracts for the physical delivery of commodities. These contracts are in the regular course of business
and are intended to be settled by delivering the product. As such, the fair value of these contracts is not recognized in the Consolidated Financial Statements and future revenues are recognized in
net income as earned over the term of the contract. The Company anticipates having sufficient future production to meet these fixed price sales contract commitments.

The
Company had the following physical commodity contracts outstanding at December 31, 2010:

|Contract               |  | Term         |  | mcf/d |  | C$/mcf | 
|---------------------- |  | ------------ |  | ----- |  | ------ | 
|                      
|AECO natural gas swaps |  | Jan-Dec 2011 |  | 3,671 |  | 2.98   | 
|                      

Long-Term Sales Contracts

In order to support the Company's investments in natural gas projects outside of North America and the North Sea, Talisman has entered into a number
of long-term sales contracts.

The
majority of Talisman's share of natural gas production from the Corridor block in Indonesia is currently sold under three long-term sales agreements with Caltex, Singapore Power and
PGN. Under an amended agreement with Caltex, natural gas

TALISMAN ENERGYMANAGEMENT'S DISCUSSION &
ANALYSIS21

---



sales
are at a price equal to 76% of the equivalent value of the Indonesia Crude Price for Duri crude oil. The minimum volume commitment under this contract is approximately 388 bcf over the
remaining 11 year life of the contract. Under the agreement with Singapore Power, natural gas sales to Singapore from Corridor are referenced to a price formula which is based on the quoted
spot price of fuel oil in Singapore. The minimum volume commitment is approximately 240 bcf over the remaining 13 year life of the contract. Under the agreement with PGN, natural gas
sales from Corridor to PGN for their markets in West Java are at a fixed price of US$1.91/mcf, with no associated transportation costs. The minimum volume commitment is approximately 668 bcf
over the remaining 13 year life of the contract.

The
Company is subject to volume delivery requirements for approximately 100 mmcf/d at prices referenced to the Singapore fuel oil spot market in relation to a long-term sales
contract in Malaysia/Vietnam which is currently scheduled to end in 2018. In the event these delivery requirements are not met on a daily basis within a contract year, volumes delivered in the
subsequent contract year equivalent to such unmet delivery requirements are subject to a 25% price discount.

Currently,
the Company anticipates having sufficient production to meet all future delivery requirements.

Interest Rate and Foreign Exchange Swaps

In order to swap a portion of the US$375 million 5.125% notes due 2015 to floating interest rates, the Company entered into fixed to floating
interest rate swap contracts with a total notional amount of US$300 million that expire on May 15, 2015. These swap contracts require Talisman to pay interest at a rate of three-month
US$ LIBOR plus 0.433% while receiving payments of 5.125% semi-annually. The Company no longer designated the swap as a hedge starting in the fourth quarter of 2008.

In
conjunction with the issuance of the 4.44% C$350 million medium term notes repaid in January 2011, the Company entered into a cross currency swap in order to hedge the foreign
exchange exposure on this C$ denominated liability. As a result, the Company is effectively paying interest semi-annually in US$ at a rate of 5.05% on a notional amount of
US$304 million. The cross currency swap is designated as a cash flow hedge.

22TALISMAN ENERGYMANAGEMENT'S DISCUSSION &
ANALYSIS

---





Summary of Quarterly Results

The following is a summary of quarterly results of the Company for the eight most recently completed quarters:

|                                          |                                                       |            |       | Three months ended |       |         
|----------------------------------------- | ----------------------------------------------------- | ---------- | ----- | ------------------ | ----- | --------
|                                          |                                                       |           
|(millions of C$, unless otherwise stated) |                                                       | Total Year |       | Dec. 311           |       | Sep. 301
|                                         
|2010                                      |                                                       |            |       |                    |       |         
|                                          |                                                       |           
|Gross sales                               |                                                       | 8,076      |       | 2,194              |       | 1,995   
|                                         
|Total revenue                             |                                                       | 6,912      |       | 1,874              |       | 1,711   
|                                          |                                                       |           
|Income (loss) from continuing operations  |                                                       | 408        |       | (313               | )     | 68      
|                                         
|Net income (loss)                         |                                                       | 648        |       | (304               | )     | 121     
|                                         
|Per common share ($)                      |                                                       |            |       |                    |       |         
|                                          |                                                       |           
|                                          | Income (loss) from continuing operations              |            | 0.40  |                    | (0.31 | )       
|                                          |                                                       |           
|                                          | Diluted income (loss) from continuing operations2     |            | 0.39  |                    | (0.31 | )       
|                                          |                                                       |           
|                                          | Net income (loss)                                     |            | 0.64  |                    | (0.30 | )       
|                                          |                                                       |           
|                                          | Diluted net income (loss)2                            |            | 0.62  |                    | (0.30 | )       
|                                         
|Daily average production                  |                                                       |            |       |                    |       |         
|                                          |                                                       |           
|                                          | Oil and liquids from continuing operations (mbbls/d)3 |            | 186   |                    | 190   |         
|                                          |                                                       |           
|                                          | Natural gas from continuing operations (mmcf/d)       |            | 1,225 |                    | 1,313 |         
|                                          |                                                       |           
|                                          | Continuing operations (mboe/d)                        |            | 390   |                    | 409   |         
|                                          |                                                       |           
|                                          | Discontinued operations (mboe/d)                      |            | 27    |                    | 8     |         
|                                         
|                                          | Total (mboe/d)                                        |            | 417   |                    | 417   |         
|                                         
|2009                                      |                                                       |            |       |                    |       |         
|                                          |                                                       |           
|Gross sales                               |                                                       | 7,011      |       | 2,056              |       | 1,647   
|                                         
|Total revenue                             |                                                       | 6,061      |       | 1,723              |       | 1,430   
|                                          |                                                       |           
|Income (loss) from continuing operations  |                                                       | (658       | )     | (181               | )     | 25      
|                                         
|Net income (loss)                         |                                                       | 437        |       | (111               | )     | 30      
|                                         
|Per common share ($)                      |                                                       |            |       |                    |       |         
|                                          |                                                       |           
|                                          | Income (loss) from continuing operations              |            | (0.65 | )                  | (0.18 | )       
|                                          |                                                       |           
|                                          | Diluted income (loss) from continuing operations2     |            | (0.65 | )                  | (0.18 | )       
|                                          |                                                       |           
|                                          | Net income (loss)                                     |            | 0.43  |                    | (0.11 | )       
|                                          |                                                       |           
|                                          | Diluted net income (loss)2                            |            | 0.43  |                    | (0.11 | )       
|                                         
|Daily average production                  |                                                       |            |       |                    |       |         
|                                          |                                                       |           
|                                          | Oil and liquids from continuing operations (mbbls/d)3 |            | 196   |                    | 193   |         
|                                          |                                                       |           
|                                          | Natural gas from continuing operations (mmcf/d)       |            | 1,016 |                    | 1,065 |         
|                                          |                                                       |           
|                                          | Continuing operations (mboe/d)                        |            | 365   |                    | 371   |         
|                                          |                                                       |           
|                                          | Discontinued operations (mboe/d)                      |            | 60    |                    | 52    |         
|                                         
|                                          | Total (mboe/d)                                        |            | 425   |                    | 423   |         
|                                         

TALISMAN ENERGYMANAGEMENT'S DISCUSSION &
ANALYSIS23

---



During the fourth quarter of 2010, gross sales increased by $138 million over the fourth quarter of 2009 as a result of increased gas production and
increased oil prices, partially offset by decreased gas prices. The loss from continuing operations in the fourth quarter increased by $132 million from the same period in 2009 resulting from
higher taxes, higher stock-based compensation and higher exploration expense, partially offset by higher production and commodity prices, lower dry hole expense and lower DD&A.

Also,
during the fourth quarter of 2010, the Company:

Outlook for 2011

Talisman expects production growth of 5-10% in 2011 relative to 417,000 boe/d in 2010. In addition, the BP Colombia acquisition will add
12,000-15,000 boe/d of incremental production. Approximately half of the 2011 production growth will be liquids. Cash exploration and development spending is expected to be
approximately US$4 billion (excluding approximately US$370 million of non-cash capitalized leases), funded by cash provided by operating activities, proceeds from asset sales
and Talisman's balance sheet strength.

North America

In North America, the Company plans to spend approximately US$1.7 billion in 2011, with emphasis shifting to liquids rich opportunities,
primarily in the Eagle Ford shale and conventional oil plays. Spending on dry gas is expected to be 35% lower than 2010.

In
the Pennsylvania Marcellus, Talisman has budgeted approximately US$800 million, including infrastructure capital. Talisman plans to reduce the number of rigs in the play from 12 at
the end of 2010 to nine rigs over the course of 2011. The plan is to drill approximately 100 net wells in the Pennsylvania Marcellus in 2011. The Company expects production to average
350-400 mmcf/d, up from approximately 180 mmcf/d in 2010. Marcellus production was 315 mmcf/d at year end.

In
the Montney shale, Talisman will continue to progress the development of the Farrell Creek area with plans to drill approximately 35 net wells in 2011. The Company has reached an agreement
to create a strategic partnership with Sasol to jointly develop this play. As part of the agreement, Talisman will act as operator for the partnership, having a 50% working interest while being
carried for about US$800 million in capital spending. The Company will expand from four rigs to an eight rig program in 2011, with Talisman spending approximately US$100 million.
Production (net to Talisman) is expected to average 50-60 mmcf/d net in 2011. The transaction with Sasol is expected to close in the first half of 2011, subject to regulatory
approvals.

Following
the successful entry into the liquids-rich Eagle Ford through two acquisitions in 2010, the Company is expecting to drill approximately 35 net wells. Talisman expects to
ramp up to eight operated rigs (from four currently) by year end, and has budgeted approximately US$300 million. Net annual production from this play is estimated at
55-65 mmcfe/d. Approximately half of this production is expected to be liquids.

24TALISMAN ENERGYMANAGEMENT'S DISCUSSION &
ANALYSIS

---



In
the conventional portfolio, the focus will also be on liquids opportunities. Expected spending will be around US$380 million, with nearly 70% of the capital focused on expanded oil
development programs in the Chauvin and Shaunavon properties, as well as continuation of the pilot programs in the Cardium oil and wet gas windows.

Shale
production in North America is expected to average 455-525 mmcfe/d (approximately 75,000-85,000 boe/d), with an additional 90,000 boe/d of
conventional production.

North Sea

In the North Sea, cash capital spending is budgeted at approximately US$1.2 billion in 2011, with approximately two-thirds of this
spending in the UK and one-third in Norway. Of the total, approximately US$150 million is being directed towards exploration. The plan also includes US$370 million of
non-cash capital (capitalized leases) in Norway.

Major
activities in the UK include ramping up production from the Auk North project, which came on stream at the end of 2010. At Claymore, Talisman will recommence infill drilling, with first
production expected in 2011. Engineering for the Auk South redevelopment project is being completed, and the Company has commenced fabrication of the new facilities, with first production expected in
2012. Plans for redevelopment of the Montrose/Arbroath area are being progressed, which extend the life of the existing field and incorporate development of the Cayley, Godwin and Shaw discoveries.

In
Norway, activities will focus on commissioning the Yme redevelopment project, with first oil expected in the second half of 2011. The topsides are complete and waiting in Stavanger for a weather
window to allow installation. There is also a large infill program ongoing in Norway, including wells on Gyda, Brage, Veslefrikk and Varg. The Grosbeak discovery will be appraised and, in addition,
the development plan for Grevling is being progressed.

Production
from the region is expected to average between 130,000-135,000 boe/d in 2011.

Southeast Asia

Talisman plans to spend between US$700-800 million in Southeast Asia in 2011, with exploration spending accounting for
one-third of the total.

Major
activities include an infill drilling program at PM-3 CAA in Malaysia/Vietnam and plans to sanction the HST/HSD development project in Block 15-02 offshore
Vietnam. Talisman expects to spend US$200-$250 million in Papua New Guinea.

In
Indonesia, Talisman expects first production from Jambi Merang by mid-year and will continue infill drilling in the OK Block. Drilling and optimization activities, which were initiated
in 2010, will continue in 2011 in the Corridor Block in Indonesia.

The
Company is also developing the Kitan discovery offshore Australia.

Production
in Southeast Asia will remain flat relative to 2010 at approximately 120,000 boe/d, due to the timing of project delivery.

Other

Capital expenditures on development in the rest of the world during 2011 are expected to be US$210 million.

International Exploration

Excluding North America, the exploration budget for 2011 is US$700 million, some of which is included in the regional capital, with
three-quarters allocated to build new core areas and one-quarter to support existing core areas. The goal of the program is to add 600-700 million boe of prospective
resource additions over a five year period at a finding cost of less than $5/boe.

In
Southeast Asia, Talisman plans to drill Lempuk-1, a deepwater well in South Makassar in Indonesia and continue with its seismic acquisition in the area. 3D seismic data will also be
acquired over the two offshore Sabah exploration blocks in Malaysia and in Vietnam's Nam Con Son Basin. In Papua New Guinea, the Company plans to drill five exploration and appraisal wells in
addition to two wells that were drilling over the year-end in its foreland blocks. 2D seismic acquisition will also continue.

TALISMAN ENERGYMANAGEMENT'S DISCUSSION &
ANALYSIS25

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In
the North Sea, Talisman continues to explore in Norway and the UK. In Norway, Talisman plans to drill the Grosbeak appraisal well, acquired in 2010 as part of an asset acquisition. In the UK, the
Company will complete drilling of the TR1 appraisal well in Block 30/13 in the Fulmar area.

In
Latin America, Talisman's focus is in Colombia and Peru. In Colombia, Talisman is focusing activity on the heavy oil trend in the southern Llanos Basin and on the foothills trend, site of the 2009
Huron discovery. In the foothills trend, the Huron-2 appraisal well on the Niscota Block will be drilled in 2011. In the heavy oil trend, the Company is currently developing
drilling and seismic plans to follow-up on the Akacias-1 discovery drilled in 2010 in Block 9. Talisman is also completing a six-well stratigraphic program
on Block 6, which will be appraised in 2011. In Block 8, Talisman will acquire seismic data in preparation for stratigraphic well drilling later in the year. In Peru, the Company is continuing seismic
acquisition over the Situche area in Block 64 and plans to spud the Situche Norte exploration well in 2011.

In
the Kurdistan region of northern Iraq, Talisman will drill the first exploration well in Block K39, Topkhana, followed by a redrill of the Kurdamir well to test for deeper potential. In Poland,
Talisman will continue with the 2D seismic program commenced in late 2010, and in mid-2011, the Company plans to commence the first two wells of a three-well vertical
exploration drilling program.

Internal Control over Financial Reporting and Disclosure Controls and Procedures

Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in
Rules 13a-15(f) and 15d-15(f) under the United States Exchange Act of 1934, as amended (the Exchange Act).

Management,
including the Company's Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the Company's internal control over financial reporting based on criteria
established inInternal Control  Integrated Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission.

Based
on management's assessment as at December 31, 2010, management has concluded that the Company's internal control over financial reporting is effective.

The
results of management's assessment were reviewed with the Audit Committee of the Company's Board of Directors. Ernst & Young LLP, the independent registered public accounting firm
that audited the Company's Consolidated Financial Statements, independently assessed the effectiveness of the Company's internal control over financial reporting. Ernst & Young LLP's
attestation is located in the Independent Auditors' Report on Internal Controls Under Standards of the Public Company Accounting Oversight Board (United States), which is an exhibit to the
Company's Annual Report on Form 40-F.

Because
of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of the Company's financial statements would be
prevented or detected. Further, the evaluation of the effectiveness of internal control over financial reporting was made as of a specific date, and continued effectiveness in future periods is
subject to the risks that controls may become inadequate.

No
changes were made in the Company's internal control over financial reporting during the fiscal year ended December 31, 2010 that have materially affected or are reasonably likely to
materially affect the Company's internal control over financial reporting.

Disclosure Controls and Procedures

At the end of the period covered by this MD&A, an evaluation was carried out under the supervision of, and with the participation of, the Company's
management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operations of the Company's disclosure controls and procedures
(as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the design and operation of these disclosure controls and procedures were effective in ensuring that information required to be disclosed by the Company in reports that it files with or
submits to the Canadian Securities

26TALISMAN ENERGYMANAGEMENT'S DISCUSSION &
ANALYSIS

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Administrators
and the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods required.

Disclosure
controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or
submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions,
as appropriate, to allow timely decisions regarding required disclosure. It should be noted that while the Company's Chief Executive Officer and Chief Financial Officer believe, with reasonable
assurance, that the Company's disclosure controls and procedures are effective, they do not expect that the Company's disclosure controls and procedures will prevent all errors and fraud. A control
system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

Litigation

From time to time, Talisman is the subject of litigation arising out of the Company's operations. While Talisman assesses the merits of each lawsuit and defends itself
accordingly, the Company may be required to incur significant expenses or devote significant resources to defend itself against such litigation. These claims are not expected to have a material impact
on the Company's financial position.

In
September 2006, the United States District Court for the Southern District of New York (the Court) granted Talisman's Motion for Summary Judgment, dismissing the lawsuit
brought against Talisman by the Presbyterian Church of Sudan and others under the Alien Tort Claims Act. The lawsuit alleged that the Company conspired with, or aided and abetted, the Government of
Sudan to commit violations of international law in connection with the Company's now disposed of interest in oil operations in Sudan. The plaintiffs have twice attempted to certify the lawsuit as a
class action. In March 2005 and in September 2005, the Court rejected the plaintiffs' effort to certify two different classes (or groups) of plaintiffs. In October 2009,
the Second Circuit Court of Appeals dismissed the plaintiffs' appeal of the Court's decision granting Talisman's Motion for Summary Judgment, denying class certification and refusing to consider the
plaintiffs' proposed third amended complaint. On April 15, 2010 the plaintiffs requested the United States Supreme Court to permit an appeal by the plaintiffs of the Second Circuit Court
of Appeals decision that dismissed their appeal. On October 4, 2010, the United States Supreme Court refused to grant the plaintiffs' appeal request. Accordingly, the action has now been
resolved in the Company's favour.

Application of Critical Accounting Policies and Use of Estimates

The preparation of financial statements requires management to make estimates and assumptions that affect reported assets and liabilities, disclosures of contingencies and
revenues and expenses. Management is also required to adopt accounting policies that require the use of significant estimates. Actual results could differ materially from those estimates. A summary of
significant accounting policies adopted by Talisman can be found in note 1 to the Consolidated Financial Statements. In assisting the Company's Audit Committee to fulfil its financial
statement oversight role, management regularly meets with the Committee to review the Company's significant accounting policies, estimates and any significant changes thereto, including those
discussed below.

Management
believes the most critical accounting policies, including judgments in their application, which may have an impact on the Company's financial results, relate to the accounting for property,
plant and equipment (PP&E), asset retirement obligations (ARO) and goodwill. The rate at which the Company's assets are depreciated or otherwise written off and the asset retirement liability provided
for, with the associated accretion expensed to the income statement, are subject to a number of judgments about future events, many of which are beyond management's control. Reserves recognition is
central to much of an oil and gas company's accounting, as described below.

Reserves Recognition

Underpinning Talisman's oil and gas assets and goodwill are its oil and gas reserves. Detailed rules and industry practice, to which Talisman
adheres, have been developed to provide uniform reserves recognition criteria. However, the process of

TALISMAN ENERGYMANAGEMENT'S DISCUSSION &
ANALYSIS27

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estimating
oil and gas reserves is inherently judgmental. There are two principal sources of uncertainty: technical and commercial. Technical reserves estimates are made using available geological and
reservoir data as well as production performance data. As new data becomes available, including actual reservoir performance, reserves estimates may change. Reserves can also be classified as proved
or probable with decreasing levels of certainty as to the likelihood that the reserves will be ultimately produced.

Reserves
recognition is also impacted by economic considerations. In order for reserves to be recognized, they must be reasonably certain of being produced under existing economic and operating
conditions,
which is viewed as being annual average commodity prices determined by the prices in effect on the first day of each month with a cost profile based on current operations (SEC requirements) or
forecast prices and cost assumptions (NI 51-101 requirements). Any anticipated changes in conditions must have reasonable certainty of occurrence. In particular, in
international operations, consideration includes the status of field development planning and gas sales contracts. As economic conditions change, primarily as a result of changes in commodity prices
and, to a lesser extent, operating and capital costs, marginally profitable production, typically experienced in the later years of a field's life cycle, may be added to reserves or, conversely, may
no longer qualify for reserves recognition.

The
Company's reserves and revisions to those reserves, although not separately reported on the Company's balance sheet or income statement, impact the Company's reported net income through the DD&A
of the Company's PP&E, asset and goodwill impairments and the provision for future ARO.

The
Reserves Committee of Talisman's Board of Directors reviews the Company's reserves booking process and related public disclosures and the report of the internal qualified reserves evaluator
(IQRE). The primary responsibilities of the Reserves Committee of the Board of Directors include, among other things, reviewing the Company's reserves booking process and recommending to the Board of
Directors the Company's annual disclosure of reserves data and other oil and gas information contained in the Company's Annual Information Form. The IQRE reports the Company's annual reserves data to
the Reserves Committee and delivers a regulatory certificate regarding proved and probable reserves and their related future net revenue.

Depreciation, Depletion and Amortization Expense (DD&A)

A significant portion of the Company's PP&E is amortized based on the unit of production method with the remaining assets being amortized equally
over their expected useful lives. The unit of production method attempts to amortize the asset's cost over its proved oil and gas reserves base. Accordingly, revisions to reserves or changes to
management's view as to the operational lifespan of an asset will impact the Company's future DD&A expense. Depletion rates are updated annually unless there is a material change in circumstances, in
which case they would be updated more frequently. Material changes in year-end reserves are reflected in the fourth quarter depletion rate.

As
outlined in the Company's Significant Accounting Policies and PP&E notes (notes 1(d), 1(e) and 8 to the Consolidated Financial Statements), $6.4 billion
(2009  $4.7 billion) of the Company's PP&E is held in non-depleted capital and is not currently subject to DD&A. The balance of
non-depleted capital relates to the costs of individually material land purchases ($2.7 billion) which will either be transferred to the depletable base when proved or written off
if unsuccessful, development projects which will be amortized when production commences ($1.6 billion), the costs of acquired unproved reserves ($1.1 billion) and incomplete drilling
activities, including those wells under evaluation or awaiting infrastructure ($1.0 billion). Uncertainty exists regarding the recoverability of these costs. For example, if the evaluation of
the acquired probable reserves or recently drilled exploration wells is determined to be unsuccessful, the associated capitalized costs would be expensed in the year such determination is made, except
that, in the case of acquired probable reserves associated with producing fields, these costs would be amortized over the reserves base of the associated producing field. Accordingly, the rate at
which these costs are written off depends on management's view of the likelihood of the existence of economically producible reserves.

28TALISMAN ENERGYMANAGEMENT'S DISCUSSION &
ANALYSIS

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Successful Efforts Accounting

Talisman uses the successful efforts method to account for its oil and gas exploration and development costs. Acquisition costs and development costs
are capitalized and depleted using the unit of production method. Costs of drilling unsuccessful exploration wells (dry hole costs) and all other exploration costs, including geological and
geophysical costs, are expensed.

The
alternative method of accounting for oil and gas exploration and development costs is the full cost method. Under this method, costs of unsuccessful exploration wells as well as all other
exploration costs are capitalized and added to the PP&E balance to be depleted on a unit of production basis in the future. In addition, future development costs are depleted over the total proved
reserves.

The
differences between the full cost and successful efforts methods of accounting make it difficult to compare net income between companies that use different methods of accounting.

Asset Impairments

The Company's oil and gas assets and goodwill are subject to impairment tests. An impairment charge is recorded in the year an asset is determined to
be impaired under the successful efforts method. Any impairment charge is the difference between the carrying value of the asset and its fair value. The determination of fair value requires management
to make assumptions regarding cash flows into the future that are subject to revisions due to changes in commodity prices, costs,
recoverable reserves, production profiles and discount rates. Due to the complexity of assumptions within the cash flow models used in a property-by-property impairment test, a
sensitivity analysis in respect of the impact of changes in assumptions on the Company's impairment assessment is not presented. Changes in any of the assumptions could result in an impairment of all
or a portion of the carrying value of oil and gas assets and goodwill in future periods.

During
the year, the Company recorded an impairment of oil and gas assets of $118 million (2009  $70 million;
2008  $4 million), which is included in other expenses on the Consolidated Statements of Income.

Goodwill Impairments

Goodwill represents the excess purchase price over the fair value of identifiable assets and liabilities acquired in business combinations. Goodwill
is not amortized but is subject to impairment reviews in the fourth quarter of each year, or more frequently as economic events dictate. The impairment test requires that goodwill be allocated to
reporting units which are determined by aggregating components having similar economic characteristics and/or are in similar geographic locations. These reporting units correspond with the segments
described in note 24 to the Consolidated Financial Statements and have not changed during the year. No impairments to goodwill were recorded during the year.

Purchase Price Allocations

The costs of corporate and asset acquisitions are allocated to the acquired assets and liabilities based on their fair value at the time of
acquisition. In many cases, the determination of fair value requires management to make certain assumptions and estimates regarding future events. Typically in determining fair value, management
develops a number of possible future cash flow scenarios to which probabilities are judgmentally assigned. The acquired assets and liabilities may span multiple geographical segments and may be
amortized at different rates, or not at all as in the case of goodwill or, initially, for acquired probable reserves. Accordingly, the allocation process impacts the Company's reported assets and
liabilities and future net income due to the impact on future DD&A expense and impairment tests.

In
2010, Talisman entered into or completed the following transactions:

TALISMAN ENERGYMANAGEMENT'S DISCUSSION &
ANALYSIS29

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In
2009, Talisman completed the following transactions:

In
2008, Talisman completed the following transactions:

Asset Retirement Obligations (ARO)

Upon retirement of its oil and gas assets, the Company anticipates incurring substantial costs associated with abandonment and reclamation
activities. At December 31, 2010, the discounted fair value of the Company's ARO liability was $2.3 billion (2009  $2.1 billion) and is
recorded as a liability on the Company's balance sheet. In determining the fair value of the Company's ARO liability, management developed a number of possible abandonment scenarios to which
probabilities were assigned based on management's reasonable judgment. The total undiscounted abandonment obligations were estimated at $4.5 billion at December 31, 2010
(2009  $4.5 billion), which is based on management's probability weighted estimate of costs and is in accordance with existing legislation and industry
practice.

Estimates
of the associated costs are subject to uncertainty associated with the method, timing and extent of future retirement activities. Accordingly, the annual expense associated with future
abandonment and reclamation activities is impacted by changes in the estimates of the expected costs and reserves. Changes to these estimates in the past year resulted in an increase to the ARO
liability of $146 million related primarily to changes in estimated field life in the UK. As an indication of possible future changes in the estimated liability, if all of the Company's
abandonment obligations could be deferred by one year, the net present value of the liability would decrease by approximately $95 million.

Income Taxes

Talisman uses the liability method to account for income taxes. Under the liability method, future income taxes are based on the differences between
assets and liabilities reported for financial accounting purposes from those reported for income tax. The determination of the income tax provision is an inherently complex process, requiring
management to interpret continually changing regulations and to make certain judgments. Issues in dispute for audited years and audits for subsequent years are ongoing and in various stages of
completion in the jurisdictions in which the Company operates around the world. As a consequence, the balance in unrecognized tax benefits can be expected to fluctuate from period to period. It is
reasonably possible that such changes could be significant when compared with the Company's total unrecognized tax benefits. However, the amount of change cannot be quantified.

Future
tax assets are recognized only to the extent that it is considered more likely than not that there will be suitable taxable profits from which the underlying temporary differences can be
deducted. Based on expectations for the future and available tax-planning strategies, management expects remaining future tax assets will be realized as offsets to reversing future tax
liabilities and as offsets to the tax consequences of future taxable income.

30TALISMAN ENERGYMANAGEMENT'S DISCUSSION &
ANALYSIS

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Foreign Exchange Accounting

Talisman's worldwide operations expose the Company to transactions denominated in a number of different currencies, which are required to be
translated into one currency for financial statement reporting purposes. Talisman's foreign currency translation policy, as detailed in note 1(j) to the Consolidated Financial
Statements, is designed to reflect the economic exposure of the Company's operations to the various currencies. The Company's functional currency is US$, a reflection of Talisman's overall exposure to
US$ denominated transactions, assets and liabilities; oil prices are largely denominated in US$ as is much of the Company's corporate debt and international capital spending and operating costs.

The
Company's self-sustaining operations in the UK (and, prior to January 1, 2010 in Canada and Norway) were translated from UK£, C$ and NOK respectively into US$ using
the current rate method whereby assets and liabilities were translated at year-end exchange rates, while revenues and expenses were converted using average rates for the period. Gains and
losses on translation to US$ relating to self-sustaining operations were deferred and included in a separate component of shareholders' equity described as accumulated other comprehensive
loss. As a result of a reorganization of the Company's operations at the end of 2010, changes in the composition of revenue and costs and changes in intercompany loan arrangements, management has
determined that the functional currency of the Company's UK, Canada and Norway operations is more closely linked to the US$. Accordingly, effective January 1, 2010 for Canada and Norway and
January 1, 2011 for the UK, these operations have been accounted for as US$ functional currency entities. As a result, foreign currency translation adjustments remain in accumulated other
comprehensive loss until Talisman reduces its net investment in those subsidiaries. Following the change in the functional currency of the UK operations, the debt denominated in UK£
will no longer be designated as a hedge of Talisman's net investment in the UK and, accordingly, future foreign exchange gains and losses will be recorded in the Consolidated Statement of
Income.

Production Sharing Contract (PSC) Arrangements

A significant portion of the Company's operations outside North America, the UK and Scandinavia are governed by PSCs. Under PSCs, Talisman, along
with other working interest holders, typically bears all risk and costs for exploration, development and production. In return, if exploration is successful, Talisman recovers the sum of its
investment and operating costs (cost oil) from a
percentage of the production and sale of the associated hydrocarbons. Talisman is also entitled to receive a share of the production in excess of cost oil (profit oil). The sharing of profit oil
varies between the working interest holders and the government from contract to contract. The cost oil, together with the Company's share of profit oil, represents Talisman's hydrocarbon entitlement
(working interest less royalties). Talisman records gross production, sales and reserves based on its working interest ownership. The difference between the Company's working interest ownership and
its entitlement is accounted for as a royalty expense. In addition, certain of the Company's contractual arrangements in foreign jurisdictions stipulate that income tax payments are to be withheld
from the Company and paid to the government out of the respective national oil company's entitlement share of production. The Company includes such amounts in income tax expense at the statutory tax
rate in effect at the time of production.

The
amount of cost oil required to recover Talisman's investment and costs in a PSC is dependent on commodity prices and, consequently, Talisman's share of profit oil is also impacted. Accordingly,
the amount of royalty paid by Talisman over the term of a PSC and the corresponding net after royalty oil and gas reserves booked by the Company are dependent on the amount of initial investment and
past costs yet to be recovered and anticipated future costs, commodity prices and production. As a result, when year-end prices increase, the amount of net reserves after royalty the
Company books may decrease and vice versa.

Risk Management

The Company enters into derivative financial instruments in order to manage risks associated with fluctuations in commodity prices, interest rates
and foreign currency exchange rates. As detailed in Talisman's financial instruments accounting policy described in note 1(l) to the Consolidated Financial Statements, derivative
instruments are recorded at fair value on the Consolidated Balance Sheets, with unrealized changes in fair value recorded in income or other comprehensive loss. Realized gains or losses on financial
instruments are recognized as hedging gains or losses or held-for-trading gains or losses in net income. Fair values are determined based on third party market information and
are subject to a degree of uncertainty.

TALISMAN ENERGYMANAGEMENT'S DISCUSSION &
ANALYSIS31

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Estimates
of fair value are subject to change with fluctuations in commodity prices, interest rates, foreign currency exchange rates and estimates of non-performance risk. Cash settlement
of derivative financial instruments may vary from fair value estimates, depending on the underlying market prices at the date of settlement.

Changes in Reporting Conventions

Change in reporting currency

Effective January 1, 2011, the Company changed its reporting currency from C$ to US$. This change to US$ reporting follows the strategic
changes of recent years and recognizes the fact that a significant proportion of the Company's activities and transactions are conducted in US$.

Change in reporting segments

Effective January 1, 2011, the composition of the Company's segments changed such that the activities in the UK and Scandinavia will be
reported as a single 'North Sea' segment. Prior periods will be restated accordingly in the first interim filing subsequent to the change. This change reflects the fact that, from 2011, the UK and
Scandinavia business each operate a mature set of cash-generating assets that share similar economic characteristics.

New US Accounting Pronouncements

Extractive Activities  Oil and Gas

In 2010, the FASB issuedExtractive Activities  Oil and Gas,
to align the reserve calculation and disclosure requirements with the requirements in the SEC Rule,Modernization of Oil and Gas Reporting Requirements.Effective December 31, 2009, but carried back to October 1, 2009, Talisman adopted this standard prospectively whereby yearly average commodity prices were used for purposes of
calculating reserves. Previously, reserves had been calculated by reference to year-end commodity prices. Since 2009 yearly average commodity prices were higher than
2008 year-end prices, Talisman recorded an upward price revision of 77.1 mmboe to its reserves in the fourth quarter of 2009 and revised its DD&A rates accordingly.

The
new standard permits companies to disclose information on probable and possible reserves. The new rules require companies to report their oil and gas reserves based on annual average prices
determined by the prices in effect on the first day of each month, rather than year-end prices. In addition, the new standard adds, subject to certain exemptions, a 15% test to use as a
minimum guideline for reporting "significant" reserves by geographic area, subject to various exemptions.

Fair Value Measurement

In 2010, the FASB issued an amendment toFair Value Measurement and Disclosure. The new standard
requires entities to disclose separately significant transfers in and out of level 1 and level 2 fair value measurements. Additionally, entities are required to present separately
information about purchases, sales, issuances and settlements of level 3 fair value measurements. This amendment was adopted for Talisman's 2010 reporting and did not have a material impact on
the Company's results or financial position.

New Regulatory Developments

Dodd-Frank Act

In 2010, the USDodd-Frank Wall Street Reform and Consumer Protection Act('the Dodd
Frank Act') was signed into law. The Dodd Frank Act provides for numerous new substantive requirements in areas such as the disclosure of payments made to foreign governments, new rules regarding the
use of credit ratings and corporate governance and executive compensation reforms, among others, some of which apply to Talisman as a foreign private issuer. Talisman will continue to assess the Act's
impact to the Company as the accompanying SEC rules relating to the Act are published or come into force.

With
respect to the disclosure of payments to governments, the Act requires resource extraction issuers to disclose payments made to the US federal government or a foreign government (including a
department, agent or instrumentality of a foreign

32TALISMAN ENERGYMANAGEMENT'S DISCUSSION &
ANALYSIS

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government
or a company owned by a foreign government) in their annual reports. A payment would be an amount that is notde minimusand that is paid to
further the commercial development of oil, natural gas or minerals, including taxes, royalties, fees (including licence fees), bonuses, production entitlements or any other material benefits the SEC
determines is part of commonly recognized revenue streams for resource extraction. The Dodd Frank Act requires disclosure of the type and total amount of such payments made for each project and to
each government. The SEC's final rule is expected to be issued in 2011, effective for 2012 year-end reporting.

NI 51-101 Exemption Orders

In December 2010, Talisman obtained a NI 51-101 exemption order permitting it to continue to rely on
internally-generated reserves data ("IQRE Exemption"); and a NI 51-101 exemption order relating to various oil and gas disclosures ("Disclosure Exemption"). These exemption
orders replace the NI 51-101 exemption order that was previously issued to Talisman in 2008.

The
IQRE Exemption permits Talisman to continue to disclose internally-generated reserves data which have been prepared by an internal qualified reserves evaluator, as opposed to an independent
qualified reserves evaluator.

The
Disclosure Exemption permits Talisman to continue to provide oil and gas disclosures prepared in accordance with SEC requirements (US disclosure) in its annual documents and other
continuous and public disclosure documents provided that Talisman also provides the required annual oil and gas disclosures in accordance with NI 51-101 and Talisman discloses the
material differences between the NI 51-101 disclosure and US disclosure. The Disclosure Exemption also provides some transitional relief as well as requirements with respect
to the disclosure of finding and development costs.

International Financial Reporting Standards (IFRS)

In 2008, the Canadian Accounting Standards Board (AcSB) confirmed that IFRS will be required for interim and annual reporting by publicly accountable enterprises effective for
January 1, 2011, including 2010 comparative information. The Company established a dedicated IFRS project team to address the conversion to IFRS that reports regularly to a steering committee,
senior management and the Audit Committee. The project team is now in the final stages of concluding the conversion project.

The
adoption of IFRS does not impact the underlying economics of Talisman's operations or its cash flows. The most significant impacts will be from the application of new accounting policies that will
reset the Company's balance sheet, and financial statement presentational changes. Management is currently finalizing the adjustments required to the Company's previously reported Canadian GAAP
results of operations, cash flows and financial position to adopt IFRS.

Based
on work performed to date, management anticipates resetting the Company's previously reported December 31, 2009 balance sheet for changes in the carrying value of PP&E, current and
long-term liabilities and retained earnings.

As
a result of the changes in accounting policies with the adoption of IFRS, management anticipates adjusting the Company's previously reported quarterly net income due principally to lower DD&A and
accretion expense, unrealized foreign exchange gains and losses, deferred income taxes (referred to as future income taxes under Canadian GAAP), a change in the accounting for stock-based compensation
and the timing of the recognition of gains and losses on the disposal of assets. The Company does not anticipate a change to the previously reported cash flows as a result of adopting IFRS except for
a reclassification of exploration expense from an investing activity to an operating activity and a reclassification of financing charges from an operating to a financing activity.

Assets
held for sale, previously reported as discontinued operations under Canadian GAAP, will no longer be classified as such under IFRS, which results in additional reclassifications on the
financial statements between continuing and discontinued operations.

These
adjustments are impacted by a number of exemptions permitted upon first time adoption as well as management's choice of policies and assumptions, which are more fully described below.

TALISMAN ENERGYMANAGEMENT'S DISCUSSION &
ANALYSIS33

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IFRS1 Exemptions

The general principle that should be applied on first-time adoption of IFRS is that standards in force at the first reporting date should
be applied retrospectively. However, IFRS 1First-time Adoption of International Financial Reporting Standardscontains a number of
exemptions which companies are permitted to apply. The Company has elected to apply the following exemptions:

In
addition, the Company has determined not to reset its cumulative translation adjustment to nil.

During
the fourth quarter of 2010, the Company:

Estimated Impact on Reported Financial Position

The following information summarizes adjustments required to reset the opening balance sheet at January 1, 2010 on adoption of IFRS:

|(billions of C$)           |  | Canadian GAAP |  | IFRS Adjustments |   | IFRS         | 
|-------------------------- |  | ------------- |  | ---------------- | - | ------------ | 
|                          
|Current assets             |  | 3.2           |  |                 |   | 3.2          | 
|                           |  |              
|Long-term assets           |  | 20.4          |  | (2.6) to (2.8    | ) | 17.6 to 17.8 | 
|                          
|Total assets               |  | 23.6          |  | (2.6) to (2.8    | ) | 20.8 to 21.0 | 
|                          
|Current liabilities        |  | 2.6           |  | 0.2 to 0.3       |   | 2.8 to 2.9   | 
|                           |  |              
|Long-term liabilities      |  | 9.9           |  | (1.0) to (1.2    | ) | 8.7 to 8.9   | 
|                           |  |              
|Equity                     |  | 11.1          |  | (1.7) to (1.9    | ) | 9.2 to 9.4   | 
|                          
|Total liabilities & equity |  | 23.6          |  | (2.6) to (2.8    | ) | 20.8 to 21.0 | 
|                          

34TALISMAN ENERGYMANAGEMENT'S DISCUSSION &
ANALYSIS

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Retained earnings are expected to decrease by approximately $1.8 billion as a result of the net after tax impact of adjustments to the opening balance
sheet described below. These comprise approximately $1.2 billion for the deemed fair value election of which a significant portion related to assets sold during 2010, and approximately
$0.6 billion relating to stock-based compensation, employee future benefits, deferred taxes and derecognition of capitalized borrowing costs.

The
carrying value of the Company's PP&E at the time of adoption is expected to decrease by approximately $2.7 billion as a result of electing to measure certain of the Company's properties at
fair value and where permitted deeming these fair values as cost (decrease of approximately $2.0 billion), changes to the cost component of PP&E relating to the Company's ARO (decrease of
approximately $0.2 billion), derecognizing capitalized borrowing costs recorded under Canadian GAAP (decrease of approximately $0.2 billion), as well as removing the tax adjustment from
PP&E previously recorded for historical asset acquisitions under Canadian GAAP, which is not permitted under IFRS (decrease of approximately $0.3 billion).

Current
liabilities at the time of adoption are expected to increase by approximately $0.2 billion due to the IFRS requirement to measure cash-settled share-based payments at fair
values rather than the intrinsic method permitted under Canadian GAAP which, in effect, accelerates the timing of the expense recognition under IFRS. Effective July 1, 2010, stock options will
be accounted for using the equity method, which will result in a decrease in current liabilities of $0.4 billion, and a corresponding increase in equity.

Long-term
liabilities are expected to decrease by approximately $1.1 billion largely as a result of the deferred tax effect of other IFRS adjustments, deferred income tax
adjustments required for historical asset acquisitions and changes in accounting methodology for deferred tax and Petroleum Revenue Tax.

In
estimating the adjustment to PP&E as a result of electing to measure certain of the Company's properties at fair value and where permitted deeming these fair values as cost, management has
estimated fair value based on market information which consisted of offers to purchase the asset or comparable assets, independent market surveys and values derived from exchange quoted prices. Where
reliable market information was not available, management relied upon internally generated discounted cash flows using a long term view of commodity prices.

Estimated Impact on Reported Financial Results

The resetting of the Company's balance sheet under IFRS which primarily impacted PP&E and the liabilities for ARO, stock based compensation and
deferred income tax, in conjunction with other changes in accounting policies under IFRS is expected to increase the Company's previously reported net income for the nine months ended
September 30, 2010 by approximately $0.5 billion. The changes in accounting policies under IFRS are expected to decrease DD&A, accretion, and other expense ($0.3 billion) and will
also impact such items as unrealized foreign exchange gains and losses and reported stock-based compensation ($0.1 billion), and the timing of when gains and losses are recognized on disposed
assets ($0.2 billion), offset by deferred income tax recovery ($0.1 billion).

The
areas impacted by IFRS discussed above should not be regarded as a comprehensive list of changes that will result from the transition to IFRS. The Company continues to work with advisors and
monitor the development of standards to understand the practical application of the IFRS principles which will affect the quantification of IFRS retrospective adjustments as at January 1, 2010
and the subsequent IFRS Consolidated Financial Statements.

IFRS Changeover Process

TALISMAN ENERGYMANAGEMENT'S DISCUSSION &
ANALYSIS35

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Risk Factors

Talisman is exposed to a number of risks inherent in exploring for, developing and producing crude oil and natural gas. This section describes the risks and other matters that
would be most likely to influence an investor's decision to purchase securities of Talisman.

Volatility of Oil and Natural Gas Prices

Talisman's financial performance is highly sensitive to prevailing prices of crude oil and natural gas. Fluctuations in crude oil or natural gas
prices could have a material adverse effect on the Company's operations and financial condition, the value of its oil and natural gas reserves and its level of spending for oil and gas exploration and
development. Prices for crude oil and natural gas fluctuate in response to changes in the supply of and demand for crude oil and natural gas, market uncertainty and a variety of additional factors
that are largely beyond the Company's control. Oil prices are determined by international supply and demand. Factors which affect crude oil prices include the actions of the Organization of Petroleum
Exporting Countries ("OPEC"), world economic conditions, government regulation, political stability throughout the world, the availability of alternative fuel sources and weather conditions. Most
natural gas prices realized by Talisman are affected primarily by North American supply and demand, weather conditions and by prices of alternative sources of energy. The development of oil and
natural gas discoveries in offshore areas and the development of shale gas plays are particularly dependent on the outlook for oil and natural gas prices because of the large amount of capital
expenditure required for development prior to commencing production.

A
substantial and extended decline in the prices of crude oil or natural gas could result in delay or cancellation of drilling, development or construction programs, or curtailment in production or
result in
unutilized long-term transportation commitments, all of which could have a material adverse impact on the Company. The amount of cost oil required to recover Talisman's investment and
costs in various PSCs is dependent on commodity prices, with higher commodity prices resulting in a lower amount of net after royalty oil and gas reserves booked by the Company.

Exchange Rate Fluctuations

Talisman's Consolidated Financial Statements are presented in C$. Results of operations are affected primarily by the exchange rates between the C$,
the US$, UK£ and NOK. These exchange rates may vary substantially. Most of the Company's revenue is received in or is referenced to US$ denominated prices, while Talisman's expenditures
are denominated in C$, US$, UK£ and NOK. A change in the relative value of the C$ against the US$ or the UK£ would also result in an increase or decrease in Talisman's US$ or
UK£ denominated debt, as expressed in C$ and the related interest expense. Talisman is also exposed to fluctuations in other foreign currencies. Effective from the first quarter of 2011,
the Company will be reporting its financial results in US$.

Reputational Impact of an Environmental, Safety or Security Incident

Oil and gas drilling and producing operations are subject to many risks, including incidents which could result in environmental damage, regulatory
investigations, penalties and liabilities to third parties, personal injury, loss of life and damage or destruction of properties. An environmental, safety or security incident could impact Talisman's
reputation in such a way that it could have a material adverse effect on the Company's business.

The
Company's operations may be adversely affected by security incidents which are not within the control of Talisman, including, among other things, killings, kidnappings, extortion, lawlessness,
gang or criminal activity, landmines, unexploded ordnance and conflict zones.

Egress and Gas Buyers

As rapidly increasing volumes of natural gas are brought onstream by Talisman and others, transportation infrastructure capacity may at times be
exceeded before capacity additions become available. In such event, there is a risk that some production may be affected waiting on pipeline connection or infrastructure additions. A result could be
reduced production

36TALISMAN ENERGYMANAGEMENT'S DISCUSSION &
ANALYSIS

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and/or
materially lower prices on some portion of production, which in turn could adversely affect the Company's operating results.

Regulatory Delays, Including Delays in Shale Gas Drilling

Talisman's operations are governed by many levels of government, including municipal, state, provincial and federal governments, in numerous
countries. The Company is subject to laws and regulations regarding health and safety, environmental matters, lease interests, taxes and royalties, among others. Failure to comply with the applicable
laws can result in significant increases in costs, penalties and even losses of operating licences. If regulatory approvals or permits are delayed or not obtained, there can also be delays or
abandonment of projects, decreases in production and increases in costs, and the Company may not be able to fully execute its strategy, which may adversely impact its financial condition.

In
addition, the Company may be subject to revisions of laws and regulations applicable to its operations. For example, in New York, continued delays are forecast to be caused by the
New York state's updating of its Generic Environmental Impact Statement on the Oil, Gas and Solution Mining Regulatory Program. In Pennsylvania, delays could also be experienced as Pennsylvania
continues to update the Pennsylvania Oil & Gas Act and other state laws. Federal or provincial legislation regarding shale gas development is also being considered which could impact the
development schedule or costs of development.

Access to Credit and Letters of Credit

The Company relies on access to letters of credit in the normal course of business in order to support some of its operations. There can be no
assurance that the Company will be able to obtain the necessary letters of credit. While the Company may have access to various financing options, including draws on existing facilities and the
issuance of debt or equity, the terms of such financing options may not be acceptable to the Company.

Uncertainty of Reserves Estimates

The process of estimating oil and gas reserves is complex and involves a significant number of assumptions in evaluating available geological,
geophysical, engineering and economic data; therefore, reserves estimates are inherently uncertain. Talisman prepares all of its reserves information internally. The Company may adjust estimates of
proved reserves based on production history, results of exploration and development drilling, prevailing oil and gas prices and other factors, many of which are beyond the Company's control. In
addition, there are numerous uncertainties in forecasting the amounts and timing of future production, costs, expenses and the results of exploration and development projects. All estimates are, to
some degree, uncertain and classifications of reserves are only attempts to define the degree of uncertainty involved. For these reasons, estimates of the economically recoverable oil and natural gas
reserves attributable to any particular group of properties, the classification of such reserves based on risk of recovery and the standardized measure of discounted future net cash flows prepared by
different engineers or by the same engineers at different times, may vary substantially. Talisman's actual production, taxes and development and operating expenditures with respect to its reserves
will likely vary from such estimates and such variances could be material.

Estimates
with respect to reserves that may be developed and produced in the future are often based upon volumetric calculations and upon analogy to similar types of reservoirs, rather than upon
actual production history. Estimates based on these methods generally are less reliable than those based on actual production history. Subsequent evaluation of the same reserves based upon production
history will result in variations, which may be material, in the estimated reserves.

Litigation

From time to time, Talisman is the subject of litigation arising out of the Company's operations. Specific disclosure of current legal proceedings,
and the risks associated with current proceedings and litigation generally, are disclosed under the heading "Litigation" in this Management's Discussion & Analysis.

TALISMAN ENERGYMANAGEMENT'S DISCUSSION &
ANALYSIS37

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Major Accident

Oil and gas drilling and producing operations are subject to many risks, including the possibility of fire, explosions, mechanical failure, pipe or
cement failure, casing collapse,
pressure or irregularities in formations, chemical spills, accidental flows of oil, natural gas or well fluids, sour gas releases, contamination of oil and gas, storms or other adverse weather
conditions and other occurrences or incidents, which could result in personal injury, human health risks and loss of life, damage or destruction of properties, environmental damage, cost of remedying
such conditions or incidents, regulatory investigations and penalties and liability to third parties.

The
Company's insurance program, which may not provide coverage in all circumstances, contemplates both first and third party exposures for all of the Company's on and offshore operations globally.
Coverage is intended to respond to sudden and accidental pollution arising from the risks identified above. Coverage amounts can be as high as US$1 billion for losses arising from third parties
and significantly higher for the Company's own assets and business losses. The Company annually benchmarks its coverage against its peers independently and with the assistance of third
party firms.

Fiscal Stability

Governments may amend or create new legislation, which could result in increased capital, operating and compliance costs. For example, the Alberta
government's new royalty framework became effective in January 2009. Under current commodity prices, the impact on royalty burdens is limited to the loss of some royalty holidays that were not
fully exhausted under the previous regime. If commodity prices increase, the royalty rates will increase significantly.

Socio-Political Risks

The Company's operations may be adversely affected by political or economic developments or social instability, which are not within the control of
Talisman, including, among other things, a change in crude oil or natural gas pricing policy, the risks of war, terrorism, abduction, expropriation, nationalization, renegotiation or nullification of
existing concessions and contracts, taxation policies, economic sanctions, the imposition of specific drilling obligations, the development and abandonment of fields, fluctuating exchange rates and
currency controls. As a result of activities in these areas and a continuing evolution of an international framework for corporate responsibility and accountability for international crimes, the
Company could also be exposed to potential claims for alleged breaches of international law. Various countries in which the Company is active, including the Kurdistan region of northern Iraq,
Indonesia, Algeria, Colombia, Papua New Guinea and Peru, have been subject to recent economic or political instability and social unrest, military or rebel hostilities.

Stakeholder Opposition

Talisman's planned activities may be adversely affected if there is strong community opposition with respect to its operations. In some
circumstances, this risk may be increased in areas occupied by indigenous communities that are not accustomed to developments of this nature. In addition, Talisman regularly evaluates opportunities
worldwide, and may in the future engage in projects or acquire properties in other nations that are experiencing economic or political instability and social unrest or military hostilities or are
subject to United Nations or US sanctions. Some of the foregoing government actions may lead to political or reputational pressures on the Company from non-governmental organizations, home
governments and investors.

Ability to Find, Develop or Acquire Additional Reserves

The Company's future success depends largely on its ability to find, develop or acquire additional oil and gas reserves that are economically
recoverable. Hydrocarbons are a limited resource which is subject to increasing competition from other companies, including national oil companies. Exploration and development drilling may not result
in commercially productive reserves. Once production begins, reservoir performance may be less than projected. Successful acquisitions require an assessment of a number of factors, many of which are
uncertain. These factors include recoverable reserves, exploration potential, future oil and gas prices, operating costs and potential environmental and other liabilities. Such assessments are inexact
and their accuracy is inherently uncertain. If a high impact prospect identified by the Company fails to materialize in a given year, the Company's multi-year international exploration
portfolio may be compromised.

38TALISMAN ENERGYMANAGEMENT'S DISCUSSION &
ANALYSIS

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Industry Cost Inflation

The industry costs to find and develop reserves have generally risen over time. An upward swing in industry activity could increase key input demand
and prices, at least in the short run, and possibly delay sourcing of key labour, materials or facilities construction. Rising industry costs broadly correspond with higher oil and gas prices, but in
a competitive market among competing fuels, it is possible that not all costs may be recovered through higher prices. Although the Company strives for continuous improvement in its planning and
procurement, material or unexpected changes can affect the Company's financial performance.

Bribery

Talisman's operations are governed by many levels of government, including municipal, state, provincial and federal governments, in numerous
countries and the possibility exists that Talisman could be subject to bribery allegations. Talisman requires all employees to participate in ethics awareness training, which includes Talisman's
policies against giving or accepting money or gifts in certain circumstances. However, if Talisman is found not to have taken effective steps to address allegations or findings of bribery or
corruption in its business, this may impair Talisman's ability to participate in business with governments or non-governmental organizations. This may result in formal exclusions from such
business, which may have a material adverse effect on the Company's business.

Shale Gas Transition

The Company's strategy includes continuing its portfolio transition from conventional to shale gas with the development of its North America shale
business. The portfolio transition could result in: heightened safety risks to personnel; loss of workforce productivity; loss of knowledge transfer from departing employees; and insufficient staffing
levels to meet business requirements.

The
success of Talisman's portfolio transition is dependent upon its management and the quality of its personnel. Failure to retain current employees or to attract and retain new employees with the
necessary skills could have a materially adverse effect on Talisman's growth and profitability.

Counterparty Credit Risk

In the normal course of business, Talisman enters into contractual relationships with counterparties in the energy industry and other industries,
including counterparties to interest rate hedging, foreign exchange hedging and commodity derivative arrangements. If such counterparties do not fulfil their contractual obligations to the Company, it
may suffer losses, may have to proceed on a sole risk basis, may have to forgo opportunities or may have to relinquish leases or blocks. While the Company maintains a risk management system that
limits exposures to any one counterparty to what management deems to be reasonable, losses due to counterparties failing to fulfil their contractual obligations may impact Talisman's financial
condition.

Project Timing and Budget

Talisman manages a variety of projects, including exploration and development projects and the construction or expansion of facilities and pipelines.
Project delays may impact expected revenues and project cost overruns could make projects uneconomic. Talisman's ability to complete projects depends upon numerous factors beyond the Company's
control. These factors include the availability of processing capacity, the availability and proximity of pipeline capacity, the availability of drilling and other equipment, the ability to access
lands, weather, unexpected cost increases, accidents, the availability of skilled labour, including engineering and project planning personnel, the need for government approvals and permits, and
regulatory matters. Talisman utilizes materials and services which are subject to general industry wide conditions. Cost escalation for materials and services may be unrelated to commodity prices
changes and may continue to have a significant impact on project planning and economics.

Information System Risk

Talisman depends on a variety of information systems to operate effectively. A failure of any one of the information systems or a failure among the
systems could result in operational difficulties, damage or loss of data, productivity losses or result in unauthorized knowledge and use of information.

TALISMAN ENERGYMANAGEMENT'S DISCUSSION &
ANALYSIS39

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Environmental Risks

Environmental risks could include regulatory and reputational matters. All phases of the oil and natural gas business are subject to environmental
regulation pursuant to a variety of laws and regulations in the countries in which Talisman does business. These regulatory regimes are laws of general application that apply to the Company's business
in the same manner as they apply to other companies or enterprises in the energy industry. Compliance with environmental legislation can require significant expenditures and failure to comply with
environmental legislation may result in the imposition of fines and penalties and liability for cleanup costs and damages. Regulatory delays, legal proceedings and reputational impacts from an
environmental incident could result in a material adverse effect on the Company's business.

Environmental Trends and Uncertainties

Talisman's business is subject to the trend toward increased rigor of regulatory compliance and civil liability for environmental matters in certain
regions (e.g. Quebec, US, EU). Although Talisman currently believes that the costs of complying with environmental legislation and dealing with environmental civil liabilities will not have a
material adverse effect on the Company's financial condition or results of operations, there can be no assurance that such costs in the future will not have such an effect. See also the 'Hydraulic
Fracturing' and 'Greenhouse Gas Emissions' risk factors.

Hydraulic Fracturing

Hydraulic fracturing involves the injection of water, sand and small amounts of additives under pressure into rock formations to stimulate
hydrocarbon (natural gas and oil) production. The use of hydraulic fracturing is necessary to produce commercial quantities of natural gas and oil from many reservoirs. The US Environmental Protection
Agency has commenced a study of the potential environmental impacts of hydraulic fracturing, including the impacts on drinking water sources and public health. In addition, some states have and others
are considering adopting regulations that could restrict hydraulic fracturing in certain circumstances. Any new laws, regulation or permitting requirements regarding hydraulic fracturing could lead to
operational delay or increased operating costs or third party or governmental claims, and could increase the Company's costs of compliance and doing business as well as delay the development of shale
gas resources from shale formations which are not commercial without the use of hydraulic fracturing. Restrictions on hydraulic fracturing could also reduce the amount of oil and natural gas that the
Company is ultimately able to produce from its reserves.

Greenhouse Gas Emissions

Talisman is subject to various greenhouse gas ("GHG") emissions-related legislation. Current GHG emissions legislation does not result in material
compliance costs but compliance costs may increase in the future and may impact the Company's operations and financial results. Talisman operates in jurisdictions with existing GHG legislation
(e.g. UK, Norway, Alberta and BC) as well as in the regions which currently do not have GHG emissions legislation and jurisdictions where GHG emissions legislation is emerging or is subject to
change (e.g. US). Talisman monitors GHG legislative developments in all areas that the Company operates. If the Company becomes subject to additional GHG legislation, there can be no assurances
that the compliance costs will be immaterial.

In
the UK, Phase II of the European Union Emissions Trading Scheme ("EU ETS") began in 2008 and will run until the end of 2012. The EU ETS requires that member states set emissions
limits for installations in their country covered by the scheme and assigns such installations an emissions cap. Installations may meet their cap by reducing emissions or by buying allowances from
other participants. Phase II impacts to
the Company are minimal. Phase III of the EU ETS will potentially have a material impact on Talisman's business in the UK. The proposed Phase III legislation, which is to begin in 2013
and run until 2020, will significantly reduce emission caps. In addition, free allowances for electrical power generation will no longer be issued. Approximately 50% of total Talisman UK emissions are
associated with electrical power generation. Compliance costs associated with Phase III of the EU ETS may have a material impact on Talisman's business in the UK.

The
Norwegian national GHG emissions trading system is linked to the EU ETS. Talisman is required to purchase emissions credits corresponding to its total annual CO2 emissions, and to pay
the CO2 emissions tax. Starting January 2011, the Company will also be required to purchase emissions credits for mobile rigs in addition to payment for the mobile rig
CO2 emissions tax that began in 2010. Phase II ends in 2012 and compliance costs are not expected to be material to Talisman because the

40TALISMAN ENERGYMANAGEMENT'S DISCUSSION &
ANALYSIS

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Norwegian
government will adjust the CO2 emissions tax so that total costs of the CO2 emissions tax and emissions credit purchases are similar to the pre-2008 costs
that were not material to Talisman. The proposed Phase III legislation, which is to begin in 2013 and run until 2020, will further reduce emissions caps for our Norwegian operation, but the
Company does not anticipate that the costs of compliance will be material considering our current compliance requirements.

Environmental Liabilities and ARO

Talisman expects to incur site restoration costs over a prolonged period as existing fields are depleted. The Company provides for ARO in its annual
Consolidated Financial Statements in accordance with Canadian GAAP. Additional information regarding asset retirement obligations is set forth in the notes to the annual Consolidated Financial
Statements. There can be no assurances that the cost estimates and asset retirement obligations are materially correct and that the liabilities will occur when predicted.

Advisories

Forward-Looking Statements

This MD&A contains information that constitutes "forward-looking information" or "forward-looking statements" (collectively "forward-looking
information") within the meaning of applicable securities legislation. Forward-looking information is included throughout this MD&A, including, among other places, under the headings 'Outlook for
2010' and 'Risk Factors'. This forward-looking information includes, but is not limited to, statements regarding:

TALISMAN ENERGYMANAGEMENT'S DISCUSSION &
ANALYSIS41

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The
following material assumptions were used in drawing the conclusions or making the forecasts and projections included in the forward-looking information contained in this MD&A. Talisman has set its
2011 capital expenditure plans assuming: (1) Talisman's production in 2011 will be approximately 5-10% greater than 2010, excluding the BP Colombia acquisition; (2) a WTI oil
price of approximately US$75/bbl, and (3) a NYMEX natural gas price of approximately US$4/mmbtu. Information regarding business plans generally assumes that the extraction of crude oil, natural
gas and natural gas liquids remains economic. Closing of any transactions will be subject to receipt of all necessary regulatory approvals and completion of definitive agreements.

Undue
reliance should not be placed on forward-looking information. Forward-looking information is based on current expectations, estimates and projections that involve a number of risks, which could
cause actual results to vary and, in some instances, to differ materially from those anticipated by Talisman and described in the forward-looking information contained in this MD&A. The material risk
factors include, but are not limited to:

42TALISMAN ENERGYMANAGEMENT'S DISCUSSION &
ANALYSIS

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The
foregoing list of risk factors is not exhaustive. Additional information on these and other factors which could affect the Company's operations or financial results are included in the Company's
most recent Annual Information Form. In addition, information is available in the Company's other reports on file with Canadian securities regulatory authorities and the SEC. Forward-looking
information is based on the estimates and opinions of the Company's management at the time the information is presented. The Company assumes no obligation to update forward-looking information should
circumstances or management's estimates or opinions change, except as required by law.

Reserves Data and Other Oil and Gas Information

Talisman's disclosure of reserves data and other oil and gas information is made in reliance on the exemptions granted to Talisman by Canadian
securities regulatory authorities, which permit Talisman to provide certain disclosure in accordance with US disclosure standards in order to provide comparability of oil and gas disclosures with that
provided by US and other peers. The primary differences between the US disclosure standards and the Canadian disclosure mandated under NI 51-101 are that:

Further
information on the differences between the US standards and NI 51-101 requirements is set forth under the heading 'Note Regarding Reserves Data and Other Oil and Gas
Information' in Talisman's most recent Annual Information Form.

The
information provided by Talisman in this MD&A may differ from the corresponding information prepared in accordance with NI 51-101 standards. Talisman's proved and
probable reserves, using SEC annual average pricing methodology, have been estimated using the standards contained in Regulation S-X of the SEC which requires that proved and
probable reserves be estimated using existing economic and operating conditions.

An
exemption granted to Talisman also permits it to disclose internally evaluated reserves data. Any reserves data contained in this MD&A reflects Talisman's estimates of its reserves. No independent
qualified reserves evaluator or auditor was involved in the preparation of the reserves data disclosed in this MD&A.

Reserves Replacement Ratio

The reserves replacement ratios before net acquisitions and dispositions were calculated by dividing the sum of changes (revisions of estimates and
discoveries) to estimated gross proved oil and gas reserves during 2010 by the Company's 2010 gross production. The Company's management uses reserves replacement ratios as an indicator of the
Company's ability to replenish annual production volumes and grow its reserves. It should be noted that a reserves replacement ratio is a statistical indicator that has limitations. As an annual
measure, the ratio is limited because it typically varies widely, based on the extent and timing of new discoveries, project sanctioning and property acquisitions. Its predictive and comparative value
is also limited for the same reasons. In addition, since the ratio does not include cost, value or timing of future production of new reserves, it cannot be used as a measure of value creation.

TALISMAN ENERGYMANAGEMENT'S DISCUSSION &
ANALYSIS43

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Replacement Costs

In this MD&A, Talisman discloses a reduction in replacement costs. Replacement costs are used by the Company to determine the cost of reserves
additions in a period. Talisman's reported replacement costs may not be comparable to similarly titled measures used by other companies. Replacement costs may not reflect full cycle replacement costs.
Replacement costs' predictive and comparative value is limited for the aforementioned reasons. Replacement costs are calculated by dividing exploration and development capital spending of
$4 billion (including discontinued operations, but excluding midstream) by gross proved reserve additions of 249 mmboe.

Gross Production

Throughout this MD&A, Talisman makes reference to production volumes. Such production volumes are stated on a gross basis, which means they are
stated prior to the deduction of royalties and similar payments. In the US, net production volumes are reported after the deduction of these amounts. US readers may refer to the table headed 'Net
Production After Royalties' in Talisman's most recent Annual Information Form for a statement of Talisman's net production volumes by reporting segment that are comparable to those made by US
companies subject to SEC reporting and disclosure requirements.

Netbacks

Talisman discloses its Company netbacks in this MD&A. Netbacks per boe are calculated by deducting from sales price associated royalties, operating
and transportation costs.

Canadian Dollars and GAAP

Dollar amounts are presented in C$, except where otherwise indicated. Unless otherwise indicated, the financial information is set out in accordance
with Canadian GAAP which may differ from US GAAP. See note 25 to the Consolidated Financial Statements for the significant differences between Canadian and US GAAP.

Financial Outlook

Included in this MD&A is the Company's financial outlook. Its purpose is to enrich management's discussion and analysis. This information may not be
appropriate for other purposes.

Abbreviations and Definitions

The following abbreviations and definitions are used in this document:

|AcSB    |  | Canadian Accounting Standards Board        
|------- |  | -------------------------------------------
|AIF     |  | Annual Information Form                    
|bbl     |  | barrel                                     
|bbls    |  | barrels                                    
|bbls/d  |  | barrels per day                            
|bcf     |  | billion cubic feet                         
|boe     |  | barrels of oil equivalent                  
|boe/d   |  | barrels of oil equivalent per day          
|C$ or $ |  | Canadian dollar                            
|CICA    |  | Canadian Institute of Chartered Accountants
|CO2     |  | Carbon dioxide                             
|EU      |  | European Union                             
|FASB    |  | Financial Accounting Standards Board       
|FSO     |  | Floating Storage and Offloading vessel     
|GAAP    |  | Generally Accepted Accounting Principles   
|GJ      |  | Gigajoule                                  
|HSSE    |  | Health, Safety, Security and Environment   

44TALISMAN ENERGYMANAGEMENT'S DISCUSSION &
ANALYSIS

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|ICE     |  | Intercontinental Exchange                    
|------- |  | ---------------------------------------------
|IFRS    |  | International Financial Reporting Standards  
|LIBOR   |  | London Interbank Offered Rate                
|LNG     |  | Liquefied Natural Gas                        
|mbbls/d |  | thousand barrels per day                     
|mboe/d  |  | thousand barrels of oil equivalent per day   
|mcf     |  | thousand cubic feet                          
|mmbbls  |  | million barrels                              
|mmboe   |  | million barrels of oil equivalent            
|mmbtu   |  | million British thermal units                
|mmcf/d  |  | million cubic feet per day                   
|NGL     |  | Natural Gas Liquids                          
|NI      |  | National Instrument                          
|NOK     |  | Norwegian Kroner                             
|NYMEX   |  | New York Mercantile Exchange                 
|OA      |  | Operational Assurance                        
|OPEC    |  | Organization of Petroleum Exporting Countries
|PRT     |  | Petroleum Revenue Tax                        
|PNG     |  | Papua New Guinea                             
|PGN     |  | PT Perusahaan Gas Negara (Persero) Tbk       
|PSC     |  | Production Sharing Contract                  
|PSU     |  | Performance share unit                       
|SEC     |  | US Securities and Exchange Commission        
|tcf     |  | trillion cubic feet                          
|UK      |  | United Kingdom                               
|UK£     |  | Pound sterling                               
|US      |  | United States of America                     
|US$     |  | United States dollar                         
|WTI     |  | West Texas Intermediate                      

Gross acres means the total number of acres in which Talisman has a working interest. Net acres means the sum of the fractional working interests owned in gross
acres expressed as whole numbers and fractions thereof.

Gross
production means Talisman's interest in production volumes (through working interests and royalty interests) before the deduction of royalties. Net production means Talisman's interest in
production volumes after deduction of royalties payable by Talisman.

Gross
wells means the total number of wells in which the Company has a working interest. Net wells means the sum of the fractional working interests owned in gross wells expressed as whole numbers and
fractions thereof.

Conversion and equivalency factors

|Imperial     |  | Metric                  
|------------ |  | ------------------------
|1 ton        |  | =    0.907 tonnes       
|1 acre       |  | =    0.40 hectares      
|1 barrel     |  | =    0.159 cubic metres 
|1 cubic foot |  | =    0.0282 cubic metres

TALISMAN ENERGYMANAGEMENT'S DISCUSSION &
ANALYSIS45

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