Exhibit 99.7



---



LOGO

CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES
For the Year Ended December 31, 2007

---



Report of Management

The Board of Directors is responsible for the Consolidated Financial Statements but has delegated responsibility for their preparation to management.

Management
has prepared the Consolidated Financial Statements in accordance with accounting principles generally accepted in Canada (with a reconciliation to accounting principles generally accepted
in the United States). If alternative accounting methods exist, management has chosen those it deems most appropriate in the circumstances. Financial statements are not precise since they
include certain amounts based on estimates and judgments. Management has ensured that the Consolidated Financial Statements are presented fairly in all material respects. Management has also prepared
the financial information presented elsewhere in the Annual Financial Report and ensured that it is consistent with information in the Consolidated Financial Statements.

The
Board of Directors is responsible for reviewing and approving the Consolidated Financial Statements and Management's Discussion and Analysis and, primarily through its Audit Committee, ensures
that management fulfills its responsibilities for financial reporting.

The
Audit Committee is appointed by the Board of Directors and is composed entirely of unrelated, independent directors. The Audit Committee meets regularly with management, and with the internal and
external auditors, to discuss internal controls and reporting issues and to satisfy itself that each party is properly discharging its responsibilities. It reviews the Consolidated Financial
Statements and the external auditors' report. The Audit Committee also considers, for review by the Board of Directors and approval by the shareholders, the engagement or reappointment of the external
auditors.

Ernst &
Young LLP, the external auditors, have audited the Consolidated Financial Statements in accordance with auditing standards generally accepted in Canada and the standards of the
Public Company Accounting Oversight Board (United States) on behalf of the shareholders. Ernst & Young LLP have full and free access to the Audit Committee.

Management Report on 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 Securities Exchange Act of 1934.

Management
has conducted an evaluation of the Company's internal control over financial reporting based on criteria established in the Internal
Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Based
on management's assessment as of December 31, 2007, the end of the Company's fiscal year, management concludes that the Company's internal control over financial reporting
is effective.

Management
reviewed the results of management's assessment with the Audit Committee of the Company's Board of Directors. The Company's independent registered public accounting firm, Ernst &
Young LLP, 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.

|/s/JOHN A. MANZONI                                   |  | /s/PHILIP D. DOLAN                                                
|---------------------------------------------------- |  | ------------------------------------------------------------------
|John A. ManzoniPresident and Chief Executive Officer |  | Philip D. DolanVice-President, Finance and
Chief Financial Officer

March 7, 2008

Talisman Energy 2007 Annual Financial Report   1

---



Independent Auditors' Report on Internal Controls Under Standards of the Public Company Accounting Oversight Board
(United States)

To the Shareholders of Talisman Energy Inc.

We have audited Talisman Energy Inc.'s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal
Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Talisman
Energy Inc.'s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial
reporting based on our audit.

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

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

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In
our opinion, Talisman Energy Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the COSO criteria.

We
also have audited, in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States), the consolidated
balance sheets of Talisman Energy Inc. as at December 31, 2007 and 2006 and the Consolidated Statements of Income, Comprehensive Income, Changes in Shareholders' Equity, and Cash Flows
for each of the years in the three-year period ended December 31, 2007, and our report dated February 27, 2008, expressed an unqualified opinion thereon.

/s/ERNST & YOUNG LLP

Ernst & Young LLPChartered Accountants

February 27,
2008
Calgary, Canada

2   Talisman Energy 2007 Annual Financial Report

---



Independent Auditors' Report on Financial Statements

To the Shareholders of Talisman Energy Inc.

We have audited the Consolidated Balance Sheets of Talisman Energy Inc. (the "Company") as at December 31, 2007 and 2006 and the Consolidated Statements of
Income, Changes to Shareholders' Equity, Comprehensive Income and Cash Flows for each of the years in the three-year period ended December 31, 2007. These financial statements are
the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In
our opinion, these Consolidated Financial Statements present fairly, in all material respects, the financial position of the Company as at December 31, 2007 and 2006 and the results of its
operations and its cash flows for each of the years in the three-year period ended December 31, 2007 in conformity with Canadian generally accepted accounting principles.

As
discussed in note 2 to the consolidated financial statements, in 2007 the Company changed its method of accounting for financial instruments, comprehensive income and hedges, and its
method of accounting for uncertainty in income taxes and adopted the recommendations requiring additional capital disclosures. Also, as discussed in Note 21 to the consolidated financial
statements, in 2006 the Company changed its method of accounting for defined benefit pension and other post-retirement plans.

We
have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of
December 31, 2007, based on criteria established in Internal Control  Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated February 27, 2008, expressed an unqualified opinion thereon.

/s/
ERNST & YOUNG LLP

LOGO

Ernst & Young LLPChartered Accountants

February 27,
2008
Calgary, Canada

Talisman Energy 2007 Annual Financial Report   3

---



Consolidated Balance Sheets

|December 31(millions of C$)                                    |                                                                   | 2007   |       | 2006                      
|-------------------------------------------------------------- | ----------------------------------------------------------------- | ------ | ----- | --------------------------
|                                                              
|                                                               |                                                                   |        |       | (restated 
notes 2 and 3)
|Assets                                                         |                                                                   |        |       |                           
|                                                              
|Current                                                        |                                                                   |        |       |                           
|                                                              
|                                                               | Cash and cash equivalents                                         |        | 536   |                           
|                                                              
|                                                               | Accounts receivable (note 12)                                     |        | 1,159 |                           
|                                                              
|                                                               | Inventories (note 5)                                              |        | 109   |                           
|                                                              
|                                                               | Prepaid expenses                                                  |        | 12    |                           
|                                                              
|                                                               | Assets of discontinued operations (note 3)                        |        | 59    |                           
|                                                              
|                                                               |                                                                   | 1,875  |       | 2,300                     
|                                                              
|Other assets (note 6)                                          |                                                                   | 387    |       | 354                       
|                                                              
|Goodwill (note 4)                                              |                                                                   | 1,418  |       | 1,522                     
|                                                              
|Property, plant and equipment (note 7)                         |                                                                   | 17,763 |       | 17,278                    
|                                                              
|Assets of discontinued operations (note 3)                     |                                                                   |       |       | 27                        
|                                                              
|                                                               |                                                                   | 19,568 |       | 19,181                    
|                                                              
|Total assets                                                   |                                                                   | 21,443 |       | 21,481                    
|                                                              
|Liabilities                                                    |                                                                   |        |       |                           
|                                                              
|Current                                                        |                                                                   |        |       |                           
|                                                              
|                                                               | Bank indebtedness                                                 |        | 15    |                           
|                                                              
|                                                               | Accounts payable and accrued liabilities (notes 8, 10, 11 and 12) |        | 1,907 |                           
|                                                              
|                                                               | Income and other taxes payable                                    |        | 388   |                           
|                                                              
|                                                               | Liabilities of discontinued operations (note 3)                   |        | 19    |                           
|                                                              
|                                                               |                                                                   | 2,329  |       | 3,182                     
|                                                              
|Deferred credits                                               |                                                                   | 21     |       | 59                        
|                                                              
|Asset retirement obligations (note 8)                          |                                                                   | 1,981  |       | 1,848                     
|                                                              
|Other long-term obligations (note 10)                          |                                                                   | 140    |       | 155                       
|                                                              
|Long-term debt (note 9)                                        |                                                                   | 4,862  |       | 4,560                     
|                                                              
|Future income taxes (note 16)                                  |                                                                   | 4,147  |       | 4,361                     
|                                                              
|Liabilities of discontinued operations (note 3)                |                                                                   |       |       | 9                         
|                                                              
|                                                               |                                                                   | 11,151 |       | 10,992                    
|                                                              
|Contingencies and commitments (notes 12 and 13)                |                                                                   |        |       |                           
|                                                              
|Shareholders' equity                                           |                                                                   |        |       |                           
|                                                              
|Common shares (note 11)                                        |                                                                   | 2,437  |       | 2,533                     
|                                                              
|Contributed surplus                                            |                                                                   | 64     |       | 67                        
|                                                              
|Retained earnings                                              |                                                                   | 5,651  |       | 4,585                     
|                                                              
|Accumulated other comprehensive income (loss) (notes 2 and 12) |                                                                   | (189   | )     | 122                       
|                                                              
|                                                               |                                                                   | 7,963  |       | 7,307                     
|                                                              
|Total liabilities and shareholders' equity                     |                                                                   | 21,443 |       | 21,481                    
|                                                              

See accompanying notes.

On behalf of the Board

|/s/DOUGLAS D. BALDWIN |  | /s/ROBERT G. WELTY
|--------------------- |  | ------------------
|Douglas D. Baldwin    |  | Robert G. Welty   
|Chairman of the Board |  | Director          

4   Talisman Energy 2007 Annual Financial Report

---



Consolidated Statements of Income

|Years ended December 31(millions of C$)                          |                                                          | 2007  |       | 2006                |       | 2005                |      
|---------------------------------------------------------------- | -------------------------------------------------------- | ----- | ----- | ------------------- | ----- | ------------------- | -----
|                                                                 |                                                         
|                                                                 |                                                          |       |       | (restated 
note 3) |       | (restated 
note 3) |      
|Revenue                                                          |                                                          |       |       |                     |       |                     |      
|                                                                 |                                                         
|                                                                 | Gross sales                                              |       | 9,265 |                     | 8,991 |                     | 8,418
|                                                                 |                                                         
|                                                                 | Hedging gain (loss)                                      |       | 104   |                     | 66    |                     | (77  
|                                                                 |                                                         
|                                                                 | Gross sales, net of hedging                              |       | 9,369 |                     | 9,057 |                     | 8,341
|                                                                 |                                                         
|                                                                 | Less royalties                                           |       | 1,598 |                     | 1,522 |                     | 1,423
|                                                                 |                                                         
|                                                                 | Net sales                                                |       | 7,771 |                     | 7,535 |                     | 6,918
|                                                                 |                                                         
|                                                                 | Other (note 14)                                          |       | 148   |                     | 111   |                     | 110  
|                                                                 |                                                         
|Total revenue                                                    |                                                          | 7,919 |       | 7,646               |       | 7,028               |      
|                                                                 |                                                         
|Expenses                                                         |                                                          |       |       |                     |       |                     |      
|                                                                 |                                                         
|                                                                 | Operating                                                |       | 1,895 |                     | 1,550 |                     | 1,261
|                                                                 |                                                         
|                                                                 | Transportation                                           |       | 210   |                     | 207   |                     | 185  
|                                                                 |                                                         
|                                                                 | General and administrative                               |       | 223   |                     | 233   |                     | 201  
|                                                                 |                                                         
|                                                                 | Depreciation, depletion and amortization                 |       | 2,316 |                     | 1,926 |                     | 1,595
|                                                                 |                                                         
|                                                                 | Dry hole                                                 |       | 684   |                     | 296   |                     | 241  
|                                                                 |                                                         
|                                                                 | Exploration                                              |       | 318   |                     | 318   |                     | 275  
|                                                                 |                                                         
|                                                                 | Interest on long-term debt                               |       | 205   |                     | 166   |                     | 163  
|                                                                 |                                                         
|                                                                 | Stock-based compensation (note 11)                       |       | (15   | )                   | 51    |                     | 633  
|                                                                 |                                                         
|                                                                 | Loss on held-for-trading financial instruments (note 12) |       | 25    |                     |      |                     |     
|                                                                 |                                                         
|                                                                 | Other, net (note 15)                                     |       | 41    |                     | (29   | )                   | 39   
|                                                                 |                                                         
|Total expenses                                                   |                                                          | 5,902 |       | 4,718               |       | 4,593               |      
|                                                                 |                                                         
|Income from continuing operations before taxes                   |                                                          | 2,017 |       | 2,928               |       | 2,435               |      
|                                                                 |                                                         
|Taxes (note 16)                                                  |                                                          |       |       |                     |       |                     |      
|                                                                 |                                                         
|                                                                 | Current income tax                                       |       | 782   |                     | 770   |                     | 960  
|                                                                 |                                                         
|                                                                 | Future income tax (recovery)                             |       | (67   | )                   | 498   |                     | 71   
|                                                                 |                                                         
|                                                                 | Petroleum revenue tax                                    |       | 256   |                     | 290   |                     | 184  
|                                                                 |                                                         
|                                                                 |                                                          | 971   |       | 1,558               |       | 1,215               |      
|                                                                 |                                                         
|Net income from continuing operations                            |                                                          | 1,046 |       | 1,370               |       | 1,220               |      
|                                                                 |                                                         
|Net income from discontinued operations (note 3)                 |                                                          | 1,032 |       | 635                 |       | 341                 |      
|                                                                 |                                                         
|Net income                                                       |                                                          | 2,078 |       | 2,005               |       | 1,561               |      
|                                                                 |                                                         
|Per common share (C$)                                            |                                                          |       |       |                     |       |                     |      
|                                                                 |                                                         
|                                                                 | Net income from continuing operations                    |       | 1.01  |                     | 1.25  |                     | 1.11 
|                                                                 |                                                         
|                                                                 | Diluted net income from continuing operations            |       | 0.99  |                     | 1.22  |                     | 1.08 
|                                                                 |                                                         
|                                                                 | Net income from discontinued operations                  |       | 1.00  |                     | 0.59  |                     | 0.30 
|                                                                 |                                                         
|                                                                 | Diluted net income from discontinued operations          |       | 0.98  |                     | 0.57  |                     | 0.30 
|                                                                 |                                                         
|                                                                 | Net income                                               |       | 2.01  |                     | 1.84  |                     | 1.41 
|                                                                 |                                                         
|                                                                 | Diluted net income                                       |       | 1.97  |                     | 1.79  |                     | 1.38 
|                                                                 |                                                         
|Average number of common shares outstanding  basic (millions)   |                                                          | 1,032 |       | 1,092               |       | 1,104               |      
|                                                                 |                                                         
|Average number of common shares outstanding  diluted (millions) |                                                          | 1,056 |       | 1,122               |       | 1,131               |      
|                                                                 |                                                         

See accompanying notes.

Talisman Energy 2007 Annual Financial Report   5

---



Consolidated Statements of Comprehensive Income

|Years ended December 31(millions of C$)                                         |                                            | 2007   |     | 2006  |   | 2005  |  
|------------------------------------------------------------------------------- | ------------------------------------------ | ------ | --- | ----- | - | ----- | -
|                                                                                |                                           
|Net income                                                                      |                                            | 2,078  |     | 2,005 |   | 1,561 |  
|                                                                                |                                           
|Foreign currency - translation of self-sustaining foreign operations1           |                                            | 947    |     | 179   |   | 40    |  
|                                                                                |                                           
|Foreign currency - translation into reporting currency                          |                                            | (1,242 | )   | 208   |   | (229  | )
|                                                                                |                                           
|Mark-to-market gains and (losses) on derivatives designated as cash flow hedges |                                            |        |     |       |   |       |  
|                                                                                |                                           
|                                                                                | Unrealized losses arising during the year2 |        | (15 | )     |  |       | 
|                                                                                |                                           
|                                                                                | Realized gains recognized in net income3   |        | (83 | )     |  |       | 
|                                                                                |                                           
|Other comprehensive income (loss)                                               |                                            | (393   | )   | 387   |   | (189  | )
|                                                                                |                                           
|Comprehensive income                                                            |                                            | 1,685  |     | 2,392 |   | 1,372 |  
|                                                                                |                                           

See accompanying notes.

Consolidated Statements of Changes in Shareholders' Equity

|December 31(millions of C$)                                             |  | 2007  |   | 2006  |   | 2005  |  
|----------------------------------------------------------------------- |  | ----- | - | ----- | - | ----- | -
|                                                                        | 
|Common shares                                                           |  |       |   |       |   |       |  
|                                                                        | 
|Balance, beginning of year                                              |  | 2,533 |   | 2,609 |   | 2,666 |  
|                                                                        | 
|Issued on exercise of stock options                                     |  | 14    |   | 8     |   | 8     |  
|                                                                        | 
|Purchased during the year                                               |  | (110  | ) | (84   | ) | (65   | )
|                                                                        | 
|Balance, end of year                                                    |  | 2,437 |   | 2,533 |   | 2,609 |  
|                                                                        | 
|Contributed surplus                                                     |  |       |   |       |   |       |  
|                                                                        | 
|Balance, beginning of year                                              |  | 67    |   | 69    |   | 71    |  
|                                                                        | 
|Purchase of common shares                                               |  | (3    | ) | (2    | ) | (2    | )
|                                                                        | 
|Balance, end of year                                                    |  | 64    |   | 67    |   | 69    |  
|                                                                        | 
|Retained earnings                                                       |  |       |   |       |   |       |  
|                                                                        | 
|Balance, beginning of year                                              |  | 4,585 |   | 3,316 |   | 2,170 |  
|                                                                        | 
|Transitional adjustment on adoption of new accounting policies (note 2) |  | 7     |   |      |   |      |  
|                                                                        | 
|Net income                                                              |  | 2,078 |   | 2,005 |   | 1,561 |  
|                                                                        | 
|Common share dividends                                                  |  | (180  | ) | (163  | ) | (125  | )
|                                                                        | 
|Purchase of common shares                                               |  | (839  | ) | (573  | ) | (290  | )
|                                                                        | 
|Balance, end of year                                                    |  | 5,651 |   | 4,585 |   | 3,316 |  
|                                                                        | 
|Accumulated other comprehensive income (loss)                           |  |       |   |       |   |       |  
|                                                                        | 
|Balance, beginning of year                                              |  | 122   |   | (265  | ) | (76   | )
|                                                                        | 
|Transitional adjustment on adoption of new accounting policies (note 2) |  | 82    |   |      |   |      |  
|                                                                        | 
|Other comprehensive income (loss)                                       |  | (393  | ) | 387   |   | (189  | )
|                                                                        | 
|Balance, end of year                                                    |  | (189  | ) | 122   |   | (265  | )
|                                                                        | 

See accompanying notes.

6   Talisman Energy 2007 Annual Financial Report

---



Consolidated Statements of Cash Flows

|Years ended December 31(millions of C$)                               |                                    | 2007   |        | 2006                |        | 2005                |       
|--------------------------------------------------------------------- | ---------------------------------- | ------ | ------ | ------------------- | ------ | ------------------- | ------
|                                                                      |                                   
|                                                                      |                                    |        |        | (restated 
note 3) |        | (restated 
note 3) |       
|Operating                                                             |                                    |        |        |                     |        |                     |       
|                                                                      |                                   
|Net income from continuing operations                                 |                                    | 1,046  |        | 1,370               |        | 1,220               |       
|                                                                      |                                   
|Items not involving cash (note 17)                                    |                                    | 2,861  |        | 2,557               |        | 2,481               |       
|                                                                      |                                   
|Exploration                                                           |                                    | 318    |        | 318                 |        | 275                 |       
|                                                                      |                                   
|                                                                      |                                    | 4,225  |        | 4,245               |        | 3,976               |       
|                                                                      |                                   
|Changes in non-cash working capital (note 17)                         |                                    | (257   | )      | (374                | )      | 199                 |       
|                                                                      |                                   
|Cash provided by continuing operations                                |                                    | 3,968  |        | 3,871               |        | 4,175               |       
|                                                                      |                                   
|Cash provided by discontinued operations                              |                                    | 102    |        | 503                 |        | 696                 |       
|                                                                      |                                   
|Cash provided by operating activities                                 |                                    | 4,070  |        | 4,374               |        | 4,871               |       
|                                                                      |                                   
|Investing                                                             |                                    |        |        |                     |        |                     |       
|                                                                      |                                   
|Corporate acquisitions, net of cash acquired (note 4)                 |                                    | (209   | )      | (66                 | )      | (2,549              | )     
|                                                                      |                                   
|Capital expenditures                                                  |                                    |        |        |                     |        |                     |       
|                                                                      |                                   
|                                                                      | Exploration, development and other |        | (4,430 | )                   | (4,482 | )                   | (3,068
|                                                                      |                                   
|                                                                      | Property acquisitions (note 4)     |        | (54    | )                   | (201   | )                   | (260  
|                                                                      |                                   
|Proceeds of resource property dispositions                            |                                    | 41     |        | 112                 |        | 17                  |       
|                                                                      |                                   
|Proceeds from investment disposition                                  |                                    | 243    |        |                    |        |                    |       
|                                                                      |                                   
|Changes in non-cash working capital                                   |                                    | (206   | )      | 246                 |        | 139                 |       
|                                                                      |                                   
|Discontinued operations, net of capital expenditures                  |                                    | 1,376  |        | 621                 |        | (423                | )     
|                                                                      |                                   
|Cash used in investing activities                                     |                                    | (3,239 | )      | (3,770              | )      | (6,144              | )     
|                                                                      |                                   
|Financing                                                             |                                    |        |        |                     |        |                     |       
|                                                                      |                                   
|Long-term debt repaid                                                 |                                    | (2,051 | )      | (4,570              | )      | (1,294              | )     
|                                                                      |                                   
|Long-term debt issued                                                 |                                    | 2,837  |        | 4,786               |        | 3,129               |       
|                                                                      |                                   
|Common shares purchased, net                                          |                                    | (946   | )      | (656                | )      | (352                | )     
|                                                                      |                                   
|Common share dividends                                                |                                    | (180   | )      | (163                | )      | (125                | )     
|                                                                      |                                   
|Deferred credits and other                                            |                                    | (42    | )      | (77                 | )      | (9                  | )     
|                                                                      |                                   
|Changes in non-cash working capital                                   |                                    | 13     |        |                    |        | (3                  | )     
|                                                                      |                                   
|Cash provided by (used in) financing activities                       |                                    | (369   | )      | (680                | )      | 1,346               |       
|                                                                      |                                   
|Effect of translation on foreign currency cash and cash equivalents   |                                    | (5     | )      | 10                  |        | 19                  |       
|                                                                      |                                   
|Net increase (decrease) in cash and cash equivalents                  |                                    | 457    |        | (66                 | )      | 92                  |       
|                                                                      |                                   
|Cash and cash equivalents net of bank indebtedness, beginning of year |                                    | 64     |        | 130                 |        | 38                  |       
|                                                                      |                                   
|Cash and cash equivalents net of bank indebtedness, end of year       |                                    | 521    |        | 64                  |        | 130                 |       
|                                                                      |                                   
|Cash and cash equivalents                                             |                                    | 536    |        | 103                 |        | 145                 |       
|                                                                      |                                   
|Bank indebtedness                                                     |                                    | 15     |        | 39                  |        | 15                  |       
|                                                                      |                                   
|                                                                      |                                    | 521    |        | 64                  |        | 130                 |       
|                                                                      |                                   

See accompanying notes.

Talisman Energy 2007 Annual Financial Report   7

---



Notes to the Consolidated Financial Statements

(tabular amounts in millions of C$, except as noted)

1.  Significant Accounting Policies

The Consolidated Financial Statements of Talisman Energy Inc. ("Talisman" or "the Company") have been prepared by management in accordance with Canadian
generally accepted accounting principles (GAAP). A summary of the differences between accounting principles generally accepted in Canada and those generally accepted in the United States (US)
is contained in note 21 to these Consolidated Financial Statements.

The
Company is in the business of exploration, development, production and marketing of crude oil, natural gas and natural gas liquids.

a)  Consolidation

The Consolidated Financial Statements 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.

b)  Inventories

Product inventories are valued at the lower of average cost and market value. Materials and supplies are valued at the lower of average cost and net realizable value.

c)  Property, Plant and Equipment

The successful efforts method is used to account for oil and gas exploration and development costs. Under this method, acquisition costs of oil and gas properties and costs of
drilling and equipping development wells are capitalized. Exploration well costs are initially capitalized and, if subsequently determined to have not found sufficient reserves to justify commercial
production, are charged to dry hole expense. Exploration well costs that have found sufficient reserves to justify commercial production, but those reserves cannot be classified as proved, continue to
be capitalized as long as sufficient progress is being made to assess the reserves and economic viability of the well and or related project. All other exploration costs, including geological and
geophysical costs and annual lease rentals, are charged to exploration expense when incurred. Producing properties and significant unproved properties are assessed annually, or more frequently as
economic events dictate, for potential impairment. Any impairment loss is the difference between the carrying value of the asset and its fair value. Fair value is calculated as the present value of
estimated expected future cash flows from proved, probable and, as appropriate, possible reserves.

d)  Depreciation, Depletion and Amortization (DD&A)

Capitalized costs of proved oil and gas properties are depleted using the unit of production method. For purposes of these calculations, production and reserves of natural gas
are converted to barrels (bbls) on an energy equivalent basis at a ratio of six thousand cubic feet (mcf) of natural gas for one barrel (bbl) of oil.

Successful
exploratory wells and development costs are depleted over proved developed reserves. However, to the extent significant development costs are incurred in connection with proved undeveloped
reserves, such costs are excluded from depletion until the reserves are developed. Acquired resource properties with proved reserves, including offshore platform costs, are depleted over proved
reserves. Acquisition costs of probable reserves are not depleted or amortized while under active evaluation for commercial reserves. Costs are transferred to depletable costs as proved reserves are
recognized. At the date of acquisition, an evaluation period is determined after which any remaining probable reserves costs associated with producing fields are transferred to depletable costs; costs
not associated with producing fields are amortized over a period not exceeding the remaining lease term.

Costs
associated with significant development projects are not depleted until commercial production commences. Unproved land acquisition costs that are individually immaterial are amortized on a
straight-line basis over the average lease term until properties are determined to be productive or impaired. Gas plants, net of estimated salvage values, are depreciated on a
straight-line basis over their estimated remaining useful lives, not to exceed the estimated remaining productive lives of related fields. Pipelines and corporate assets are depreciated
using the straight-line method at annual rates of 4% and 5% to 33%, respectively. Gas plants and pipelines in the UK and Scandinavia are depreciated using the unit of production method
based on the related fields.

e)  Asset Retirement Obligations (ARO)

The fair value of the statutory, contractual or legal liability associated with the retirement and reclamation of tangible long-lived assets is recorded when
incurred, with a corresponding increase to the carrying amount of the related assets. The increase to capitalized costs is amortized to net income on a basis consistent with DD&A of the underlying
assets. Subsequent changes in the estimated fair value of the ARO are capitalized and amortized over the remaining useful life of the underlying asset.

The
ARO liabilities are carried on the Consolidated Balance Sheets at their discounted present value and are accreted over time for the change in their present value, with this accretion charge
included in DD&A. Actual expenditures incurred are charged against the accumulated obligation.

8   Talisman Energy 2007 Annual Financial Report

---



f)  Capitalized Interest

Interest costs associated with major development projects are capitalized until the necessary facilities are completed and ready for use. These costs are subsequently amortized
to income with the related assets.

g)  Royalties

Certain of the Company's foreign operations are conducted jointly with the respective national oil companies. These operations are reflected in the Consolidated Financial
Statements based on Talisman's working interest in such activities. All other government takes, other than income taxes, are considered to be royalty interests. Royalties on production from these
joint foreign operations represent the entitlement of the respective governments to a portion of Talisman's share of crude oil, liquids and natural gas production and are recorded using rates in
effect under the terms of contracts at the time of production.

h)  Petroleum Revenue Tax

UK Petroleum Revenue Tax (PRT) is accounted for using the life-of-field method, whereby total future PRT is estimated using current reserves and
anticipated costs and prices and charged to income based on net operating income as a proportion of estimated future net operating income. Changes in the estimated total future PRT are accounted for
prospectively.

i)  Foreign Currency Translation

The Company's functional currency is the US$. The Company's financial results have been reported in C$ as explained below.

The
Company's self-sustaining operations, which include the Canadian, the UK and Norway operations, are translated into US$ using the current rate method, whereby assets and liabilities
are translated at year-end exchange rates, while revenues and expenses are converted using average rates for the period. Gains and losses on translation to US$ relating to
self-sustaining operations are deferred and included in a separate component of shareholders' equity described as accumulated other comprehensive income.

The
remaining foreign operations are not considered self-sustaining and are translated using the temporal method. Under this method, monetary assets and liabilities denominated in foreign
currencies are translated at exchange rates in effect at the balance sheet date. Non-monetary assets and liabilities denominated in foreign currencies are translated at rates in effect on
the dates the assets were
acquired or liabilities were assumed. Revenues and expenses are translated at rates of exchange prevailing on the transaction dates. Gains and losses on translation are reflected in income
when incurred.

The
Company's financial results have been reported in C$, with amounts translated to C$ as follows: assets and liabilities at the rate of exchange in effect at the applicable balance sheet date and
revenues and expenses at the average exchange rates for the periods. The Company's share capital accounts, including its common shares and contributed surplus, are translated at rates in effect at the
time of issuance. Unrealized gains and losses resulting from the translation to C$ are included in accumulated other comprehensive income.

j)  Employee Benefits

The cost of pensions and other retirement benefits earned by employees is determined using the projected benefit method pro-rated on service and management's best
estimate of expected plan investment performance, salary escalation and retirement ages of employees. There is uncertainty relating to the assumptions used to calculate the net benefit plan expense
and accrued benefit obligation, which are long term, consistent with the nature of employee future benefits.

The
discount rate used to determine the accrued benefit obligation is determined by reference to market interest rates at the measurement date on high quality debt instruments with cash flows that
match the timing and amount of expected benefit payments. For purposes of calculating the expected return on plan assets, those assets are valued at fair value. The excess of the cumulative
unamortized net actuarial gain or loss greater than 10% of the greater of the accrued benefit obligation and the fair value of plan assets at the beginning of the year is amortized over the average
remaining service life of active employees. The unamortized transitional assets and obligations and past service costs are being amortized over the average remaining service period of active employees
expected to receive benefits under the benefit plans.

k)  Financial Instruments

Non-hedge financial instruments

The Company classifies its financial instruments into one of the following categories: held-for-trading (assets and liabilities), assets
available-for-sale, loans and receivables, assets held-to-maturity and other financial liabilities. All financial instruments are measured at fair value
on initial recognition. Transaction costs are included in the initial carrying amount of financial instruments except for held-for-trading items, in which case they are
expensed as incurred. Measurement in subsequent periods depends on the classification of the financial instrument.

Financial
assets and liabilities held-for-trading are subsequently measured at fair value with changes in fair value recognized in net income. Financial assets
available-for-sale are subsequently measured at fair value with changes in fair value recognized in other comprehensive income, net of tax.

Financial
assets held-to-maturity, loans and receivables, and other financial liabilities are, as appropriate, subsequently measured at amortized cost using the effective
interest rate method.

Talisman Energy 2007 Annual Financial Report   9

---



Cash
equivalents are classified as held-for-trading and are measured at carrying value, which approximates fair value due to the short-term nature of these
instruments. Accounts receivable and certain other assets that are financial instruments are classified as loans and receivables. Accounts payable and accrued liabilities, other long-term
obligations and current and long-term debt are classified as other financial liabilities.

Financial
instruments that are derivative contracts are considered held-for-trading unless they are designated as a hedge. The financial derivative contracts outstanding at
December 31, 2007 are disclosed in note 12 to the Consolidated Financial Statements.

Hedges

In conducting its business, the Company may use derivative financial instruments in order to manage risks associated with fluctuations in commodity prices, interest rates and
foreign currency exchange rates. The Company may designate financial instruments as a hedging instrument for accounting purposes.

Hedge
accounting requires the designation of a hedging relationship, including a hedged and a hedging item, identification of the risk exposure being hedged and reasonable assurance that the hedging
relationship will be effective throughout its term. In addition, in the case of anticipated transactions, it must also be probable that the transaction designated as being hedged will occur. The
Company assesses, both at the hedge's inception and on an ongoing basis, whether the derivative financial instruments that have been designated as hedges are highly effective in offsetting changes in
fair value or cash flows of the hedged items.

If
the derivative financial instrument that has been designated as a hedge is terminated or is no longer designated as part of the hedging relationship, the gain or loss on the hedge at that date is
deferred in other comprehensive income and recognized in net income concurrently with the anticipated transaction. If it is probable that the anticipated transaction will not occur substantially as
and when identified at the inception of the hedging relationship, the gain or loss on the hedge at that date is recognized in net income immediately.

Cash
flow hedges  the effective portion of changes in the fair value of financial instruments designated as cash flow hedges is recognized in other comprehensive
income, net of tax, with any ineffective portion being recognized immediately in net income. Gains and losses are recovered from other comprehensive income and recognized in net income in the same
period as the hedged item is realized.

Fair
value hedges  both the financial instrument designated as the hedging item, and the portion of the underlying hedged asset or liability attributable to the
hedged risk are measured at fair value. Changes in the fair value of the financial instrument designated as the hedging item and changes in the fair value of the hedged item attributable to the hedged
risk are reflected in net income immediately.

Net
investment hedges  foreign exchange gains and losses on debt designated as a net investment hedge are recognized in other comprehensive income. These gains
and losses are recovered from other comprehensive income and recognized in net income if the net investment is reduced below the value of such debt.

The
Company enters into physical commodity contracts in the normal course of business including contracts with fixed terms. The natural gas sales contract outstanding at December 31, 2007 is
disclosed in note 13 to the Consolidated Financial Statements. The Company's production is expected to be sufficient to deliver all required volumes under this contract. No amounts are
recognized in the Consolidated Financial Statements related to this contract until such time as the associated volumes are delivered.

l)  Comprehensive Income and Equity

The Consolidated Statements of Comprehensive Income reflect net income and the changes in accumulated other comprehensive income in the period. Changes in accumulated other
comprehensive income are comprised of changes in the fair value of financial instruments designated as cash flow or net investment hedges, to the extent they are effective, gains and losses recovered
from other comprehensive income and recognized in net income, and foreign currency translation gains or losses arising from the translation of the Company's self-sustaining foreign
operations.

The
Company's operations in Canada, the UK and Norway are self-sustaining and their economic exposure is more closely tied to their respective domestic currencies. Accordingly, these
operations are measured in C$, UK£ and NOK, respectively and translated to the Company's functional currency of US$ using the current rate method. The translation of
self-sustaining foreign operations into the Company's functional currency is recorded in other comprehensive income. The effect of translating the Consolidated Financial Statements from
the Company's functional currency of US$ into its presentation currency of C$ is included in a separate component of shareholders' equity described as cumulative foreign currency translation.

m)  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. Future income tax assets and liabilities are measured using substantively enacted tax rates. The impact of a change in
tax rate is recognized in net income in the period in which the tax rate is substantively enacted.

Certain
of the Company's contractual arrangements in foreign jurisdictions stipulate that income taxes are to be paid by the respective national oil company out of its entitlement share of production.
Such amounts are included in income tax expense at the statutory tax rate in effect at the time of production.

10   Talisman Energy 2007 Annual Financial Report

---



See
note 2(d) for disclosure concerning the impact of adopting the recognition and measurement principles of Financial Accounting Standards Board (FASB) Interpretation 48
Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109 (FIN 48).

n)  Revenue Recognition

Revenues associated with the sale of crude oil, natural gas and liquids are recognized when title passes from the Company to the customer. For the Company's international
operations, generally, customers take title when the crude oil is loaded onto a tanker. The Company employs the entitlement method in accounting for crude oil sales and records a receivable from a
joint interest participant if a participant sells more than its proportionate
share of crude oil production. Crude oil and natural gas produced and sold, below or above the Company's working interest share in the related resource properties, results in production underliftings,
or overliftings. Underliftings are recorded as inventory at the cost to produce and transport the product to storage tanks and overliftings are recorded in accounts payable and accrued liabilities.
Underliftings are reversed from inventory when the crude oil is lifted and sold, with the sales proceeds recorded as revenue and the cost of the inventory expensed. Overliftings are reversed from
accounts payable and accrued liabilities and recorded as revenue when sufficient volumes are produced to make up the overlifted volume. Amounts received under take-or-pay gas
sales contracts in respect of undelivered volumes are accounted for as deferred income in accounts payable and accrued liabilities and recognized as revenue when volumes are delivered. Transportation
expenses are reported as a separate expense and not netted off against revenue.

o)  Stock-Based Compensation

Talisman has stock option plans, a cash unit plan, a deferred share units plan and a restricted share units plan for employees and directors, which are described in
note 11. As all plans may be settled for cash at the option of the holder, plans are classified as liability instruments and measured at their intrinsic value, less any unvested portion.
Unvested options accrue evenly over the vesting period. The intrinsic value is determined as the difference between the market value of the Company's common shares and the exercise price of the
options or units. This obligation is revalued each reporting period and the change in the obligation is recognized as stock-based compensation expense (recovery), except for the changes related to
deferred share units and restricted share units which are included in general and administrative expenses.

p)  Goodwill

Goodwill represents the excess purchase price over the fair value of identifiable assets and liabilities acquired in business combinations, and is allocated to reporting units.
Goodwill is not amortized but is subject to annual impairment reviews, or more frequently as economic events dictate, based on the fair value of the reporting units. The fair value of each reporting
unit is determined and compared to the book value of the reporting unit. If the fair value of the reporting unit is less than the book value, then a second test is performed to determine the amount of
the goodwill impairment. The amount of the impairment is determined by deducting the fair value of the reporting unit's individual assets and liabilities from the fair value of the reporting unit to
determine the implied fair value of goodwill and comparing that amount to the book value of the reporting unit's goodwill. Any excess of the book value of goodwill over the implied fair value of
goodwill is the impairment amount.

q)  Net Income and Diluted Net Income Per Share

Net income per share is calculated by dividing net income by the weighted average number of common shares outstanding. Diluted net income per share is calculated giving effect
to the potential dilution that could occur if stock options were exercised in exchange for common shares.

The
Company uses the treasury stock method to determine the dilutive impact of options. This method assumes that any proceeds from the exercise of options would be used to purchase common shares at
the average market price during the year.

r)  Cash and Cash Equivalents

Cash and cash equivalents include cash on deposit with banks and short-term investments with an original maturity of three months or less. Cash and cash equivalents
are stated at cost, which approximates market value.

s)  Measurement Uncertainty

To facilitate the timely preparation of the Consolidated Financial Statements, management has made estimates and assumptions regarding certain assets and liabilities and
contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the period. Such estimates primarily relate to unsettled
transactions and events as of the date of the Consolidated Financial Statements. Accordingly, actual results may differ from estimated amounts.

Purchase
price allocations, DD&A and amounts used for impairment calculations are based on estimates of oil and natural gas reserves and commodity prices and capital costs required to develop those
reserves. By their nature, estimates of reserves and the related future cash flows are subject to measurement uncertainty, and the impact of differences between actual and estimated amounts on the
Consolidated Financial Statements of future periods could be material.

Inherent
in the fair value calculation of ARO are numerous assumptions and judgments, including the ultimate settlement amounts, inflation factors, credit-adjusted discount rates, timing of settlement
and changes in the legal, regulatory, environmental and political environments. To the extent future revisions to these assumptions impact the fair value of the existing ARO liability, a corresponding
adjustment is made to the oil and gas assets balance.

Talisman Energy 2007 Annual Financial Report   11

---



The
values of pension assets and obligations and the amount of the net benefit plan expense charged to income depend on certain actuarial and economic assumptions which, by their nature, are subject
to significant measurement uncertainty.

The
measurement of income tax expense, in particular UK PRT, and the related provisions on the Consolidated Balance Sheets, is subject to uncertainty associated with future recoverability of oil and
natural gas reserves, commodity prices, the timing of future events and changes in legislation, tax rates and interpretations by tax authorities.

The
fair values of financial instruments are estimated based upon market or third party information. These estimates are subject to change with fluctuations in commodity prices, interest rates and
foreign currency exchange rates.

t)  Reclassification

Certain information provided for prior years has been reclassified to conform to the presentation adopted in the current year.

During
the year, the Company reclassified inventories that are expected to be capitalized when consumed, from inventories to other assets, with comparative balances reclassified accordingly. The
impact on the December 31, 2006 Consolidated Balance Sheet is an increase of $182 million in other assets and a decrease of $182 million in inventories.

2.  Changes in Accounting Policies

a)  Comprehensive Income, Equity, Recognition and Measurement of Financial Instruments, Hedges

Effective January 1, 2007, Talisman adopted the new Canadian Institute of Chartered Accountants (CICA) accounting standards related to Comprehensive Income
(section 1530), Equity (section 3251), Financial Instruments  Recognition and Measurement (section 3855), Financial
Instruments  Disclosure and Presentation (section 3861), and Hedges (section 3865).

Under
these standards, the Company must classify all financial instruments into one of the following categories: loans and receivables, assets held-to-maturity, assets
available-for-sale, other financial liabilities and held-for-trading (assets and liabilities). Financial instruments reclassified to
held-for-trading or available-for-sale items are re-measured at fair value on adoption of this standard. On adoption, gains or losses on
re-measurement of held-for-trading items are recognized as an adjustment to opening retained earnings, while gains or losses on re-measurement of
available-for-sale items are recognized as an adjustment to opening accumulated other comprehensive income.

On
adoption, Talisman did not have any held-for-trading or available-for-sale financial instruments. On January 1, 2007, all of Talisman's
derivative contracts were designated as hedges.

Financial
instruments that are classified as held-for-trading or available-for-sale are re-measured each reporting period at fair value,
with the resulting gain or loss recognized immediately in net income and other comprehensive income, respectively. All other financial instruments are accounted for at amortized cost with foreign
exchange gains and losses recognized immediately in net income. The recognition, de-recognition and measurement policies followed in financial statements for periods prior to the effective
date of this standard are not reversed and, therefore, those financial statements are not restated.

Gains
and losses on financial instruments that continue to be part of cash flow or net investment hedges are recognized in other comprehensive income until realized, at which time they are recovered
from other comprehensive income and realized in net income. Any ineffective portion of cash flow hedges is recognized in net income immediately. Net gains/losses on fair value hedges are recognized
immediately in net income. Accounting for hedging relationships in financial statements for prior fiscal years is not retroactively changed.

Section 3855
requires that an asset or liability be recognized for certain embedded derivatives by separating them from their host contracts and measuring them at fair value. Talisman has
elected the beginning of its fiscal year-end December 31, 2003 as the effective date for embedded derivatives. Consequently, only embedded derivatives in contracts entered into or
acquired or substantially modified on or after January 1, 2003 are subject to the measurement provisions of these standards.

Section
3251 requires separate presentation of the components of equity, including retained earnings, accumulated other comprehensive income, contributed surplus, share capital and reserves and the
changes therein.

As
required, these standards were adopted prospectively without restatement of prior periods, except to reclassify the foreign currency translation of self-sustaining operations, net of net investment
hedges, to US$. Pursuant to an Emerging Issues Committee abstract amendment issued in December 2007, foreign currency translation relating to the translation from US$ into C$ which had
previously been included in a separate component of shareholders' equity described as the cumulative foreign currency translation account was reclassified to accumulated other comprehensive income.

12   Talisman Energy 2007 Annual Financial Report

---



The
adjustment required to the January 1, 2007 Consolidated Balance Sheets to implement the change in accounting standards was as follows:

|Impact increase/(decrease)                                                |                                          | January 1, 2007 |    
|------------------------------------------------------------------------- | ---------------------------------------- | --------------- | ---
|                                                                          |                                         
|To recognize mark-to-market gains and losses on cash flow hedges          |                                          |                 |    
|                                                                          |                                         
|                                                                          | Accounts receivable                      |                 | 122
|                                                                          |                                         
|                                                                          | Accounts payable and accrued liabilities |                 | 11 
|                                                                          |                                         
|                                                                          | Other long-term obligations              |                 | (12
|                                                                          |                                         
|                                                                          | Future income tax liabilities            |                 | 34 
|                                                                          |                                         
|                                                                          | Retained earnings                        |                 | 7  
|                                                                          |                                         
|                                                                          | Accumulated other comprehensive income   |                 | 82 
|                                                                          |                                         
|To include unamortized transaction costs as a reduction of long-term debt |                                          |                 |    
|                                                                          |                                         
|                                                                          | Long-term debt                           |                 | (41
|                                                                          |                                         
|                                                                          | Other assets                             |                 | (41
|                                                                          |                                         
|To revalue hedged debt as part of fair value hedges                       |                                          |                 |    
|                                                                          |                                         
|                                                                          | Long-term debt                           |                 | (14
|                                                                          |                                         
|                                                                          | Other long-term obligations              |                 | 14 
|                                                                          |                                         

b)  Capital Disclosures

Effective October 1, 2007, Talisman adopted the recommendations of the CICA relating to Capital Disclosures (section 1535). Talisman's objectives when managing
capital are:



Talisman
manages its capital structure within guidelines approved by the Board of Directors. Talisman makes adjustments to its capital structure based on changes in economic conditions and the
Company's planned requirements. Talisman has the ability to adjust its capital structure by issuing new equity or debt, selling assets to reduce equity (through a normal course issuer bid) or debt,
controlling the amount it returns to shareholders, and making adjustments to its capital expenditures program.

Consistent
with its capital structure guidelines, Talisman monitors capital using the debt-to-debt plus equity ratio and the debt-to-cash flow ratio.
The first ratio is calculated using gross debt divided by gross debt plus total equity. Talisman generally maintains this ratio between 35% to 45%. The second ratio is calculated using debt as defined
above divided by cash flow for the year. Talisman generally maintains this ratio under 2:1.

The
ratios at December 31, 2007 and 2006 are as follows:

|Debt-to-debt plus equity at December 31 |  | 2007  |  | 2006 
|--------------------------------------- |  | ----- |  | -----
|                                       
|Gross debt (note 9)                     |  | 4,897 |  | 4,560
|                                       
|Total equity                            |  | 7,963 |  | 7,307
|                                       
|Debt-to-debt plus equity                |  | 38%   |  | 38%  
|                                       

|
|

|Debt-to-cash flow at December 31 |  | 2007   |  | 2006  
|-------------------------------- |  | ------ |  | ------
|                                
|Gross debt (note 9)              |  | 4,897  |  | 4,560 
|                                
|Cash flow                        |  | 4,327  |  | 4,748 
|                                
|Debt-to-cash flow                |  | 1.13:1 |  | 0.96:1
|                                

The calculation of cash flow is as follows:

|                                      |  | 2007  |  | 2006 
|------------------------------------- |  | ----- |  | -----
|                                     
|Cash provided by operating activities |  | 4,070 |  | 4,374
|                                     
|Changes in non-cash working capital   |  | 257   |  | 374  
|                                     
|Cash flow                             |  | 4,327 |  | 4,748
|                                     

Talisman's debt-to-debt plus equity ratio was approximately 38% at both December 31, 2007 and at December 31, 2006. An increase in gross debt of
approximately $340 million was offset by an increase in total equity of approximately $660 million. Talisman's debt-to-cash flow was 1.13 at December 31, 2007, and
0.96 at December 31, 2006. The increase was due mostly to a decrease in cash flow, while gross debt increased during

Talisman Energy 2007 Annual Financial Report   13

---



2007.
In January 2008, Talisman reduced its debt levels by applying proceeds received from its sale of the Brae non-operated assets. Talisman's debt ratios remain well within the Company's
stated guidelines.

c)  Accounting Changes

Effective January 1, 2007, Talisman adopted the new CICA recommendations relating to Accounting Changes (section 1506). These require that voluntary changes in
accounting policy may be made only if they result in more reliable and relevant information. Voluntary accounting policy changes and correction of prior period errors must be applied retrospectively,
with a provision to apply accounting policy changes prospectively if it is impractical to determine prior period amounts. Changes in accounting estimates are applied prospectively. The adoption of
these recommendations had no impact on Talisman, except for requiring disclosure of accounting recommendations issued by the CICA that have not yet been adopted because they are not effective until a
future date.

d)  Income Taxes

Effective January 1, 2007, Talisman adopted the recognition and measurement principles of FIN 48 for purposes of accounting for its uncertain tax positions.
FIN 48 requires an enterprise to recognize in its financial statements the best estimate of the impact of a tax position by determining if the available evidence indicates whether it is more
likely than not, based solely on technical merits, that the position will be sustained on audit. On adopting FIN 48, the cumulative effect of the change in accounting principle was
not material.

e)  Inventories

The CICA has issued recommendations relating to the accounting for inventories (section 3031) which will become effective for Talisman's first quarter 2008 reporting. The
new standard provides guidance on the determination of cost and subsequent recognition as an expense, including any writedown to net realizable value. The adoption of these recommendations is not
expected to have a material impact on Talisman.

f)  Financial Instruments Disclosure and Presentation

The CICA has issued recommendations relating to disclosure (section 3862) and presentation (section 3863) of financial instruments, which will be effective
for Talisman's first quarter 2008 reporting. The recommendations of section 3862 will result in incremental disclosures explaining the risks
associated with financial instruments to which the Company is exposed during the period and at the balance sheet date, and how the Company manages these risks.

g)  Goodwill and Intangible Assets

The CICA has issued recommendations relating to the recognition, measurement and disclosure of goodwill and intangible assets (section 3064) which will be effective for
Talisman's 2009 reporting. Talisman is currently assessing the impact of implementing these recommendations.

h)  International Financial Reporting Standards (IFRS)

The Accounting Standards Board confirmed recently that public companies will be required to report under IFRS effective January 1, 2011. Talisman is currently assessing
the impact of adopting IFRS, including an examination of recognition, measurement and disclosure differences.

3.  Discontinued Operations

The assets and liabilities related to discontinued operations have been reclassified as assets or liabilities of discontinued operations on the Consolidated
Balance Sheets. Operating results related to these assets and liabilities have been included in net income from discontinued operations on the Consolidated Statements of Income. Comparative periods
for both the UK and North America segments have been restated.

14   Talisman Energy 2007 Annual Financial Report

---



Net
income from discontinued operations reported on the Consolidated Statements of Income comprises the following:

|                                                        |                                          | For the 12 months ended December 31
|------------------------------------------------------- | ---------------------------------------- | -----------------------------------
|                                                        |                                          | North America                      
|                                                        |                                          | 2007                               
|                                                       
|Revenue                                                 |                                          |                                    
|                                                       
|                                                        | Gross sales                              |                                    
|                                                       
|                                                        | Royalties                                |                                    
|                                                       
|Revenues, net of royalties                              |                                          | 137                                
|                                                       
|Expenses                                                |                                          |                                    
|                                                       
|                                                        | Operating, marketing and general         |                                    
|                                                       
|                                                        | Interest2                                |                                    
|                                                       
|                                                        | Depreciation, depletion and amortization |                                    
|                                                       
|Income from discontinued operations before income taxes |                                          | 88                                 
|                                                       
|                                                        | Taxes                                    |                                    
|                                                       
|                                                        | Net gain on disposition, net of tax3     |                                    
|                                                       
|Net income from discontinued operations                 |                                          | 644                                
|                                                       

The assets and liabilities of discontinued operations presented on the Consolidated Balance Sheets comprise the following:

|                   |                                    | As at December 31, 2007 |   | As at December 31, 2006
|------------------ | ---------------------------------- | ----------------------- | - | -----------------------
|                   |                                    | North America           |   | UK                     
|                  
|Assets             |                                    |                         |   |                        
|                  
|                   | Current assets                     |                         |  |                        
|                  
|                   | Property, plant and equipment, net |                         |  |                        
|                  
|                   | Future income tax asset            |                         |  |                        
|                  
|                   | Goodwill                           |                         |  |                        
|                  
|Total assets1      |                                    |                        |   | 59                     
|                  
|Liabilities        |                                    |                         |   |                        
|                  
|                   | Current liabilities                |                         |  |                        
|                  
|                   | Asset retirement obligations       |                         |  |                        
|                  
|                   | Other long-term obligations        |                         |  |                        
|                  
|                   | Future income tax liability        |                         |  |                        
|                  
|Total liabilities1 |                                    |                        |   | 19                     
|                  

North America

During 2007, Talisman sold oil and gas producing assets in Western Canada. These sales closed for proceeds of $746 million, resulting in a gain of $304 million,
net of tax of $79 million.

Talisman Energy 2007 Annual Financial Report   15

---



During
2007, Talisman sold its 1.25% indirect interest in Syncrude Canada. The sale closed for proceeds of $472 million, consisting of cash of $229 million, net of adjustments and
8.2 million units of Canadian Oil Sands Trust, for a gain of $277 million, net of tax of $33 million. The Canadian Oil Sands Trust units were sold during the third quarter of 2007
for approximately $262 million, crystallizing a gain of $19 million.

During
2006, Talisman sold certain non-core oil and gas producing assets in Western Canada for proceeds of $361 million, resulting in a gain of $147 million, net of tax of
$61 million.

UK

During 2006, Talisman entered into an agreement to dispose of certain UK non-core oil and gas properties, with an effective date of January 1, 2007. This sale
closed on December 31, 2007 for total proceeds of $510 million (including a $55 million deposit received in the fourth quarter of 2006), resulting in a gain of
$335 million, net of tax of $64 million.

During
2007, Talisman entered into an agreement to sell additional assets in the UK for approximately UK£10 million, resulting in an after tax writedown of these assets of
$32 million to their net realizable value. The sale is expected to close in the first half of 2008, with an effective date of January 1, 2008.

During
2006, Talisman sold certain non-core oil and gas producing assets in the UK. These sales closed for proceeds of $392 million, resulting in a gain of $209 million, net
of tax of nil.

4.  Acquisitions

Corporate Acquisitions

Tangguh LNG Project

On December 31, 2007, Talisman acquired 100% of the shares of a company having a 3.06% participating interest in the Tangguh LNG Project, located in Indonesia. The shares
and certain obligations were acquired for a total cost of $280 million comprising $213 million in cash and the assumption of $67 million of long-term debt.

The
acquisition has been accounted for using the purchase method and the assets and liabilities attributable to Talisman's participating interest in the Tangguh LNG Project have been included in the
Consolidated Financial Statements from December 31, 2007. The accounting for this transaction is subject to final adjustments.

|Fair value of net assets acquired |  | Southeast Asia |  
|--------------------------------- |  | -------------- | -
|                                  | 
|Property, plant and equipment     |  | 410            |  
|                                  | 
|Net non-cash working capital      |  | 3              |  
|                                  | 
|Asset retirement obligations      |  | (2             | )
|                                  | 
|Future income tax                 |  | (131           | )
|                                  | 
|                                  |  | 280            |  
|                                  | 

Paladin Resources plc

In November 2005, Talisman acquired control (73%) of Paladin Resources plc (Paladin), an oil and gas exploration and development company. An additional 25% of the
shares were acquired prior to year-end, resulting in a 98% ownership interest in Paladin at December 31, 2005. The 98% of Paladin was acquired for $2,560 million in cash and
$74 million in long-term debt, net of cash acquired ($11 million). The acquisition was accounted for using the purchase method and the Paladin results have been included in
the Consolidated Financial Statements of the Company from the date of acquisition. The remaining 2% of Paladin was acquired in January 2006.

|Fair value of net assets acquired |  | UK    |   | Scandinavia |   | Southeast Asia |   | Other |   | Total  |  
|--------------------------------- |  | ----- | - | ----------- | - | -------------- | - | ----- | - | ------ | -
|                                  | 
|Property, plant and equipment     |  | 1,956 |   | 1,000       |   | 324            |   | 14    |   | 3,294  |  
|                                  | 
|Net non-cash working capital      |  | (9    | ) |            |   |               |   |      |   | (9     | )
|                                  | 
|Goodwill                          |  | 417   |   | 474         |   | 26             |   | 4     |   | 921    |  
|                                  | 
|Fair value of derivatives         |  | (147  | ) |            |   |               |   |      |   | (147   | )
|                                  | 
|Future income tax                 |  | (622  | ) | (516        | ) | (48            | ) | (5    | ) | (1,191 | )
|                                  | 
|Asset retirement obligations      |  | (89   | ) | (66         | ) | (13            | ) |      |   | (168   | )
|                                  | 
|Non-controlling interest          |  | (66   | ) |            |   |               |   |      |   | (66    | )
|                                  | 
|                                  |  | 1,440 |   | 892         |   | 289            |   | 13    |   | 2,634  |  
|                                  | 

Property Acquisitions

During 2007, Talisman completed a number of minor oil and gas property acquisitions for a total cost of $40 million, comprising cash of $54 million, working
capital assumed of $(17) million and properties exchanged of $3 million. Two transactions accounted for the majority of the acquisitions.

16   Talisman Energy 2007 Annual Financial Report

---



During
2006, Talisman completed a number of minor oil and gas property acquisitions for a total cost of $204 million. These acquisitions included oil and gas properties in North America,
$17 million; the UK, $184 million; and Scandinavia, $3 million. The fair value of the net assets acquired has been assigned to property, plant and equipment, $510 million;
ARO, $278 million; and future income tax, $28 million. Three transactions having a total cost of $181 million accounted for the majority of the acquisitions.

|Fair value of net assets acquired |  | UK   |  
|--------------------------------- |  | ---- | -
|                                  | 
|Property, plant and equipment     |  | 487  |  
|                                  | 
|Asset retirement obligations      |  | (278 | )
|                                  | 
|Future income tax                 |  | (28  | )
|                                  | 
|                                  |  | 181  |  
|                                  | 

During 2005, Talisman completed a number of oil and gas property acquisitions for a total cost of $536 million, comprised of $544 million in cash,
working capital assumed of $(12) million and $4 million of properties exchanged. Four transactions accounted for the majority of the acquisitions and were acquired for a total cost of
$515 million. These acquisitions included oil and gas properties in North America, the UK and Scandinavia.

|Fair value of net assets acquired |  | North America |   | UK  |   | Scandinavia |   | Total |  
|--------------------------------- |  | ------------- | - | --- | - | ----------- | - | ----- | -
|                                  | 
|Property, plant and equipment     |  | 218           |   | 131 |   | 355         |   | 704   |  
|                                  | 
|Goodwill                          |  |              |   |    |   | 177         |   | 177   |  
|                                  | 
|Asset retirement obligations      |  |              |   | (7  | ) | (74         | ) | (81   | )
|                                  | 
|Future income tax                 |  | (70           | ) | (33 | ) | (182        | ) | (285  | )
|                                  | 
|                                  |  | 148           |   | 91  |   | 276         |   | 515   |  
|                                  | 

Goodwill Continuity

|                                |  | 2007  |   | 2006 
|------------------------------- |  | ----- | - | -----
|                               
|Opening balance at January 1    |  | 1,522 |   | 1,413
|                               
|Foreign currency translation    |  | (104  | ) | 109  
|                               
|Closing balance at December 311 |  | 1,418 |   | 1,522
|                               

Goodwill has no tax basis.

5.  Inventories

|December 31            |  | 2007 |  | 2006
|---------------------- |  | ---- |  | ----
|                      
|Materials and supplies |  | 37   |  | 45  
|                      
|Product                |  | 72   |  | 141 
|                      
|                       |  | 109  |  | 186 
|                      

6.  Other Assets

|December 31                                  |  | 2007 |  | 2006
|-------------------------------------------- |  | ---- |  | ----
|                                            
|Accrued pension asset (note 19)              |  | 42   |  | 50  
|                                            
|Long-term capital inventory                  |  | 216  |  | 182 
|                                            
|Fair value of derivative contracts (note 12) |  | 40   |  |    
|                                            
|Investments                                  |  | 33   |  | 39  
|                                            
|Future tax assets (note 16)                  |  | 33   |  | 20  
|                                            
|Prepaid financing costs                      |  |     |  | 41  
|                                            
|Other                                        |  | 23   |  | 22  
|                                            
|                                             |  | 387  |  | 354 
|                                            

Talisman Energy 2007 Annual Financial Report   17

---



7.  Property, Plant and Equipment

|                        |  | Accumulated
|----------------------- |  | -----------
|Years ended December 31 |  | Cost       
|                       
|2007                    |  |            
|                       
|Oil and gas assets1     |  | 24,231     
|                       
|Corporate assets        |  | 390        
|                       
|                        |  | 24,621     
|                       
|2006                    |  |            
|                       
|Oil and gas assets1     |  | 22,358     
|                       
|Corporate assets        |  | 364        
|                       
|                        |  | 22,722     
|                       

During the year ended December 31, 2007, interest costs of $83 million (2006  $72 million;
2005  $19 million) were capitalized.

Included
in property, plant and equipment are the following costs that were not subject to DD&A as at December 31:

|Non-depleted capital                                                  |                | 2007  |     | 2006 
|--------------------------------------------------------------------- | -------------- | ----- | --- | -----
|                                                                     
|Acquired unproved reserve costs associated with producing fields1     |                |       |     |      
|                                                                     
|                                                                      | North America  |       |    |      
|                                                                     
|                                                                      | UK             |       | 717 |      
|                                                                     
|                                                                      | Scandinavia    |       | 180 |      
|                                                                     
|                                                                      | Southeast Asia |       | 7   |      
|                                                                     
|Acquired unproved reserve costs not associated with producing fields1 |                |       |     |      
|                                                                     
|                                                                      | UK             |       | 136 |      
|                                                                     
|                                                                      | Scandinavia    |       | 2   |      
|                                                                     
|                                                                      | Southeast Asia |       | 156 |      
|                                                                     
|                                                                      | Other          |       | 20  |      
|                                                                     
|Exploration costs2                                                    |                | 812   |     | 769  
|                                                                     
|Development Projects3                                                 |                |       |     |      
|                                                                     
|                                                                      | North America  |       |    |      
|                                                                     
|                                                                      | UK             |       | 263 |      
|                                                                     
|                                                                      | Scandinavia    |       | 469 |      
|                                                                     
|                                                                      | Southeast Asia |       | 726 |      
|                                                                     
|                                                                      | Other          |       | 88  |      
|                                                                     
|                                                                      |                | 3,576 |     | 4,900
|                                                                     

|Continuity of exploration costs |  | December 31, 2006 |  | Reclassified to depletable and development projects |   | Expensed to
dry hole |   | Spent during the year |  | December 31, 2007
|------------------------------- |  | ----------------- |  | --------------------------------------------------- | - | -------------------- | - | --------------------- |  | -----------------
|                               
|North America                   |  | 503               |  | (163                                                | ) | (234                 | ) | 386                   |  | 492              
|                               
|UK                              |  | 135               |  | (7                                                  | ) | (91                  | ) | 102                   |  | 139              
|                               
|Scandinavia                     |  | 36                |  | (11                                                 | ) | (24                  | ) | 15                    |  | 16               
|                               
|Southeast Asia                  |  | 33                |  | (31                                                 | ) |                     |   | 121                   |  | 123              
|                               
|Other                           |  | 62                |  | (12                                                 | ) | (10                  | ) | 2                     |  | 42               
|                               
|                                |  | 769               |  | (224                                                | ) | (359                 | ) | 626                   |  | 812              
|                               

18   Talisman Energy 2007 Annual Financial Report

---



Costs relating to wells drilled prior to 2007 continue to be capitalized, since management's ongoing assessment includes further development activity planned for
2008. The number of wells drilled prior to 2007 and related costs are as follows:

|              |  | Years    |  | Number of wells |  | Cost
|------------- |  | -------- |  | --------------- |  | ----
|             
|North America |  | 2003  6 |  | 33              |  | 121 
|             
|UK            |  | 2005  6 |  | 3               |  | 31  
|             
|Other         |  | 2004  6 |  | 15              |  | 40  
|             
|              |  |          |  | 51              |  | 192 
|             

8.  Asset Retirement Obligations (ARO)

At December 31, 2007, the estimated total undiscounted ARO associated with oil and gas properties and facilities were $4.5 billion
(2006  $4.6 billion). The majority of the payments to settle these ARO will occur over a period of 35 years and will be funded from general company
resources as they arise. The ARO have been discounted using a weighted average credit adjusted risk free rate of 5.95%. Total accretion for the year ended December 31, 2007 of
$100 million (2006  $74 million; 2005  $70 million) has been included in DD&A expense in the
Consolidated Statements of Income.

A
reconciliation of the Company's discounted ARO is as follows:

|                                     |  | 2007  |   | 2006  |  
|------------------------------------ |  | ----- | - | ----- | -
|                                     | 
|ARO liability at January 1           |  | 1,879 |   | 1,234 |  
|                                     | 
|Liabilities incurred during the year |  | 89    |   | 324   |  
|                                     | 
|Liabilities settled during the year3 |  | (46   | ) | (51   | )
|                                     | 
|Accretion expense                    |  | 100   |   | 74    |  
|                                     | 
|Revisions in estimated cash flows    |  | 207   |   | 171   |  
|                                     | 
|Foreign currency translation         |  | (204  | ) | 127   |  
|                                     | 
|ARO liability at December 311,2      |  | 2,025 |   | 1,879 |  
|                                     | 

9.  Long-Term Debt

|December 31                       |                                                    | 2007  |       | 2006 
|--------------------------------- | -------------------------------------------------- | ----- | ----- | -----
|                                 
|Bank credit facilities            |                                                    |       |       |      
|                                 
|                                  | 5.21% Bank credit facilities1,2                    |       | 1,806 |      
|                                 
|Tangguh project financing         |                                                    | 67    |       |     
|                                 
|Debentures and notes (unsecured)3 |                                                    |       |       |      
|                                 
|                                  | 6.89% notes (US$30 million), Series B, due 20104   |       | 30    |      
|                                 
|                                  | 5.80% medium term notes, due 2007                  |       |      |      
|                                 
|                                  | 7.125% debentures (US$175 million), due 2007       |       |      |      
|                                 
|                                  | 6.68% notes (US$100 million), due 20082            |       | 99    |      
|                                 
|                                  | 8.06% medium term notes, due 2009                  |       | 174   |      
|                                 
|                                  | 4.44% medium term notes (C$350 million), due 20115 |       | 350   |      
|                                 
|                                  | 5.125% notes (US$375 million), due 20156           |       | 377   |      
|                                 
|                                  | 6.625% notes (UK£250 million), due 2017            |       | 490   |      
|                                 
|                                  | 7.25% debentures (US$300 million), due 2027        |       | 296   |      
|                                 
|                                  | 5.75% notes (US$125 million), due 2035             |       | 124   |      
|                                 
|                                  | 5.85% notes (US$500 million), due 2037             |       | 494   |      
|                                 
|                                  | 6.25% notes (US$600 million), due 2038             |       | 590   |      
|                                 
|Gross debt                        |                                                    | 4,897 |       | 4,560
|                                 
|Prepaid financing costs           |                                                    | (35   | )     |     
|                                 
|Long-term debt                    |                                                    | 4,862 |       | 4,560
|                                 

Talisman Energy 2007 Annual Financial Report   19

---



Bank Credit Facilities

At December 31, 2007, Talisman had unsecured credit facilities totaling $2,748 million, consisting of facilities of $2,125 million (Facility No. 1),
$75 million (Facility No. 2), $200 million (Facility No. 3), $150 million (Facility No. 4) and $198 million (US$200 million) (Facility
No. 5). The maturity dates are for Facility No. 1 June 30, 2012 and September 30, 2012 for Facilities 2, 3, 4 and 5, although these dates may be extended from
time to time upon agreement between the Company and the respective lenders. Prior to the maturity date, the Company may borrow, repay and reborrow at its discretion except for Facility No. 5.
The term date of Facility No. 5 is September 30, 2009. Until the term date, the Company may borrow, repay and reborrow at its discretion; this date can also be extended from time to time
upon agreement between the Company and the lender. All facilities must be repaid on their maturity dates. In 2007, Talisman increased its available credit facilities by $760 million.

Borrowings
under Facility No. 1 are available in the form of prime loans, C$ or US$ bankers' acceptances, US$ base rate loans or LIBOR-based loans. In addition, drawings to a total of
$1,062 million are available in the form of letters of credit. Borrowings under Facility No. 2 are available in the form of prime loans, C$ or US$ guaranteed notes, US$ base rate loans
and LIBOR-based loans. Borrowings under Facility No. 3 are available in the form of prime loans, C$ or US$ bankers' acceptances, US$ base rate loans, LIBOR-based loans and letters of credit.
Borrowings under Facility No. 4 are available in the form of prime loans, C$ or US$ bankers' acceptances, US$ base rate loans and LIBOR-based loans. Borrowings under Facility No. 5 are
available in the form of prime loans, C$ or US$ guaranteed notes, US$ base rate loans and LIBOR-based loans. See note 13 for a summary of letters of credit.

Acquisition Credit Facility

In connection with the funding of the acquisition of Paladin, the Company arranged a $2,605 million (UK£1,300 million), unsecured
non-revolving acquisition credit facility maturing in October 2006. During 2006 the balance was repaid and the facility was cancelled.

Paladin Credit Facility

During 2006, borrowings under the Paladin US$600 million senior credit facility were repaid and the facility was cancelled.

Tangguh Project Financing

In connection with the acquisition of the participating interest in the Tangguh LNG Project described in note 4, the Company became a participant in a series of project
financing facilities, the Company's share of which is up to US$107 million. Approximately $67 million was outstanding under these facilities at December 31, 2007. Draws under
these facilities bear interest at LIBOR plus 0.19% through to LIBOR plus 0.33% per annum (approximately 5% at December 31, 2007) and will mature in 2021.

Repayment Schedule

The Company's contractual minimum repayments of gross long-term debt are as follows:

|Year               |  |      
|------------------ |  | -----
|                  
|20081              |  | 109  
|                  
|2009               |  | 184  
|                  
|2010               |  | 10   
|                  
|2011               |  | 350  
|                  
|2012               |  | 1,806
|                  
|Subsequent to 2012 |  | 2,438
|                  
|Total              |  | 4,897
|                  

10.  Other Long-Term Obligations

|December 31                                                             |  | 2007 |  | 2006 |  
|----------------------------------------------------------------------- |  | ---- |  | ---- | -
|                                                                        | 
|Accrued pension and other post-employment benefits liability1 (note 19) |  | 51   |  | 40   |  
|                                                                        | 
|Mark-to-market liability for stock-based compensation (note 11)         |  |     |  | 42   |  
|                                                                        | 
|Commodity price derivative contracts (note 12)                          |  | 52   |  | (3   | )
|                                                                        | 
|Discounted obligations under capital leases2                            |  | 28   |  | 37   |  
|                                                                        | 
|Other                                                                   |  | 9    |  | 39   |  
|                                                                        | 
|Total                                                                   |  | 140  |  | 155  |  
|                                                                        | 

20   Talisman Energy 2007 Annual Financial Report

---



11.  Share Capital

Talisman's authorized share capital consists of an unlimited number of common shares without nominal or par value and an unlimited number of first and second
preferred shares. No preferred shares have been issued.

|                              |  | 2007          |   | 2006   |   | 2005          |  
|----------------------------- |  | ------------- | - | ------ | - | ------------- | -
|Continuity of common shares   |  | Shares        |   | Amount |   | Shares        |  
|                              | 
|Balance, beginning of year    |  | 1,063,928,405 |   | 2,533  |   | 1,098,783,945 |  
|                              | 
|Issued on exercise of options |  | 655,950       |   | 14     |   | 438,860       |  
|                              | 
|Purchased during the year     |  | (45,994,100   | ) | (110   | ) | (35,294,400   | )
|                              | 
|Balance, end of year          |  | 1,018,590,255 |   | 2,437  |   | 1,063,928,405 |  
|                              | 

During the year ended December 31, 2007, Talisman repurchased 45,994,100 common shares of the Company pursuant to a Normal Course Issuer Bid (NCIB)
for a total of $951 million (2006  35,294,400 for $659 million; 2005  27,267,300 for
$355 million). The cost to repurchase common shares in excess of their average book value has been charged to retained earnings ($838 million) and contributed surplus
($3 million).

In
March 2007, the Company renewed its NCIB with the Toronto Stock Exchange. Pursuant to the NCIB, the Company may repurchase up to 104,732,244 of its common shares (representing 10% of the
public float outstanding at the time the NCIB was renewed) during the 12-month period commencing March 28, 2007 and ending March 27, 2008. Of the total shares purchased
year-to-date, 30,480,700 common shares were purchased under the March 2007 NCIB and the remaining 15,513,400 common shares were purchased under the
Company's previous NCIB.

Subsequent
to December 31, 2007, 27,350 stock options were exercised for shares, resulting in 1,018,617,605 common shares outstanding as at February 27, 2008.

a)  Stock Option Plans

Talisman has stock option plans that grant options to employees and directors. All options issued by the Company permit the holder to purchase one common share of the Company at
the stated exercise price or to receive a cash payment equal to the appreciated value of the stock option. Options granted under the plans prior to 2006 are generally exercisable after three years and
expire 10 years after the grant date. Commencing in 2006, options granted to new employees vest evenly on an annual basis over a three-year period. Option exercise prices
approximate the market price for the common shares on the date the options are granted.

|                                                                                 |                             | 2007              |             | 2006                       |       | 2005             
|-------------------------------------------------------------------------------- | --------------------------- | ----------------- | ----------- | -------------------------- | ----- | -----------------
|Continuity of stock options                                                      |                             | Number
of options |             | Average exercise
price ($) |       | Number
of options
|                                                                                
|Outstanding at January 1                                                         |                             | 63,921,148        |             | 10.79                      |       | 64,485,717       
|                                                                                
|                                                                                 | Granted                     |                   | 12,812,895  |                            | 20.21 |                  
|                                                                                
|                                                                                 | Exercised for common shares |                   | (655,950    | )                          | 6.94  |                  
|                                                                                
|                                                                                 | Exercised for cash payment  |                   | (11,402,848 | )                          | 7.45  |                  
|                                                                                
|                                                                                 | Forfeited                   |                   | (1,096,333  | )                          | 17.56 |                  
|                                                                                
|Outstanding at December 31                                                       |                             | 63,578,912        |             | 13.21                      |       | 63,921,148       
|                                                                                
|Exercisable at December 31                                                       |                             | 29,722,984        |             | 8.32                       |       | 27,606,033       
|                                                                                
|Options available for future grants pursuant to the Company's Stock Option Plans |                             | 47,187,653        |             |                            |       | 47,501,367       
|                                                                                

Talisman Energy 2007 Annual Financial Report   21

---



The range of exercise prices of the Company's outstanding stock options is as follows:

|                                               |  | Outstanding Options |  | Exercisable Options                
|---------------------------------------------- |  | ------------------- |  | -----------------------------------
|December 31, 2007
Range of exercise prices ($) |  | Number of options   |  | Weighted average exercise price ($)
|                                              
|2.86  3.99                                    |  | 1,284,795           |  | 3.11                               
|                                              
|4.00  5.99                                    |  | 1,452,005           |  | 4.33                               
|                                              
|6.00  8.99                                    |  | 22,907,537          |  | 7.28                               
|                                              
|9.00  11.99                                   |  | 250,800             |  | 9.94                               
|                                              
|12.00  14.99                                  |  | 15,370,410          |  | 14.01                              
|                                              
|15.00  17.99                                  |  | 94,500              |  | 15.41                              
|                                              
|18.00  20.70                                  |  | 22,218,865          |  | 19.96                              
|                                              
|2.86  20.70                                   |  | 63,578,912          |  | 13.21                              
|                                              

The mark-to-market liability for the stock option plans as at December 31, 2007 was $361 million
(2006  $542 million).

Subsequent
to December 31, 2007, 491,951 options were exercised for cash, 27,350 options were exercised for shares, 54,770 options were granted and 57,210 were cancelled, with 63,057,171
options outstanding at February 27, 2008.

b)  Cash Unit Plan

In addition to the Company's stock option plans, Talisman's subsidiaries issue stock appreciation rights under the cash unit plan. Cash units are similar to stock options except
that the holder does not have a right to purchase the underlying shares of the Company. Units granted under the cash unit plan are generally exercisable after three years and expire 10 years
after the grant date.

|                           |           | 2007            |           | 2006                       |       | 2005           
|-------------------------- | --------- | --------------- | --------- | -------------------------- | ----- | ---------------
|Continuity of cash units   |           | Number
of units |           | Average exercise
price ($) |       | Number
of units
|                          
|Outstanding at January 1   |           | 8,352,328       |           | 12.68                      |       | 7,351,065      
|                          
|                           | Granted   |                 | 2,762,980 |                            | 20.16 |                
|                          
|                           | Exercised |                 | (943,220  | )                          | 7.56  |                
|                          
|                           | Forfeited |                 | (201,595  | )                          | 17.53 |                
|                          
|Outstanding at December 31 |           | 9,970,493       |           | 15.14                      |       | 8,352,328      
|                          
|Exercisable at December 31 |           | 2,605,153       |           | 7.67                       |       | 2,411,293      
|                          

The range of exercise prices of the Company's cash units is as follows:

|                                               |  | Outstanding Units |  | Exercisable Units                  
|---------------------------------------------- |  | ----------------- |  | -----------------------------------
|December 31, 2007
Range of exercise prices ($) |  | Number
of units   |  | Weighted average
exercise price ($)
|                                              
|6.60  8.99                                    |  | 2,474,973         |  | 7.22                               
|                                              
|9.00  11.99                                   |  | 22,725            |  | 10.29                              
|                                              
|12.00  14.99                                  |  | 2,727,350         |  | 14.02                              
|                                              
|15.00  17.99                                  |  | 121,370           |  | 17.24                              
|                                              
|18.00  20.41                                  |  | 4,624,075         |  | 20.01                              
|                                              
|6.60  20.41                                   |  | 9,970,493         |  | 15.14                              
|                                              

The mark-to-market liability for the cash unit plans as at December 31, 2007 was $40 million
(2006  $54 million).

Subsequent
to December 31, 2007, 128,733 cash units were exercised, 21,860 cash units were granted and 14,605 were cancelled, with 9,849,015 cash units outstanding at
February 27, 2008.

c)  Deferred Share Units

Talisman also issues deferred share units to directors in lieu of cash compensation. Each deferred share unit (DSU) represents the right to receive a cash payment on retirement
equal to the market value of the Company's shares at the time of surrender. Dividends are credited as additional DSUs when paid. As at December 31, 2007, there were 244,000
(2006  261,637) units outstanding. The mark-to-market liability of $4 million
(2006  $5 million) is included in accounts payable and accrued liabilities on the Consolidated Balance Sheets. Expense related to the DSUs is recognized
in general and administrative expense on the Consolidated Statements of Income.

22   Talisman Energy 2007 Annual Financial Report

---



d)  Restricted Share Units

Talisman has a restricted share unit (RSU) plan that grants RSUs to eligible employees. All RSUs issued by the Company permit the holder to receive a cash payment equal to the
market value of the stock. Typically, RSUs granted under the plan are paid three years after the grant date. As at December 31, 2007, there were 83,793
(2006  nil) units outstanding (including dividend equivalent RSUs) and the mark-to-market liability was $0.2 million
(2006  $nil). Expense related to the RSUs is recognized in general and administrative expense on the Consolidated Statements of Income.

e)  Stock-Based Compensation

For the year ended December 31, 2007, the Company recorded a stock-based compensation recovery of $15 million
(2006  $51 million expense; 2005  $633 million expense) relating to its stock option, cash unit and
restricted share unit plans. The Company paid cash of $168 million (2006  $159 million;
2005  $153 million) to employees in settlement of fully accrued option liabilities for options exercised. In addition, the Company recovered capitalized
stock-based compensation expense of $3 million in 2007 (2006  $3 million; 2005  $15 million).

Of
the combined mark-to-market liability for the stock option, cash unit, deferred share unit and restricted share unit plans of $405 million
(2006  $596 million), $405 million (2006  $554 million) is included in accounts payable and accrued
liabilities on the Consolidated Balance Sheets.

12.  Financial Instruments

Carrying Value and Estimated Fair Value of Financial Instruments

|                                            |  | 2007           |   | 2006       |  
|------------------------------------------- |  | -------------- | - | ---------- | -
|Asset (liability) at December 31            |  | Carrying
Value |   | Fair Value |  
|                                            | 
|Gross long-term debt                        |  | (4,897         | ) | (4,876     | )
|                                            | 
|Discounted obligations under capital leases |  | (33            | ) | (33        | )
|                                            | 
|Cross currency and interest rate swaps      |  | 54             |   | 41         |  
|                                            | 
|Natural gas derivatives                     |  | (65            | ) | (65        | )
|                                            | 
|Crude oil derivatives                       |  | (20            | ) | (20        | )
|                                            | 

Borrowings under bank credit facilities are for short terms and are market rate based; thus, carrying value approximates fair value. The fair value of debentures
and notes is based on market quotations, which reflect the discounted present value of the principal and interest payments using the effective yield at December 31 for instruments having the
same term and risk characteristics. Discounted obligations under capital leases are valued using the discounted minimum payments method. Fair values for cross currency and interest rate derivative
instruments are determined based on the estimated cash payment or receipt necessary to settle the contract at December 31. Cash payments or receipts are based on discounted cash flow analysis
using current market rates and prices. Fair values for commodity and foreign exchange derivatives are based on option pricing models using forward pricing curves and implied volatility as at
December 31, as appropriate.

The
fair values of other financial instruments, including cash and cash equivalents, accounts receivable, bank indebtedness and accounts payable and accrued liabilities approximate their carrying
values.

Commodity Price Derivative Contracts

A portion of the Company's outstanding commodity price derivative contracts at December 31, 2007 have been designated as hedges of the Company's anticipated future
commodity sales. For new commodity price derivative contracts entered into since January 1, 2007, the Company has elected not to designate these as cash flow hedges and consequently these
derivatives have been classified as held-for-trading.

At
December 31, 2007, $33 million was included in accounts payable and accrued liabilities and $52 million in other long-term obligations related to the fair value of
commodity price derivative contracts. During the year ended December 31, 2007, the ineffective portion of derivatives designated as cash flow hedges that was recognized in net income was $nil.
During the year ended December, 31, 2007, the Company also recorded unrealized losses of $65 million and realized gains of $21 million on its held-for-trading
commodity price derivative contracts.

During
the first quarter of 2007, the Company settled a portion of its 2007 WTI costless collar covering a notional volume of 10,000 bbls/d for a gain of $40 million. The gain on
settlement was realized as a hedging gain in the year, the term of the original hedge.

The
Company had the following commodity price derivative contracts outstanding at December 31, 2007:

Commodity Contracts Designated as Hedges

|Fixed price swaps     |  | Hedge type |  | Term         |  | bbls/d |  | $/bbl |  | Fair value |  
|--------------------- |  | ---------- |  | ------------ |  | ------ |  | ----- |  | ---------- | -
|                      | 
|Dated Brent oil index |  | Cash flow  |  | 2008 Jan-Jun |  | 2,473  |  | 59.63 |  | (15        | )
|                      | 
|Dated Brent oil index |  | Cash flow  |  | 2008 Jul-Dec |  | 815    |  | 60.00 |  | (5         | )
|                      | 

Talisman Energy 2007 Annual Financial Report   23

---



Commodity Contracts Not Designated as Hedges

|Fixed price swaps |  | Financial instrument classification |  | Term              |  | mcf/d  |  | C$/mcf |  | Fair value |  
|----------------- |  | ----------------------------------- |  | ----------------- |  | ------ |  | ------ |  | ---------- | -
|                  | 
|ICE index         |  | Held-for-trading                    |  | 2008 Jul  Sep    |  | 24,390 |  | 6.29   |  | (7         | )
|                  | 
|ICE index         |  | Held-for-trading                    |  | 2008/09 Oct  Mar |  | 23,452 |  | 8.73   |  | (14        | )
|                  | 
|ICE index         |  | Held-for-trading                    |  | 2009 Apr  Sep    |  | 23,452 |  | 6.64   |  | (13        | )
|                  | 
|ICE index         |  | Held-for-trading                    |  | 2009/10 Oct  Mar |  | 20,638 |  | 8.43   |  | (11        | )
|                  | 
|ICE index         |  | Held-for-trading                    |  | 2010 Apr  Sep    |  | 20,638 |  | 6.93   |  | (8         | )
|                  | 
|ICE index         |  | Held-for-trading                    |  | 2010/11 Oct  Mar |  | 17,824 |  | 8.14   |  | (9         | )
|                  | 
|ICE index         |  | Held-for-trading                    |  | 2011 Apr  Jun    |  | 16,886 |  | 7.43   |  | (3         | )
|                  | 

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 not intended to be
settled for net cash payment. 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.

Interest Rate and Foreign Exchange Derivative Contracts

The Company has fixed to floating interest rate swap contracts with a total notional amount of US$300 million that expire on May 15, 2015. These contracts have
been designated as a hedge of the fair value of a portion (US$300 million) of the total US$375 million notes due May 2015. The Company also has cross currency interest rate swap
contracts, that effectively swap the 4.44% C$350 million medium term notes into US$304 million at an interest rate of 5.054%. The ineffectiveness recorded in net income was $nil and the
unrecognized loss of $13 million was recorded in other comprehensive income for the year ended December 31. At December 31, 2007, $1 million was recorded in accounts
receivable and $40 million in other assets related to the interest rate and foreign exchange derivative contracts.

Foreign Exchange Risk and Net Investment Hedges

The Company's operations in Canada, the UK and Norway are self-sustaining and their economic exposure is more closely tied to their respective domestic currencies.
Accordingly, these operations are measured in C$, UK£ and NOK, respectively. Currently, the Company's foreign exchange translation exposure principally relates to US$ denominated UK,
Norwegian and Canadian oil sales. The Eurobond debt denominated in UK£ and the Company's C$ debt are designated as hedges of the Company's net investments in the UK and Canadian
self-sustaining operations, respectively. As such, the unrealized foreign exchange gains and losses resulting from the translation of this debt are recorded in other comprehensive income.

Other Held-for-Trading Financial Instruments

On January 2, 2007, the Company acquired 8.2 million units of Canadian Oil Sands Trust on the disposition of its indirect interest in Syncrude Canada. During the
third quarter of 2007, these were sold for approximately $262 million, crystallizing a gain of $19 million, net of tax.

Interest Rate Risk

Drawings under the Company's bank credit facilities are at floating interest rates and expose the Company to interest rate risk. The Company is also exposed to interest rate
risk on maturity and refinancing of its fixed rate debt.

Credit Risk

A significant portion of the Company's accounts receivable is due from entities in the oil and gas industry. Concentration of credit risk is mitigated by having a broad domestic
and international customer base, which includes a significant number of companies engaged in joint operations with Talisman. The Company routinely assesses the financial strength of its joint
participants and customers, including parties involved in marketing or other commodity arrangements. At December 31, 2007, the Company's largest credit exposure to a single party was
approximately $158 million.

The
Company is exposed to credit risk associated with possible non-performance by derivative instrument counterparties. The Company actively limits the total exposure to individual
counterparties.

13.  Contingencies and Commitments

From time to time, Talisman is the subject of litigation arising out of the Company's operations. Damages claimed under such litigation, including the litigation
discussed below may be material or may be indeterminate and the outcome of such litigation may materially impact the Company's financial condition or results of 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 defending itself against such litigation. These
claims are not expected to have a material impact on the Company's financial position.

On
September 12, 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. The

24   Talisman Energy 2007 Annual Financial Report

---



plaintiffs
have appealed to the Second Circuit Court of Appeals, the Court's decision granting Talisman's Motion for Summary Judgment, its denial of class certification and its refusal to consider the
plaintiffs' proposed third amended complaint. Talisman believes the lawsuit is entirely without merit and will continue to vigorously defend itself. Talisman does not expect the lawsuit to have a
material adverse effect on it.

Estimated Future Minimum Commitments1

|                                           |  | 2008  |  | 2009  |  | 2010 |  | 2011 |  | 2012 |  | Subsequent
to 2012 |  | Total 
|------------------------------------------ |  | ----- |  | ----- |  | ---- |  | ---- |  | ---- |  | ------------------ |  | ------
|                                          
|Office leases                              |  | 33    |  | 31    |  | 34   |  | 33   |  | 31   |  | 75                 |  | 237   
|                                          
|Ocean-going vessel leases2                 |  | 150   |  | 133   |  | 93   |  | 53   |  | 46   |  | 48                 |  | 523   
|                                          
|Transportation and processing commitments3 |  | 152   |  | 142   |  | 130  |  | 127  |  | 120  |  | 401                |  | 1,072 
|                                          
|Minimum work commitments                   |  | 301   |  | 139   |  | 20   |  |     |  |     |  |                   |  | 460   
|                                          
|Abandonment obligations                    |  | 45    |  | 45    |  | 58   |  | 49   |  | 40   |  | 4,290              |  | 4,527 
|                                          
|Other service contracts4                   |  | 861   |  | 1,613 |  | 441  |  | 179  |  | 103  |  | 45                 |  | 3,242 
|                                          
|Total                                      |  | 1,542 |  | 2,103 |  | 776  |  | 441  |  | 340  |  | 4,859              |  | 10,061
|                                          

Talisman's estimated total undiscounted future ARO at December 31, 2007 was $4.5 billion
(2006  $4.6 billion), approximately 58% of which is denominated in UK£. At December 31, 2007, Talisman had accrued
$2,025 million (2006  $1,879 million) of this liability. The Company has provided letters of credit, effective January 1, 2008 in an amount
of $1,025 million, of which the majority were provided as security for the costs of future dismantlement, site restoration and abandonment obligations in the UK ($759 million). The
remaining outstanding letters of credit primarily relate to a retirement compensation arrangement, guarantees of minimum work commitments and abandonment obligations in other areas. In addition, the
Company has issued guarantees as security for certain minimum work, future dismantlement, site restoration and abandonment obligations in lieu of letters of credit.

Talisman
leases certain of its ocean-going vessels and corporate offices, all of which, with the exception of the leasing arrangement described in note 10 to the Consolidated Financial
Statements, are accounted for as operating leases. In addition to the minimum lease payments, Talisman has ongoing operating commitments associated with the vessels.

The
majority of Talisman's Corridor natural gas production in Indonesia is currently sold to Caltex under long-term sales agreements, with the majority of the natural gas sales exchanged for crude oil
on an energy equivalent basis. Sales to Singapore from Corridor are also under long-term sales agreements referenced to the spot price of fuel oil in Singapore. Sales from Corridor to West Java are
under long-term contract at a price of US$1.91/mcf, with no associated transportation costs. The Company anticipates having sufficient production to meet all future delivery commitments
related to Corridor.

In
conjunction with the PM-3 CAA development project, the Company entered into a long-term firm supply contract for approximately 100 mmcf/d, at prices referenced to the
Singapore fuel oil spot market. The Company is subject to volume delivery requirements in relation to the long-term sales contract in Malaysia. In the event these delivery requirements are
not met in a contract year, volumes delivered in the subsequent contract year are subject to a 25% price discount on the quantities that were not delivered in the prior year. An accrual of
$3 million has been made in 2007 related to undelivered volumes. The Company currently expects to be able to meet delivery requirements once the Northern Fields development has been fully
commissioned. Commissioning is expected to start mid-2008.

Talisman
has firm commitments for gathering, processing and transportation services that require the Company to pay tariffs to third parties for processing or shipment of certain minimum quantities of
crude oil and liquids and natural gas. The Company anticipates having sufficient production to meet these commitments.

Natural Gas (North America)

The Company has entered into sales contracts for a portion of its future North American natural gas production. The following are the average volumes under contract and the
weighted average contract price in each of the years shown. The Company has sufficient future production to meet these fixed price sales contracts as the volumes represent less than 1% of the
anticipated future North American production.

|Fixed price sales              |  | 2008   |  | 2009  |  | 2010  |  | 2011  |  | 2012
|------------------------------ |  | ------ |  | ----- |  | ----- |  | ----- |  | ----
|                              
|Volumes (mcf/d)                |  | 12,800 |  | 3,552 |  | 3,552 |  | 3,552 |  |    
|                              
|Weighted average price ($/mcf) |  | 3.96   |  | 2.96  |  | 3.04  |  | 3.14  |  |    
|                              

Talisman Energy 2007 Annual Financial Report   25

---



14.  Other Revenue

|Years ended December 31               |  | 2007 |  | 2006 |  | 2005
|------------------------------------- |  | ---- |  | ---- |  | ----
|                                     
|Pipeline and custom treating tariffs1 |  | 115  |  | 95   |  | 86  
|                                     
|Investment income                     |  | 21   |  | 13   |  | 14  
|                                     
|Marketing income                      |  | 12   |  | 3    |  | 10  
|                                     
|                                      |  | 148  |  | 111  |  | 110 
|                                     

15.  Other Expenses, Net

|Years ended December 31      |  | 2007 |   | 2006 |   | 2005 |  
|---------------------------- |  | ---- | - | ---- | - | ---- | -
|                             | 
|Net gain on asset disposals  |  | (12  | ) | (106 | ) | (3   | )
|                             | 
|Foreign exchange loss (gain) |  | 53   |   | 24   |   | (7   | )
|                             | 
|Property impairments         |  | 9    |   |     |   | 31   |  
|                             | 
|Wind farm                    |  | 5    |   | 22   |   |     |  
|                             | 
|Miscellaneous interest       |  | 20   |   | 21   |   | 6    |  
|                             | 
|Other                        |  | (34  | ) | 10   |   | 12   |  
|                             | 
|                             |  | 41   |   | (29  | ) | 39   |  
|                             | 

16.  Taxes

Income Taxes

The current and future income taxes related to continuing operations for each of the three years ended December 31 are as follows:

|                               |                | 2007 |      | 2006  |      | 2005  |    
|------------------------------ | -------------- | ---- | ---- | ----- | ---- | ----- | ---
|                               |               
|Current income taxes           |                |      |      |       |      |       |    
|                               |               
|                               | North America  |      | 105  |       | 31   |       | 95 
|                               |               
|                               | UK             |      | 73   |       | 86   |       | 224
|                               |               
|                               | Scandinavia    |      | 189  |       | 215  |       | 236
|                               |               
|                               | Southeast Asia |      | 294  |       | 333  |       | 291
|                               |               
|                               | Other          |      | 121  |       | 105  |       | 114
|                               |               
|                               |                | 782  |      | 770   |      | 960   |    
|                               |               
|Future income taxes (recovery) |                |      |      |       |      |       |    
|                               |               
|                               | North America  |      | (251 | )     | (141 | )     | 75 
|                               |               
|                               | UK             |      | 305  |       | 685  |       | 124
|                               |               
|                               | Scandinavia    |      | (109 | )     | (16  | )     | (72
|                               |               
|                               | Southeast Asia |      | (28  | )     | (5   | )     | (34
|                               |               
|                               | Other          |      | 16   |       | (25  | )     | (22
|                               |               
|                               |                | (67  | )    | 498   |      | 71    |    
|                               |               
|Total1                         |                | 715  |      | 1,268 |      | 1,031 |    
|                               |               

The components of the net future tax liability related to continuing operations at December 31 are as follows:

|                          |                               | 2007  |       | 2006 
|------------------------- | ----------------------------- | ----- | ----- | -----
|                         
|Future tax liabilities    |                               |       |       |      
|                         
|                          | Property, plant and equipment |       | 4,969 |      
|                         
|                          | Other                         |       | 258   |      
|                         
|                          |                               | 5,227 |       | 5,368
|                         
|Future tax assets         |                               |       |       |      
|                         
|                          | Asset retirement obligations  |       | 959   |      
|                         
|                          | Other                         |       | 154   |      
|                         
|                          |                               | 1,113 |       | 1,027
|                         
|Net future tax liability1 |                               | 4,114 |       | 4,341
|                         

26   Talisman Energy 2007 Annual Financial Report

---



The net future tax liability is presented in the balance sheet as follows:

|Years ended December 31    |  | 2007  |   | 2006  |  
|-------------------------- |  | ----- | - | ----- | -
|                           | 
|Balance sheet              |  |       |   |       |  
|                           | 
|Future tax liabilities     |  | 4,147 |   | 4,361 |  
|                           | 
|Future tax assets (note 6) |  | (33   | ) | (20   | )
|                           | 
|                           |  | 4,114 |   | 4,341 |  
|                           | 

Income taxes vary from the amount that would be computed by applying the Canadian statutory income tax rate of 25.35% for the year ended December 31, 2007
(2006  29.37%; 2005  34.13%) to income from continuing operations as follows:

|Years ended December 31                                |                                                      | 2007 |      | 2006  |     | 2005  |    
|------------------------------------------------------ | ---------------------------------------------------- | ---- | ---- | ----- | --- | ----- | ---
|                                                       |                                                     
|Income taxes calculated at the Canadian statutory rate |                                                      | 511  |      | 860   |     | 831   |    
|                                                       |                                                     
|Increase (decrease) in income taxes resulting from:    |                                                      |      |      |       |     |       |    
|                                                       |                                                     
|                                                       | Non-deductible royalties, mineral taxes and expenses |      |     |       | 17  |       | 84 
|                                                       |                                                     
|                                                       | Resource allowances                                  |      |     |       | (14 | )     | (63
|                                                       |                                                     
|                                                       | Change in statutory tax rates                        |      | (183 | )     | 113 |       |   
|                                                       |                                                     
|                                                       | Non-taxable expense (income)                         |      | 89   |       | (26 | )     | 19 
|                                                       |                                                     
|                                                       | Deductible PRT expense                               |      | (65  | )     | (82 | )     | (27
|                                                       |                                                     
|                                                       | Higher foreign tax rates                             |      | 393  |       | 422 |       | 157
|                                                       |                                                     
|                                                       | Provincial rebates and credits                       |      |     |       | (1  | )     | (7 
|                                                       |                                                     
|                                                       | Federal tax on large corporations                    |      |     |       |    |       | 9  
|                                                       |                                                     
|                                                       | Other                                                |      | (30  | )     | (21 | )     | 28 
|                                                       |                                                     
|Income taxes                                           |                                                      | 715  |      | 1,268 |     | 1,031 |    
|                                                       |                                                     

Petroleum Revenue Tax (PRT)

PRT expense relates primarily to the UK and is comprised of current tax expense of $262 million (2006  $256 million;
2005  $147 million) and future tax recovery of $6 million (2006  expense of $34 million;
2005  expense of $37 million). The measurement of PRT expense and the related provision in the Consolidated Financial Statements is subject to uncertainty
associated with future recovery of oil and gas reserves, commodity prices and the timing of future events, which could result in material changes to deferred amounts.

17.  Supplemental Cash Flow Information

|Years ended December 31                          |                                                             | 2007  |       | 2006  |       | 2005  |      
|------------------------------------------------ | ----------------------------------------------------------- | ----- | ----- | ----- | ----- | ----- | -----
|                                                 |                                                            
|Items not involving cash                         |                                                             |       |       |       |       |       |      
|                                                 |                                                            
|                                                 | Depreciation, depletion and amortization                    |       | 2,316 |       | 1,926 |       | 1,595
|                                                 |                                                            
|                                                 | Property impairments                                        |       | 9     |       |      |       | 31   
|                                                 |                                                            
|                                                 | Dry hole                                                    |       | 684   |       | 296   |       | 241  
|                                                 |                                                            
|                                                 | Net gain on asset disposals                                 |       | (12   | )     | (106  | )     | (3   
|                                                 |                                                            
|                                                 | Stock-based (recovery) compensation                         |       | (183  | )     | (108  | )     | 480  
|                                                 |                                                            
|                                                 | Future taxes and deferred PRT (recovery)                    |       | (73   | )     | 532   |       | 108  
|                                                 |                                                            
|                                                 | Unrealized losses on held-for-trading financial instruments |       | 65    |       |      |       |     
|                                                 |                                                            
|                                                 | Other                                                       |       | 55    |       | 17    |       | 29   
|                                                 |                                                            
|                                                 |                                                             | 2,861 |       | 2,557 |       | 2,481 |      
|                                                 |                                                            
|Cash interest paid (net of capitalized interest) |                                                             | 232   |       | 184   |       | 171   |      
|                                                 |                                                            
|Cash income taxes paid                           |                                                             | 997   |       | 1,173 |       | 757   |      
|                                                 |                                                            

Talisman Energy 2007 Annual Financial Report   27

---



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

|Years ended December 31                    |  | 2007 |   | 2006 |   | 2005 |  
|------------------------------------------ |  | ---- | - | ---- | - | ---- | -
|                                           | 
|Accounts receivable                        |  | (91  | ) | 197  |   | (175 | )
|                                           | 
|Inventories                                |  | 77   |   | (182 | ) | (64  | )
|                                           | 
|Prepaid expenses                           |  | 13   |   | (9   | ) | (2   | )
|                                           | 
|Asset retirement obligations expenditures1 |  | (46  | ) | (50  | ) | (32  | )
|                                           | 
|Accounts payable and accrued liabilities   |  | (186 | ) | (93  | ) | 254  |  
|                                           | 
|Income and other taxes payable             |  | (24  | ) | (237 | ) | 218  |  
|                                           | 
|Net source (use) of cash                   |  | (257 | ) | (374 | ) | 199  |  
|                                           | 

18.  Weighted Average Shares Outstanding - Basic and Diluted

|(millions)                                                     |  | 2007  |  | 2006  |  | 2005 
|-------------------------------------------------------------- |  | ----- |  | ----- |  | -----
|                                                              
|Weighted average number of common shares outstanding  basic   |  | 1,032 |  | 1,092 |  | 1,104
|                                                              
|Dilution effect of stock options                               |  | 24    |  | 30    |  | 27   
|                                                              
|Weighted average number of common shares outstanding  diluted |  | 1,056 |  | 1,122 |  | 1,131
|                                                              

Outstanding stock options are the only instruments that are currently dilutive to net income per share. For 2007, 10,859,778 stock options that were
antidilutive have been excluded from the computation of diluted net income per share (2006  2,548,433; 2005  5,389,872).

19.  Employee Benefits

The Company sponsors both defined benefit and defined contribution pension arrangements covering substantially all employees. Defined benefit pension plans are
based on years of service and final average salary. The defined pension benefits in the UK and Norway, which account for 46% of the accrued benefit obligation as at December 31, 2007, will
increase at the rate of inflation. Although the Company has no commitment to provide for increases related to inflation on the remainder of its defined benefit pension plans, the benefits have
increased annually by one-half of the rate of inflation.

The
Company uses actuarial reports prepared by independent actuaries for funding and accounting purposes. The Company uses a December 31 measurement date for the majority of its defined benefit
pension plans. The most recent actuarial valuation of the benefit plans for funding purposes was as of December 31, 2006, with the next valuation as of December 31, 2007. The following
significant actuarial assumptions were employed to determine the periodic pension expense and the accrued benefit obligations:

|                                                     |  | 2007 |  | 2006 |  | 2005
|---------------------------------------------------- |  | ---- |  | ---- |  | ----
|                                                    
|Accrued benefit obligation                           |  |      |  |      |  |     
|                                                    
|Discount rate (%)                                    |  | 5.5  |  | 5.1  |  | 4.9 
|                                                    
|Rate of compensation increase (%)                    |  | 4.8  |  | 4.5  |  | 4.3 
|                                                    
|Benefit expense                                      |  |      |  |      |  |     
|                                                    
|Discount rate (%)                                    |  | 5.0  |  | 4.9  |  | 5.6 
|                                                    
|Expected long-term rate of return on plan assets (%) |  | 6.8  |  | 6.8  |  | 7.0 
|                                                    
|Assumed health care cost trend rates                 |  |      |  |      |  |     
|                                                    
|Initial health care cost trend rate (%)              |  | 10.0 |  | 10.0 |  | 10.0
|                                                    
|Health care cost trend rate declines to (%)          |  | 5.0  |  | 5.0  |  | 5.0 
|                                                    
|Year that the cost trend rate reaches final rate     |  | 2018 |  | 2018 |  | 2018
|                                                    

28   Talisman Energy 2007 Annual Financial Report

---



The Company's net benefit plan expense is as follows:

|                                                                               |  | 2007 |   | 2006 |   | 2005 |  
|------------------------------------------------------------------------------ |  | ---- | - | ---- | - | ---- | -
|                                                                               | 
|Current service cost  defined benefit                                         |  | 21   |   | 12   |   | 10   |  
|                                                                               | 
|Current service cost  defined contribution                                    |  | 11   |   | 11   |   | 8    |  
|                                                                               | 
|Interest cost                                                                  |  | 12   |   | 10   |   | 10   |  
|                                                                               | 
|Actual return on plan assets                                                   |  | (7   | ) | (22  | ) | (16  | )
|                                                                               | 
|Actuarial losses on accrued benefit obligation                                 |  | 2    |   | 24   |   | 19   |  
|                                                                               | 
|Other                                                                          |  | (3   | ) | 2    |   |     |  
|                                                                               | 
|Costs arising during the year                                                  |  | 36   |   | 37   |   | 31   |  
|                                                                               | 
|Differences between costs arising during the year and net benefit plan expense |  |      |   |      |   |      |  
|                                                                               | 
|Actual return on plan assets                                                   |  | (7   | ) | 19   |   | 4    |  
|                                                                               | 
|Actuarial (gain) loss                                                          |  | 2    |   | (31  | ) | (14  | )
|                                                                               | 
|Prior service benefit                                                          |  | (3   | ) |     |   |     |  
|                                                                               | 
|Amortization of net transitional asset                                         |  | (1   | ) |     |   | (2   | )
|                                                                               | 
|Net benefit plan expense                                                       |  | 27   |   | 25   |   | 19   |  
|                                                                               | 

The net benefit plan expense for the year is determined by using actuarial assumptions, including expected return on plan assets, and includes the amortization
of net actuarial losses and net transitional assets and obligations as described in note 1(j).

Information
about the Company's defined pension benefit plans is as follows:

|                                                |  | 2007                                   |   | 2006                                   |  
|----------------------------------------------- |  | -------------------------------------- | - | -------------------------------------- | -
|                                                |  | Pension plans grouped by funded status |   | Pension plans grouped by funded status |  
|                                                |  | Surplus                                |   | Deficit                                |  
|                                                | 
|Accrued benefit obligation                      |  |                                        |   |                                        |  
|                                                | 
|Accrued benefit obligation, beginning of year   |  | 67                                     |   | 180                                    |  
|                                                | 
|Current service cost                            |  | 1                                      |   | 20                                     |  
|                                                | 
|Interest cost                                   |  | 3                                      |   | 9                                      |  
|                                                | 
|Actuarial losses (gains)                        |  | (1                                     | ) | 3                                      |  
|                                                | 
|Plan participants' contributions                |  |                                       |   | 1                                      |  
|                                                | 
|Benefits paid                                   |  | (4                                     | ) | (3                                     | )
|                                                | 
|Foreign currency translation                    |  |                                       |   | (16                                    | )
|                                                | 
|Other                                           |  |                                       |   | 2                                      |  
|                                                | 
|Accrued benefit obligation, end of year         |  | 66                                     |   | 196                                    |  
|                                                | 
|Plan assets                                     |  |                                        |   |                                        |  
|                                                | 
|Fair value of plan assets, beginning of year    |  | 111                                    |   | 100                                    |  
|                                                | 
|Actual return on plan assets                    |  |                                       |   | 7                                      |  
|                                                | 
|Employer contributions                          |  |                                       |   | 18                                     |  
|                                                | 
|Plan participants' contributions                |  |                                       |   | 1                                      |  
|                                                | 
|Surplus applied to defined contribution plan    |  | (11                                    | ) |                                       |  
|                                                | 
|Benefits paid                                   |  | (4                                     | ) | (3                                     | )
|                                                | 
|Expenses                                        |  |                                       |   |                                       |  
|                                                | 
|Foreign currency translation                    |  |                                       |   | (13                                    | )
|                                                | 
|Other                                           |  |                                       |   | (1                                     | )
|                                                | 
|Fair value of plan assets, end of year          |  | 96                                     |   | 109                                    |  
|                                                | 
|Funded status  surplus (deficit)2              |  | 30                                     |   | (87                                    | )
|                                                | 
|Unamortized net actuarial losses                |  | 15                                     |   | 38                                     |  
|                                                | 
|Unamortized prior service cost                  |  |                                       |   | 6                                      |  
|                                                | 
|Unamortized net transitional (asset) obligation |  | (3                                     | ) | 2                                      |  
|                                                | 
|Net accrued benefit asset (liability)1          |  | 42                                     |   | (41                                    | )
|                                                | 

Talisman Energy 2007 Annual Financial Report   29

---



At December 31, 2007, the accrued benefit obligation for other post-retirement benefit plans was $10 million
(2006  $9 million; 2005  $13 million). The other post-retirement benefit plans provide medical,
dental and life benefits for active and retired employees. The effect of a one-percentage point change in the assumed health care cost trend rates on accrued benefit obligations and
benefit costs would be immaterial.

The
composition of the plan assets as a percentage of fair value is as follows:

|                      |  | 2007 |  | 2006 |  | 2005
|--------------------- |  | ---- |  | ---- |  | ----
|                     
|Equity securities (%) |  | 71   |  | 79   |  | 76  
|                     
|Fixed income (%)      |  | 27   |  | 20   |  | 24  
|                     
|Cash (%)              |  | 2    |  | 1    |  |    
|                     
|                      |  | 100  |  | 100  |  | 100 
|                     

The approximate target allocation percentage for the Canadian employee and executive plans that account for 50% of total plan assets is 70% equities and 30%
bonds. Plan assets do not include any common shares of Talisman.

The
projected future benefit payments are as follows:

| |  | 2008 |  | 2009 |  | 2010 |  | 2011 |  | 2012 |  | Thereafter
| |  | ---- |  | ---- |  | ---- |  | ---- |  | ---- |  | ----------
|
| |  | 8    |  | 9    |  | 9    |  | 10   |  | 11   |  | 75        
|

20.  Segmented Information

Talisman's activities are conducted in five geographic segments: North America, UK, Scandinavia, Southeast Asia, and Other. North America includes operations in
Canada and the US. The UK segment includes operations in the UK and the Netherlands. Scandinavia includes operations in Norway and Denmark. The Southeast Asia segment includes operations in Indonesia,
Malaysia, Vietnam and Australia. The Other segment includes operations in Algeria, Tunisia, Trinidad and Tobago as well as other international areas. All activities relate to the exploration,
development, production and transportation of oil, liquids and natural gas.

In
2006, Talisman redefined its reporting segments to those described above. In 2005, the UK and Scandinavia were reported in aggregate as the North Sea, Alaska was included in the Other reporting
segment and excluded from the North America segment, and operations in North Africa (Algeria, Tunisia) and Trinidad and Tobago were reported as separate segments. All prior periods have been restated
to conform to the current presentation.

30   Talisman Energy 2007 Annual Financial Report

---





|                                               |  | North America1 |   | UK2   |   | Scandinavia3
|---------------------------------------------- |  | -------------- | - | ----- | - | ------------
|                                               |  | 2007           |   | 2006  |   | 2005        
|
|                                              
|Revenue                                        |  |                |   |       |   |             
|                                              
|Gross sales                                    |  | 2,975          |   | 3,021 |   | 3,536       
|                                              
|Hedging                                        |  | 110            |   | 86    |   | (78         
|                                              
|Royalties                                      |  | 544            |   | 551   |   | 690         
|                                              
|Net sales                                      |  | 2,541          |   | 2,556 |   | 2,768       
|                                              
|Other                                          |  | 105            |   | 74    |   | 72          
|                                              
|Total revenue                                  |  | 2,646          |   | 2,630 |   | 2,840       
|                                              
|Segmented expenses                             |  |                |   |       |   |             
|                                              
|Operating expenses                             |  | 522            |   | 463   |   | 389         
|                                              
|Transportation                                 |  | 65             |   | 73    |   | 75          
|                                              
|DD&A                                           |  | 1,053          |   | 946   |   | 815         
|                                              
|Dry hole                                       |  | 376            |   | 135   |   | 122         
|                                              
|Exploration                                    |  | 148            |   | 168   |   | 143         
|                                              
|Other                                          |  | (48            | ) | (108  | ) | (14         
|                                              
|Total segmented expenses                       |  | 2,116          |   | 1,677 |   | 1,530       
|                                              
|Segmented income before taxes                  |  | 530            |   | 953   |   | 1,310       
|                                              
|Non-segmented expenses                         |  |                |   |       |   |             
|                                              
|General and administrative                     |  |               |   |      |   |            
|                                              
|Interest on long-term debt                     |  |               |   |      |   |            
|                                              
|Stock-based compensation                       |  |               |   |      |   |            
|                                              
|Currency translation                           |  |               |   |      |   |            
|                                              
|Loss on held-for-trading financial instruments |  |               |   |      |   |            
|                                              
|Total non-segmented expenses                   |  |               |   |      |   |            
|                                              
|Income from continuing operations before taxes |  |               |   |      |   |            
|                                              
|Capital expenditures                           |  |                |   |       |   |             
|                                              
|Exploration                                    |  | 851            |   | 1,080 |   | 707         
|                                              
|Development                                    |  | 836            |   | 1,102 |   | 757         
|                                              
|Midstream                                      |  | 133            |   | 174   |   | 72          
|                                              
|Exploration and development                    |  | 1,820          |   | 2,356 |   | 1,536       
|                                              
|Property acquisitions                          |  |               |   |      |   |            
|                                              
|Proceeds on dispositions                       |  |               |   |      |   |            
|                                              
|Other non-segmented                            |  |               |   |      |   |            
|                                              
|Net capital expenditures6                      |  |               |   |      |   |            
|                                              
|Property, plant and equipment                  |  | 7,914          |   | 7,571 |   | 6,339       
|                                              
|Goodwill                                       |  | 249            |   | 249   |   | 249         
|                                              
|Other                                          |  | 1,153          |   | 723   |   | 612         
|                                              
|Discontinued operations                        |  |               |   | 599   |   | 818         
|                                              
|Segmented assets                               |  | 9,316          |   | 9,142 |   | 8,018       
|                                              
|Non-segmented assets                           |  |               |   |      |   |            
|                                              
|Total assets                                   |  |               |   |      |   |            
|                                              

|1 | North America                 |  | 2007  |  | 2006  |  | 2005  |  | 2 | UK                            |  | 2007  |  | 2006  |  | 2005  |  | 3 | Scandinavia                   |  | 2007  |  | 2006  |  | 2005 
|- | ----------------------------- |  | ----- |  | ----- |  | ----- |  | - | ----------------------------- |  | ----- |  | ----- |  | ----- |  | - | ----------------------------- |  | ----- |  | ----- |  | -----
|  |                               |  |       |  |       |  |      
|  | Canada                        |  | 2,436 |  | 2,377 |  | 2,494 |  |   | UK                            |  | 2,612 |  | 2,342 |  | 2,135 |  |   | Norway                        |  | 845   |  | 819   |  | 604  
|  | US                            |  | 210   |  | 253   |  | 346   |  |   | Netherlands                   |  | 73    |  | 73    |  | 56    |  |   | Denmark                       |  | 77    |  | 78    |  | 10   
|  |                               |  |       |  |       |  |      
|  | Total revenue                 |  | 2,646 |  | 2,630 |  | 2,840 |  |   | Total revenue                 |  | 2,685 |  | 2,415 |  | 2,191 |  |   | Total revenue                 |  | 922   |  | 897   |  | 614  
|  |                               |  |       |  |       |  |      
|  | Canada                        |  | 7,524 |  | 7,124 |  | 5,836 |  |   | UK                            |  | 5,592 |  | 6,054 |  | 4,067 |  |   | Norway                        |  | 1,595 |  | 1,321 |  | 1,149
|  | US                            |  | 390   |  | 447   |  | 503   |  |   | Netherlands                   |  | 58    |  | 50    |  | 45    |  |   | Denmark                       |  | 178   |  | 237   |  | 256  
|  |                               |  |       |  |       |  |      
|  | Property, plant and equipment |  | 7,914 |  | 7,571 |  | 6,339 |  |   | Property, plant and equipment |  | 5,650 |  | 6,104 |  | 4,112 |  |   | Property, plant and equipment |  | 1,773 |  | 1,558 |  | 1,407
|  |                               |  |       |  |       |  |      

Talisman Energy 2007 Annual Financial Report   31

---



|                                               |  | Southeast Asia4 |  | Other5 |  | Total | 
|---------------------------------------------- |  | --------------- |  | ------ |  | ----- | 
|                                               |  | 2007            |  | 2006   |  | 2005  | 
|
|                                               | 
|Revenue                                        |  |                 |  |        |  |       | 
|                                               | 
|Gross sales                                    |  | 2,096           |  | 2,125  |  | 1,527 | 
|                                               | 
|Hedging                                        |  |                |  |       |  |      | 
|                                               | 
|Royalties                                      |  | 843             |  | 797    |  | 553   | 
|                                               | 
|Net sales                                      |  | 1,253           |  | 1,328  |  | 974   | 
|                                               | 
|Other                                          |  | 2               |  | 2      |  | 1     | 
|                                               | 
|Total revenue                                  |  | 1,255           |  | 1,330  |  | 975   | 
|                                               | 
|Segmented expenses                             |  |                 |  |        |  |       | 
|                                               | 
|Operating expenses                             |  | 169             |  | 161    |  | 87    | 
|                                               | 
|Transportation                                 |  | 47              |  | 46     |  | 43    | 
|                                               | 
|DD&A                                           |  | 248             |  | 224    |  | 144   | 
|                                               | 
|Dry hole                                       |  | 48              |  | 15     |  | 11    | 
|                                               | 
|Exploration                                    |  | 22              |  | 22     |  | 40    | 
|                                               | 
|Other                                          |  | 6               |  | 9      |  | 1     | 
|                                               | 
|Total segmented expenses                       |  | 540             |  | 477    |  | 326   | 
|                                               | 
|Segmented income before taxes                  |  | 715             |  | 853    |  | 649   | 
|                                               | 
|Non-segmented expenses                         |  |                 |  |        |  |       | 
|                                               | 
|General and administrative                     |  |                |  |       |  |      | 
|                                               | 
|Interest on long-term debt                     |  |                |  |       |  |      | 
|                                               | 
|Stock-based compensation                       |  |                |  |       |  |      | 
|                                               | 
|Currency translation                           |  |                |  |       |  |      | 
|                                               | 
|Loss on held-for-trading financial instruments |  |                |  |       |  |      | 
|                                               | 
|Total non-segmented expenses                   |  |                |  |       |  |      | 
|                                               | 
|Income from continuing operations before taxes |  |                |  |       |  |      | 
|                                               | 
|Capital expenditures                           |  |                 |  |        |  |       | 
|                                               | 
|Exploration                                    |  | 172             |  | 72     |  | 74    | 
|                                               | 
|Development                                    |  | 340             |  | 259    |  | 231   | 
|                                               | 
|Midstream                                      |  |                |  |       |  |      | 
|                                               | 
|Exploration and development                    |  | 512             |  | 331    |  | 305   | 
|                                               | 
|Property acquisitions                          |  |                |  |       |  |      | 
|                                               | 
|Proceeds on dispositions                       |  |                |  |       |  |      | 
|                                               | 
|Other non-segmented                            |  |                |  |       |  |      | 
|                                               | 
|Net capital expenditures6                      |  |                |  |       |  |      | 
|                                               | 
|Property, plant and equipment                  |  | 1,988           |  | 1,561  |  | 1,465 | 
|                                               | 
|Goodwill                                       |  | 104             |  | 123    |  | 123   | 
|                                               | 
|Other                                          |  | 335             |  | 365    |  | 348   | 
|                                               | 
|Discontinued operations                        |  |                |  |       |  |      | 
|                                               | 
|Segmented assets                               |  | 2,427           |  | 2,049  |  | 1,936 | 
|                                               | 
|Non-segmented assets                           |  |                |  |       |  |      | 
|                                               | 
|Total assets                                   |  |                |  |       |  |      | 
|                                               | 

|4 | Southeast Asia                |  | 2007  |  | 2006  |  | 2005  |  | 5 | Other                         |  | 2007 |  | 2006 |  | 2005 |  | 6 | Excluding corporate acquisitions
|- | ----------------------------- |  | ----- |  | ----- |  | ----- |  | - | ----------------------------- |  | ---- |  | ---- |  | ---- |  | - | --------------------------------
|  |                               |  |       |  |       |  |       |  |   |                               |  |      | 
|  | Indonesia                     |  | 591   |  | 558   |  | 408   |  |   | Trinidad and Tobago           |  | 158  |  | 186  |  | 194  |  |   |                                 
|  | Malaysia                      |  | 473   |  | 561   |  | 539   |  |   | Algeria                       |  | 220  |  | 174  |  | 212  |  |   |                                 
|  | Vietnam                       |  | 28    |  | 30    |  | 28    |  |   | Tunisia                       |  | 35   |  | 14   |  | 2    |  |   |                                 
|  | Australia                     |  | 163   |  | 191   |  |      |  |   |                               |  |      |  |      |  |      |  |   |                                 
|  |                               |  |       |  |       |  |       |  |   |                               |  |      | 
|  | Total revenue                 |  | 1,255 |  | 1,330 |  | 975   |  |   | Total revenue                 |  | 411  |  | 374  |  | 408  |  |   |                                 
|  |                               |  |       |  |       |  |       |  |   |                               |  |      | 
|  | Indonesia                     |  | 778   |  | 417   |  | 371   |  |   | Trinidad and Tobago           |  | 210  |  | 246  |  | 275  |  |   |                                 
|  | Malaysia                      |  | 884   |  | 879   |  | 818   |  |   | Algeria                       |  | 180  |  | 199  |  | 162  |  |   |                                 
|  | Vietnam                       |  | 162   |  | 54    |  | 23    |  |   | Tunisia                       |  | 14   |  | 15   |  | 15   |  |   |                                 
|  | Australia                     |  | 164   |  | 211   |  | 253   |  |   | Other                         |  | 34   |  | 24   |  | 30   |  |   |                                 
|  |                               |  |       |  |       |  |       |  |   |                               |  |      | 
|  | Property, plant and equipment |  | 1,988 |  | 1,561 |  | 1,465 |  |   | Property, plant and equipment |  | 438  |  | 484  |  | 482  |  |   |                                 
|  |                               |  |       |  |       |  |       |  |   |                               |  |      | 

32   Talisman Energy 2007 Annual Financial Report

---



21.  Information Regarding United States GAAP Differences

Accounting Principles Generally Accepted in the United States

The Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in Canada (Canadian GAAP) which, in most respects, conform
to accounting principles generally accepted in the United States (US GAAP). Differences between Canadian and US GAAP are identified below:

Balance Sheet Items in Accordance with US GAAP

|                                           |                                        |        |          | 2007          |       | 2006   
|------------------------------------------ | -------------------------------------- | ------ | -------- | ------------- | ----- | -------
|December 31(millions of C$)                |                                        | Notes  |          | Canadian GAAP |       | US GAAP
|                                          
|                                           |                                        |        |          |               |       |        
|Current assets                             |                                        |        |          | 1,875         |       | 1,875  
|                                          
|Property, plant and equipment              |                                        | 1-3    |          | 17,763        |       | 17,969 
|                                          
|Other non-current assets                   |                                        | 4,9    |          | 1,805         |       | 1,735  
|                                          
|                                           |                                        |        |          | 21,443        |       | 21,579 
|                                          
|Current liabilities                        |                                        | 10     |          | 2,329         |       | 2,448  
|                                          
|Long-term debt                             |                                        |        |          | 4,862         |       | 4,862  
|                                          
|Future income taxes                        |                                        | 2,9    |          | 4,147         |       | 4,055  
|                                          
|Other non-current liabilities              |                                        | 4,9,10 |          | 2,142         |       | 2,220  
|                                          
|                                           |                                        |        |          | 13,480        |       | 13,585 
|                                          
|Shareholders' equity                       |                                        |        |          |               |       |        
|                                          
|                                           | Common shares                          |        |          |               | 2,437 |        
|                                          
|                                           | Contributed surplus                    |        | 5        |               | 64    |        
|                                          
|                                           | Accumulated other comprehensive income |        | 4,6,9    |               | (189  | )      
|                                          
|                                           | Retained earnings                      |        | 1-6,9,10 |               | 5,651 |        
|                                          
|Total liabilities and shareholders' equity |                                        |        |          | 21,443        |       | 21,579 
|                                          

Net Income in Accordance with US GAAP

|Years ended December 31(millions of C$)                                 |                                                                     | Notes |       | 2007  |      | 2006                    |       | 2005                    |     
|----------------------------------------------------------------------- | ------------------------------------------------------------------- | ----- | ----- | ----- | ---- | ----------------------- | ----- | ----------------------- | ----
|                                                                        |                                                                    
|                                                                        |                                                                     |       |       |       |      | (restated -
see note 3) |       | (restated -
see note 3) |     
|Net income from continuing operations  Canadian GAAP                   |                                                                     |       |       | 1,046 |      | 1,370                   |       | 1,220                   |     
|                                                                        |                                                                    
|                                                                        | Depreciation, depletion and amortization                            |       | 1,2,3 |       | (29  | )                       | (35   | )                       | (41 
|                                                                        |                                                                    
|                                                                        | Loss on derivative instruments                                      |       | 4     |       | (9   | )                       | (13   | )                       | (19 
|                                                                        |                                                                    
|                                                                        | Deferred income taxes                                               |       | 2     |       | 34   |                         | 12    |                         | (6  
|                                                                        |                                                                    
|                                                                        | Stock-based compensation                                            |       | 10    |       | (103 | )                       | (37   | )                       |    
|                                                                        |                                                                    
|                                                                        | Interest on long-term debt                                          |       | 4     |       | (3   | )                       | (3    | )                       | 1   
|                                                                        |                                                                    
|                                                                        |                                                                     |       |       | (110  | )    | (76                     | )     | (65                     | )   
|                                                                        |                                                                    
|Net income from continuing operations                                   |                                                                     |       |       | 936   |      | 1,294                   |       | 1,155                   |     
|                                                                        |                                                                    
|Net income from discontinued operations                                 |                                                                     |       |       | 1,032 |      | 635                     |       | 341                     |     
|                                                                        |                                                                    
|Net income before cumulative effect of changes in accounting principles |                                                                     |       |       | 1,968 |      | 1,929                   |       | 1,496                   |     
|                                                                        |                                                                    
|Cumulative effect of changes in accounting principles, net of tax       |                                                                     | 10    |       |      |      | (9                      | )     |                        |     
|                                                                        |                                                                    
|Net income  US GAAP                                                    |                                                                     |       |       | 1,968 |      | 1,920                   |       | 1,496                   |     
|                                                                        |                                                                    
|Per common share amounts US GAAP (C$)                                   |                                                                     |       |       |       |      |                         |       |                         |     
|                                                                        |                                                                    
|Basic                                                                   |                                                                     |       |       |       |      |                         |       |                         |     
|                                                                        |                                                                    
|                                                                        | Income from continuing operations                                   |       |       |       | 0.91 |                         | 1.18  |                         | 1.05
|                                                                        |                                                                    
|                                                                        | Income from discontinued operations                                 |       |       |       | 1.00 |                         | 0.59  |                         | 0.30
|                                                                        |                                                                    
|                                                                        | Income before cumulative effect of changes in accounting principles |       |       |       | 1.91 |                         | 1.77  |                         | 1.36
|                                                                        |                                                                    
|                                                                        | Cumulative effect of changes in accounting principles, net of tax   |       |       |       |     |                         | (0.01 | )                       |    
|                                                                        |                                                                    
|                                                                        | Net income                                                          |       |       |       | 1.91 |                         | 1.76  |                         | 1.36
|                                                                        |                                                                    
|Diluted                                                                 |                                                                     |       |       |       |      |                         |       |                         |     
|                                                                        |                                                                    
|                                                                        | Income from continuing operations                                   |       |       |       | 0.89 |                         | 1.15  |                         | 1.02
|                                                                        |                                                                    
|                                                                        | Income from discontinued operations                                 |       |       |       | 0.98 |                         | 0.57  |                         | 0.30
|                                                                        |                                                                    
|                                                                        | Income before cumulative effect of changes in accounting principles |       |       |       | 1.87 |                         | 1.72  |                         | 1.32
|                                                                        |                                                                    
|                                                                        | Cumulative effect of changes in accounting principles, net of tax   |       |       |       |     |                         | (0.01 | )                       |    
|                                                                        |                                                                    
|                                                                        | Net income                                                          |       |       |       | 1.87 |                         | 1.71  |                         | 1.32
|                                                                        |                                                                    

Talisman Energy 2007 Annual Financial Report   33

---



Comprehensive Income in Accordance with US GAAP

|Years ended December 31(millions of C$)                      |  | Notes |  | 2007   |   | 2006  |  | 2005  |  
|------------------------------------------------------------ |  | ----- |  | ------ | - | ----- |  | ----- | -
|                                                             | 
|Net Income  US GAAP                                         |  |       |  | 1,968  |   | 1,920 |  | 1,496 |  
|                                                             | 
|Foreign currency  translation of self-sustaining operations |  | 6     |  | 947    |   | 179   |  | 40    |  
|                                                             | 
|Foreign currency  translation into reporting currency       |  |       |  | (1,242 | ) | 208   |  | (229  | )
|                                                             | 
|Employee benefits, net of tax                                |  | 9     |  | (13    | ) |      |  | (8    | )
|                                                             | 
|Change in fair value of cash flow hedges, net of tax         |  | 4     |  | (98    | ) | 92    |  | (20   | )
|                                                             | 
|Other Comprehensive Income (loss)  US GAAP                  |  |       |  | (406   | ) | 479   |  | (217  | )
|                                                             | 
|Comprehensive Income  US GAAP                               |  |       |  | 1,562  |   | 2,399 |  | 1,279 |  
|                                                             | 

Statement of Cash Flow Items in Accordance with US GAAP

|Years ended December 31(millions of C$)              |                                                 | Notes |   | 2007 |        | 2006 |        | 2005 |       
|---------------------------------------------------- | ----------------------------------------------- | ----- | - | ---- | ------ | ---- | ------ | ---- | ------
|                                                     |                                                
|Operating                                            |                                                 |       |   |      |        |      |        |      |       
|                                                     |                                                
|                                                     | Cash provided by operating activities           |       | 7 |      | 3,752  |      | 4,056  |      | 4,596 
|                                                     |                                                
|Investing                                            |                                                 |       |   |      |        |      |        |      |       
|                                                     |                                                
|                                                     | Cash used in investing activities               |       | 7 |      | (2,921 | )    | (3,452 | )    | (5,869
|                                                     |                                                
|Financing                                            |                                                 |       |   |      |        |      |        |      |       
|                                                     |                                                
|                                                     | Cash provided by (used in) financing activities |       | 8 |      | (393   | )    | (656   | )    | 1,361 
|                                                     |                                                
|Effect of translation on foreign currency cash       |                                                 |       |   | (5   | )      | 10   |        | 19   |       
|                                                     |                                                
|Net increase (decrease) in cash and cash equivalents |                                                 |       |   | 433  |        | (42  | )      | 107  |       
|                                                     |                                                
|Cash and cash equivalents, beginning of year         |                                                 | 8     |   | 103  |        | 145  |        | 38   |       
|                                                     |                                                
|Cash and cash equivalents, end of year               |                                                 | 8     |   | 536  |        | 103  |        | 145  |       
|                                                     |                                                

21.1Gains on Property Exchanges:In 2005,
the Company early adopted a new Canadian standard that eliminated a US GAAP reconciling item on a go forward basis. Under both US and Canadian GAAP, non-monetary property exchanges are
recorded at fair value unless the transaction lacks commercial substance. Prior to 2005 under both US and Canadian GAAP, property exchanges were recorded at the carrying value of the assets given up
unless the exchange transaction included significant cash consideration, in which case it was recorded at fair value. Previous differences in the definition of significant cash consideration under
Canadian GAAP, has created differences in the carrying value of these properties and results in differences in DD&A in subsequent years.

21.2Income Taxes and DD&A Expense:In 2000, the Company adopted the liability
method to account for income taxes. The change to the liability method has eliminated a difference between Canadian and US GAAP, however, in accordance with the recommendations of the CICA, the effect
of the adoption under Canadian GAAP resulted in a charge to retained earnings, whereas, under US GAAP, the future tax costs that gave rise to the Canadian GAAP adjustment have already been reflected
in property, plant and equipment. As a result of the implementation method, further differences in DD&A expense result in subsequent years. Other adjustments to the Canadian GAAP net income required
under US GAAP, as disclosed in this note, have been tax effected as necessary.

21.3Impairments:In 2004, the Company adopted a new Canadian standard that
eliminated a US GAAP reconciling item in respect to impairments on a go forward basis. Under both US and Canadian GAAP, property, plant and equipment must be assessed for potential impairments. Under
US GAAP, and effective in 2004 Canadian GAAP, if the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, then an impairment
loss (the amount by which the carrying amount of the asset exceeds the fair value of the asset) should be recognized. Fair value is calculated as the present value of estimated expected future
cash flows. Prior to 2004, under Canadian GAAP, the impairment loss was the difference between the carrying value of the asset and its net recoverable amount (undiscounted). Previous impairment
charges not required under Canadian GAAP have resulted in differences in DD&A expense in subsequent years.

21.4Forward Foreign Exchange Contracts and Other Financial Instruments:The
Company has designated, for Canadian GAAP purposes, some of its derivative financial instruments as hedges, as described in note 12. In accordance with Canadian GAAP, payments or receipts on
these contracts are recognized in income concurrently with the hedged transaction.

Effective
January 1, 2001, for US GAAP purposes, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, as amended, Accounting for Derivative Instruments and
Hedging Activities. Effective with the adoption of this standard, every derivative instrument, including certain derivative instruments embedded in other contracts, is recognized on the balance sheets
at fair value. The statement requires that changes in the derivative instrument's fair value be recognized currently in net income unless specific hedge accounting criteria are met.

Prior
to January 1, 2004, management did not designate any derivative instruments as hedges for US GAAP purposes and, accordingly, these derivative instruments were recognized on the balance
sheets at their fair value with the change in their fair value recognized in net income. Subsequent to January 1, 2004, management designated its commodity derivative financial instruments as
hedges for US GAAP purposes and, accordingly, the changes in their fair value are now recognized in other comprehensive income with any ineffective portion recognized in net income. The ineffective
portion was a loss of $nil in 2007 (2006  $10 million; 2005  $nil). In 2006, the change in the fair value of
derivative financial

34   Talisman Energy 2007 Annual Financial Report

---



instruments
increased other comprehensive income by $92 million, net of income tax of $38 million. For fair value hedges, both the financial instrument designated as the hedging item,
and the portion of the underlying hedged asset or liability attributable to the hedged risk are measured at fair value. Changes in the fair value of the financial instrument designated as the hedging
item and changes in the fair value of the hedged item attributable to the hedged risk are reflected in net income immediately. Effective January 1, 2007, the Company adopted the new Canadian
standards that effectively harmonize with US GAAP and, consequently, no GAAP differences remain.

21.5Appropriation of Contributed Surplus:In 1992, concurrent with a change in
control of the Company, $17 million of contributed surplus was appropriated to retained earnings to eliminate the deficit at June 30, 1992. This restatement of retained earnings is not
permitted under US GAAP as the events that precipitated it did not constitute a quasi-reorganization.

21.6Foreign Exchange Gains and Losses on Translation of Self-Sustaining Foreign
Operations:Under US GAAP, foreign exchange gains and losses on translation of self-sustaining foreign operations are realized in other comprehensive
income. Under Canadian GAAP, prior to 2007, such gains and losses are included as a separate component of shareholders' equity referred to as cumulative foreign currency translation. Effective
January 1, 2007, the Company adopted the new Canadian standards that effectively harmonize with US GAAP and consequently no GAAP differences remain.

21.7Cash Provided by Operating Activities Presentation:Under US GAAP,
exploration expense is treated as an operating item. It is an investing item under Canadian GAAP.

21.8Cash and Cash Equivalents:Under US GAAP, the movement in bank indebtedness
is treated as a financing activity. Under Canadian GAAP, bank indebtedness may be treated as a component of cash and cash equivalents.

21.9Employee Future Benefits:In 2006, the Company adopted FASB Statement
158 for US GAAP purposes. This statement requires the recognition of the net funded status of pension and other post retirement plans on the balance sheet and recognition of changes in the
funded status through comprehensive income. Deferred actuarial losses, past service costs and transitional assets are now presented on the balance sheet in accumulated other comprehensive income and
charged to net income in a manner consistent with the provision of Statements 87 and 106. In order to record the difference between the funded positions of our plans and the carrying value under
Canadian GAAP, other assets have decreased by $12 million (2006  $6 million), other long-term liabilities have increased by
$49 million (2006  $47 million) and future tax liabilities have been reduced by $15 million
(2006  $16 million), with the balance of $46 million (2006  $37 million) recorded in accumulated
other comprehensive income. Also under this Statement a company is required to measure defined benefit plan assets and obligations as of the balance sheet date, this is consistent with Talisman's
current practice and has not resulted in a GAAP difference.

The
amounts in accumulated other comprehensive income are as follows:

|                                                           |  | Surplus |   | Deficit |   | Total |  
|---------------------------------------------------------- |  | ------- | - | ------- | - | ----- | -
|                                                           | 
|Amounts not yet reflected in the net periodic benefit cost |  |         |   |         |   |       |  
|                                                           | 
|Transitional asset (obligation)                            |  | 3       |   | (2      | ) | 1     |  
|                                                           | 
|Past service costs                                         |  |        |   | (7      | ) | (7    | )
|                                                           | 
|Net actuarial loss                                         |  | (16     | ) | (39     | ) | (55   | )
|                                                           | 
|Future tax assets                                          |  | 3       |   | 12      |   | 15    |  
|                                                           | 
|Included in accumulated other comprehensive income         |  | (10     | ) | (36     | ) | (46   | )
|                                                           | 

Prior to the adoption of Statement 158 in 2006, the company recognized the amount by which the accumulated benefit obligation exceeded the fair value of
the plan assets as an additional minimum liability, and an intangible asset was recognized equal to the lesser of the additional minimum liability and the unrecognized past service costs, with the
excess of the additional minimum liability over the unrecognized past service costs reported in comprehensive income, net of tax.

The
amounts in accumulated other comprehensive income that are expected to be recognized as components of net periodic benefit expense over the next fiscal year are as follows; net transitional asset
of $1 million, net actuarial losses of $5 million and past service costs of $1 million.

21.10Stock-Based Compensation:Effective January 1, 2006, the Company
adopted FASB Statement 123R for US GAAP purposes. All of the Company's stock-based compensation plans are classified as liability instruments. Prior to adoption of Statement 123R, there was no GAAP
difference and our stock-based compensation was accounted for using the intrinsic value method, whereby obligations were accrued over the vesting period and represented the difference between the
market value of the Company's common shares and the exercise price of the options. Under Statement 123R, obligations for liability-based stock compensation plans are measured at their fair value, and
re-measured at fair value in each reporting date with the change in the obligation charged as stock-based compensation. Upon adoption of Statement 123R in 2006, the Company recorded a loss
of $9 million, net of tax of $4 million as a cumulative effect of change in accounting principle. A description of the Company's stock-based compensation plans and additional information
is available in note 11.

Talisman Energy 2007 Annual Financial Report   35

---



The
Company uses the Black-Scholes option pricing model to estimate the fair value of stock-based compensation plans, with the following assumptions:

|                               |  | 2007 |  | 2006
|------------------------------ |  | ---- |  | ----
|                              
|Expected volatility            |  | 30%  |  | 30% 
|                              
|Risk free interest rate        |  | 3.7% |  | 4.0%
|                              
|Expected term (years)          |  | 5.0  |  | 5.4 
|                              
|Expected forfeiture rate       |  | 7.5% |  | 7.5%
|                              
|Expected annual dividend yield |  | 1.0% |  | 1.0%
|                              

The expected volatility is based on the historical volatility of our common shares over an historical period that matches the expected term of the stock-based
compensation plans. The risk free rate is based on Government of Canada bond yields for terms that match the expected term of the stock-based compensation plans. The expected term is based on the
experienced historical holding period for stock-based compensation instruments. Under liability accounting, the expected life used to determine fair value is reduced as options approach their expected
life, such that options that are still outstanding beyond their expected life have no remaining time value and, accordingly, are recorded at their intrinsic value. The expected dividend rate takes
into account historical dividend payments and our expectation for future payments.

For
the year ended December 31, 2007, the total stock-based compensation expense was $88 million (2006  $88 million;
2005  $633 million). The stock-based compensation expense net of tax was $66 million
(2006  $58 million; 2005  $447 million). At December 31, 2007, there was unrecognized compensation
expense of $60 million (2006  $95 million; 2005  $nil) which is expected to be realized over a weighted
average period of 2.1 years (2006  1.8 years). The total number of options and cash units expected to vest as at December 31, 2007 was
73.5 million, with a weighted average remaining contractual life of 6.9 years, a weighted average exercise price of $13.47 and an aggregate intrinsic value of $362 million.

Newly Issued US Accounting Standards

a)Fair Value Measurements

In
September 2006, the FASB issued Statement 157, Fair Value Measurements. This statement is intended to increase the consistency and comparability of fair value measurements and eliminate
different definitions of fair value under various US standards. It establishes a framework for measuring fair value and expands disclosures about fair value measurements. The adoption of these
recommendations is not expected to have a material impact on Talisman.

b)Accounting for Uncertainty in Income Taxes

Effective
January 1, 2007, Talisman adopted FIN 48 for purposes of accounting for its uncertain tax positions. FIN 48 requires an enterprise to recognize in its financial
statements the best estimate of the impact of a tax position by determining if the available evidence indicates whether it is more likely than not, based solely on technical merits, that the position
will be sustained on audit. On adopting FIN 48, the cumulative effect of the change in accounting principle was not material.

c)Fair Value Option

In
February 2007, the FASB issued Statement 159, The Fair Value Option for Financial Assets and Financial Liabilities, which provides an option to report eligible financial assets and
liabilities at fair value, with changes in fair value recognized in earnings. Upon adoption, the first remeasurement to fair value would be reported as a cumulative-effect adjustment to the opening
balance of retained earnings. This statement will be effective for Talisman's 2008 reporting. Talisman is currently evaluating whether to elect to report certain eligible assets and liabilities at
fair value.

d)Business Combinations

In
December 2007, the FASB issued Statement 141R Business Combinations which requires recognition of the assets acquired, liabilities assumed and non-controlling interest arising in
a business combination at their fair value as of the acquisition date. In addition, the costs of acquisition must be recognized separately from the business combination. This statement will be
effective for Talisman's 2009 reporting.

Summary US Dollar Information

Unless otherwise noted, all tabular amounts in the Consolidated Financial Statements, including accounting principles generally accepted in the US above, are reported in C$. The
following information reflects summary financial information prepared in accordance with US GAAP translated from C$ to US$ at the average exchange rate prevailing in the respective year.

|(millions of US$, except as noted)      |  | 2007   |  | 2006   |  | 2005  
|--------------------------------------- |  | ------ |  | ------ |  | ------
|                                       
|Total revenue1                          |  | 7,403  |  | 6,744  |  | 5,804 
|                                       
|Net income                              |  | 1,840  |  | 1,694  |  | 1,235 
|                                       
|Net income per common share (US$/share) |  | 1.78   |  | 1.55   |  | 1.12  
|                                       
|Average exchange rate (US$/C$)          |  | 0.9348 |  | 0.8820 |  | 0.8258
|                                       

36   Talisman Energy 2007 Annual Financial Report

---



QuickLinks