GRAPHIC

---





Report of Management

Management is responsible for the Consolidated Financial Statements.

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.

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 fulfils 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, as amended.

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

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

The
results of management's assessment were reviewed with the Audit Committee of the Company's Board of Directors. Ernst & Young LLP, the independent registered public accounting firm
that audited the Company's Consolidated Financial Statements included herewith, 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.

|                                      |  |                                                              
|------------------------------------- |  | -------------------------------------------------------------
|GRAPHIC                               |  | GRAPHIC                                                      
|John A. Manzoni                       |  | L. Scott Thomson                                             
|President and Chief Executive Officer |  | Executive Vice-President, Finance and Chief Financial Officer
|February 24, 2011                     |  |                                                              

TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS1

---





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

To the Shareholders ofTalisman Energy Inc.

We
have auditedTalisman Energy Inc.'s internal control over financial reporting as at December 31, 2010, based on criteria established in Internal
Control  Integrated Frameworkissued 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 at December 31, 2010, 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, 2010 and 2009 and the Consolidated Statements of Income, Comprehensive Income (Loss), Changes in Shareholders' Equity and Cash
Flows for each of the years in the three-year period ended December 31, 2010, and our report dated February 24, 2011 expressed an unqualified opinion thereon.

LOGO

Chartered
Accountants

February 24,
2011
Calgary, Canada

2TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS

---





Independent Auditors' Report of
Registered Public Accounting Firm

To the Shareholders ofTalisman Energy Inc.

We
have audited the accompanying Consolidated Financial Statements ofTalisman Energy Inc., which comprise the Consolidated Balance Sheets as at
December 31, 2010 and 2009, and the Consolidated Statements of Income, Comprehensive Income (Loss), Changes in Shareholders' Equity and Cash Flows for each of the years in the
three-year period ended December 31, 2010, and a summary of significant accounting policies and other explanatory information.

Management's Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Canadian generally accepted accounting
principles, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to
fraud or error.

Auditors' Responsibility

Our responsibility is to express an opinion on these consolidated 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 comply with ethical requirements and plan and
perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An
audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors' judgment,
including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal
control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes evaluating the appropriateness of accounting
policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We
believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the Consolidated Financial Statements present fairly, in all material respects, the financial position of Talisman Energy Inc. as at December 31,
2010 and 2009, and its financial performance and cash flows for each of the years in the three-year period ended December 31, 2010 in accordance with Canadian generally accepted
accounting principles.

Other Matter

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Talisman Energy Inc.'s internal control
over financial reporting as at December 31, 2010, based on criteria established inInternal Control  Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 24, 2011 expressed an unqualified opinion on
Talisman Energy Inc.'s internal control over financial reporting.

LOGO

Chartered
Accountants

February 24,
2011
Calgary, Canada

TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS3

---





Consolidated Balance Sheets

|December 31 (millions of C$)                    |                                                 | 2010   |       | 2009                |       | 
|----------------------------------------------- | ----------------------------------------------- | ------ | ----- | ------------------- | ----- | 
|                                               
|                                                |                                                 |        |       | (restated 
note 3) |       | 
|Assets                                          |                                                 |        |       |                     |       | 
|Current                                         |                                                 |        |       |                     |       | 
|                                                |                                                 |       
|                                                | Cash and cash equivalents (note 21)             |        | 1,646 |                     | 1,690 | 
|                                                |                                                 |       
|                                                | Accounts receivable (note 5)                    |        | 1,399 |                     | 1,253 | 
|                                                |                                                 |       
|                                                | Inventories (note 6)                            |        | 143   |                     | 144   | 
|                                                |                                                 |       
|                                                | Prepaid expenses                                |        | 20    |                     | 9     | 
|                                                |                                                 |       
|                                                | Assets of discontinued operations (note 3)      |        |      |                     | 58    | 
|                                               
|                                                |                                                 | 3,208  |       | 3,154               |       | 
|                                               
|Other assets (note 7)                           |                                                 | 861    |       | 170                 |       | 
|                                                |                                                 |       
|Future income taxes (note 19)                   |                                                 | 170    |       | 120                 |       | 
|                                                |                                                 |       
|Goodwill (note 4)                               |                                                 | 1,150  |       | 1,176               |       | 
|                                                |                                                 |       
|Property, plant and equipment, net (note 8)     |                                                 | 18,804 |       | 16,431              |       | 
|                                                |                                                 |       
|Assets of discontinued operations (note 3)      |                                                 |       |       | 2,567               |       | 
|                                               
|                                                |                                                 | 20,985 |       | 20,464              |       | 
|                                               
|Total assets                                    |                                                 | 24,193 |       | 23,618              |       | 
|                                               
|Liabilities                                     |                                                 |        |       |                     |       | 
|Current                                         |                                                 |        |       |                     |       | 
|                                                |                                                 |       
|                                                | Bank indebtedness                               |        | 2     |                     | 36    | 
|                                                |                                                 |       
|                                                | Accounts payable and accrued liabilities        |        | 2,532 |                     | 2,121 | 
|                                                |                                                 |       
|                                                | Income and other taxes payable                  |        | 510   |                     | 357   | 
|                                                |                                                 |       
|                                                | Current portion of long-term debt (note 10)     |        | 357   |                     | 10    | 
|                                                |                                                 |       
|                                                | Future income taxes (note 19)                   |        |      |                     | 68    | 
|                                                |                                                 |       
|                                                | Liabilities of discontinued operations (note 3) |        |      |                     | 9     | 
|                                               
|                                                |                                                 | 3,401  |       | 2,601               |       | 
|                                               
|Deferred credits                                |                                                 | 51     |       | 59                  |       | 
|                                                |                                                 |       
|Asset retirement obligations (note 9)           |                                                 | 2,252  |       | 2,116               |       | 
|                                                |                                                 |       
|Other long-term obligations (note 11)           |                                                 | 212    |       | 168                 |       | 
|                                                |                                                 |       
|Long-term debt (note 10)                        |                                                 | 3,824  |       | 3,770               |       | 
|                                                |                                                 |       
|Future income taxes (note 19)                   |                                                 | 3,974  |       | 3,599               |       | 
|                                                |                                                 |       
|Liabilities of discontinued operations (note 3) |                                                 |       |       | 194                 |       | 
|                                               
|                                                |                                                 | 10,313 |       | 9,906               |       | 
|                                               
|Contingencies and commitments (note 16)         |                                                 |        |       |                     |       | 
|Shareholders' equity                            |                                                 |        |       |                     |       | 
|Common shares, no par value (note 13)           |                                                 |        |       |                     |       | 
|                                                | Authorized: unlimited                           |        |       |                     |       | 
|                                                | Issued and outstanding:                         |        |       |                     |       | 
|                                                |                                                 |       
|                                                | 2010  1,019,290,939 (2009  1,014,876,564)     |        | 2,457 |                     | 2,374 | 
|                                                |                                                 |       
|Contributed surplus                             |                                                 | 132    |       | 153                 |       | 
|                                                |                                                 |       
|Retained earnings                               |                                                 | 9,568  |       | 9,174               |       | 
|                                                |                                                 |       
|Accumulated other comprehensive loss (note 14)  |                                                 | (1,678 | )     | (590                | )     | 
|                                               
|                                                |                                                 | 10,479 |       | 11,111              |       | 
|                                               
|Total liabilities and shareholders' equity      |                                                 | 24,193 |       | 23,618              |       | 
|                                               

See accompanying notes.

On
behalf of the Board:

|LOGO                  |  | LOGO           | 
|--------------------- |  | -------------- | 
|Charles R. Williamson |  | John D. Watson | 
|Chairman of the Board |  | Director       | 

4TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS

---





Consolidated Statements of Income

|Years ended December 31 (millions of C$)                         |                                                                 | 2010  |       | 2009                |       | 2008                |        |  
|---------------------------------------------------------------- | --------------------------------------------------------------- | ----- | ----- | ------------------- | ----- | ------------------- | ------ | -
|                                                                
|                                                                 |                                                                 |       |       | (restated 
note 3) |       | (restated 
note 3) |        |  
|Revenue                                                          |                                                                 |       |       |                     |       |                     |        |  
|                                                                 |                                                                 |      
|                                                                 | Gross sales                                                     |       | 8,076 |                     | 7,011 |                     | 10,269 |  
|                                                                 |                                                                 |      
|                                                                 | Hedging loss                                                    |       |      |                     |      |                     | (28    | )
|                                                                
|                                                                 | Gross sales, net of hedging                                     |       | 8,076 |                     | 7,011 |                     | 10,241 |  
|                                                                 |                                                                 |      
|                                                                 | Less royalties                                                  |       | 1,274 |                     | 1,065 |                     | 1,799  |  
|                                                                
|                                                                 | Net sales                                                       |       | 6,802 |                     | 5,946 |                     | 8,442  |  
|                                                                 |                                                                 |      
|                                                                 | Other (note 17)                                                 |       | 110   |                     | 115   |                     | 112    |  
|                                                                
|Total revenue                                                    |                                                                 | 6,912 |       | 6,061               |       | 8,554               |        |  
|                                                                
|Expenses                                                         |                                                                 |       |       |                     |       |                     |        |  
|                                                                 |                                                                 |      
|                                                                 | Operating                                                       |       | 1,867 |                     | 1,861 |                     | 1,822  |  
|                                                                 |                                                                 |      
|                                                                 | Transportation                                                  |       | 227   |                     | 222   |                     | 207    |  
|                                                                 |                                                                 |      
|                                                                 | General and administrative                                      |       | 392   |                     | 334   |                     | 294    |  
|                                                                 |                                                                 |      
|                                                                 | Depreciation, depletion and amortization                        |       | 2,164 |                     | 2,360 |                     | 2,606  |  
|                                                                 |                                                                 |      
|                                                                 | Dry hole                                                        |       | 123   |                     | 539   |                     | 442    |  
|                                                                 |                                                                 |      
|                                                                 | Exploration                                                     |       | 384   |                     | 301   |                     | 429    |  
|                                                                 |                                                                 |      
|                                                                 | Interest on long-term debt                                      |       | 163   |                     | 192   |                     | 168    |  
|                                                                 |                                                                 |      
|                                                                 | Stock-based compensation (recovery) (note 13)                   |       | 201   |                     | 290   |                     | (73    | )
|                                                                 |                                                                 |      
|                                                                 | (Gain) loss on held-for-trading financial instruments (note 15) |       | (102  | )                   | 412   |                     | (1,664 | )
|                                                                 |                                                                 |      
|                                                                 | Other, net (note 18)                                            |       | 194   |                     | 47    |                     | (179   | )
|                                                                
|Total expenses                                                   |                                                                 | 5,613 |       | 6,558               |       | 4,052               |        |  
|                                                                
|Income (loss) from continuing operations before taxes            |                                                                 | 1,299 |       | (497                | )     | 4,502               |        |  
|                                                                 |                                                                 |      
|Taxes (note 19)                                                  |                                                                 |       |       |                     |       |                     |        |  
|                                                                 |                                                                 |      
|                                                                 | Current income tax                                              |       | 1,032 |                     | 731   |                     | 1,282  |  
|                                                                 |                                                                 |      
|                                                                 | Future income tax (recovery)                                    |       | (272  | )                   | (678  | )                   | 165    |  
|                                                                 |                                                                 |      
|                                                                 | Petroleum revenue tax                                           |       | 131   |                     | 108   |                     | 176    |  
|                                                                
|                                                                 |                                                                 | 891   |       | 161                 |       | 1,623               |        |  
|                                                                
|Income (loss) from continuing operations                         |                                                                 | 408   |       | (658                | )     | 2,879               |        |  
|                                                                
|Income from discontinued operations (note 3)                     |                                                                 | 240   |       | 1,095               |       | 640                 |        |  
|                                                                
|Net income                                                       |                                                                 | 648   |       | 437                 |       | 3,519               |        |  
|                                                                
|Per common share (C$):                                           |                                                                 |       |       |                     |       |                     |        |  
|                                                                 |                                                                 |      
|                                                                 | Income (loss) from continuing operations                        |       | 0.40  |                     | (0.65 | )                   | 2.83   |  
|                                                                 |                                                                 |      
|                                                                 | Diluted income (loss) from continuing operations                |       | 0.39  |                     | (0.65 | )                   | 2.78   |  
|                                                                 |                                                                 |      
|                                                                 | Income from discontinued operations                             |       | 0.24  |                     | 1.08  |                     | 0.63   |  
|                                                                 |                                                                 |      
|                                                                 | Diluted income from discontinued operations                     |       | 0.23  |                     | 1.08  |                     | 0.62   |  
|                                                                 |                                                                 |      
|                                                                 | Net income                                                      |       | 0.64  |                     | 0.43  |                     | 3.46   |  
|                                                                 |                                                                 |      
|                                                                 | Diluted net income                                              |       | 0.62  |                     | 0.43  |                     | 3.40   |  
|                                                                
|Average number of common shares outstanding (millions) (note 22) |                                                                 | 1,018 |       | 1,015               |       | 1,017               |        |  
|                                                                 |                                                                 |      
|Diluted number of common shares outstanding (millions) (note 22) |                                                                 | 1,037 |       | 1,015               |       | 1,034               |        |  
|                                                                

See accompanying notes.

TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS5

---





Consolidated Statements of Comprehensive Income (Loss)

|Years ended December 31 (millions of C$) |                                                                      | 2010                                               |      | 2009 |      | 2008  |      |    
|---------------------------------------- | -------------------------------------------------------------------- | -------------------------------------------------- | ---- | ---- | ---- | ----- | ---- | ---
|                                        
|Net income                               |                                                                      | 648                                                |      | 437  |      | 3,519 |      |    
|                                         |                                                                      |                                                   
|Other comprehensive loss:                |                                                                      |                                                    |      |      |      |       |      |    
|                                         |                                                                      |                                                   
|                                         | Foreign currency translation adjustments1                            |                                                    | (625 | )    | (317 | )     | (100 | )  
|                                         |                                                                      |                                                   
|                                         | Transfer of accumulated foreign currency gain to net income (note 3) |                                                    | (465 | )    |     |       |     |    
|                                         |                                                                      |                                                   
|                                         | Gains and losses on derivatives designated as cash flow hedges:      |                                                    |      |      |      |       |      |    
|                                         |                                                                      |                                                   
|                                         |                                                                      | Unrealized gains (losses) arising during the year2 |      | 14   |      | 39    |      | (50
|                                         |                                                                      |                                                   
|                                         |                                                                      | Realized losses (gains) recognized in net income3  |      | (12  | )    | (40   | )    | 67 
|                                        
|                                         |                                                                      | 2                                                  |      | (1   | )    | 17    |      |    
|                                        
|Other comprehensive loss                 |                                                                      | (1,088                                             | )    | (318 | )    | (83   | )    |    
|                                        
|Comprehensive income (loss)              |                                                                      | (440                                               | )    | 119  |      | 3,436 |      |    
|                                        

See accompanying notes.

Consolidated Statements of Changes in
Shareholders' Equity

|Years ended December 31 (millions of C$)                   |  | 2010   |   | 2009  |   | 2008  |   | 
|---------------------------------------------------------- |  | ------ | - | ----- | - | ----- | - | 
|                                                          
|Common shares                                              |  |        |   |       |   |       |   | 
|                                                           |  |       
|Balance at beginning of year                               |  | 2,374  |   | 2,372 |   | 2,437 |   | 
|                                                           |  |       
|Issued on exercise of stock options                        |  | 97     |   | 2     |   | 3     |   | 
|                                                           |  |       
|Shares purchased and held in trust for PSU plans (note 13) |  | (82    | ) |      |   | (68   | ) | 
|                                                           |  |       
|Shares released from trust for 2008 PSU plan (note 13)     |  | 68     |   |      |   |      |   | 
|                                                          
|Balance at end of year                                     |  | 2,457  |   | 2,374 |   | 2,372 |   | 
|                                                          
|Contributed surplus                                        |  |        |   |       |   |       |   | 
|                                                           |  |       
|Balance at beginning of year                               |  | 153    |   | 84    |   | 64    |   | 
|                                                           |  |       
|Stock-based compensation (recovery) (note 13)              |  | (21    | ) | 69    |   | 20    |   | 
|                                                          
|Balance at end of year                                     |  | 132    |   | 153   |   | 84    |   | 
|                                                          
|Retained earnings                                          |  |        |   |       |   |       |   | 
|                                                           |  |       
|Balance at beginning of year                               |  | 9,174  |   | 8,966 |   | 5,651 |   | 
|                                                           |  |       
|Net income                                                 |  | 648    |   | 437   |   | 3,519 |   | 
|                                                           |  |       
|Common share dividends                                     |  | (254   | ) | (229  | ) | (204  | ) | 
|                                                          
|Balance at end of year                                     |  | 9,568  |   | 9,174 |   | 8,966 |   | 
|                                                          
|Accumulated other comprehensive loss                       |  |        |   |       |   |       |   | 
|                                                           |  |       
|Balance at beginning of year                               |  | (590   | ) | (272  | ) | (189  | ) | 
|                                                           |  |       
|Other comprehensive loss                                   |  | (1,088 | ) | (318  | ) | (83   | ) | 
|                                                          
|Balance at end of year                                     |  | (1,678 | ) | (590  | ) | (272  | ) | 
|                                                          

See accompanying notes.

6TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS

---





Consolidated Statements of Cash Flows

|Years ended December 31 (millions of C$)                              |                                    | 2010   |        | 2009                    |        | 2008                    |        |  
|--------------------------------------------------------------------- | ---------------------------------- | ------ | ------ | ----------------------- | ------ | ----------------------- | ------ | -
|                                                                     
|                                                                      |                                    |        |        | (restated 
see note 3) |        | (restated 
see note 3) |        |  
|Operating                                                             |                                    |        |        |                         |        |                         |        |  
|                                                                      |                                    |       
|Income (loss) from continuing operations                              |                                    | 408    |        | (658                    | )      | 2,879                   |        |  
|                                                                      |                                    |       
|Items not involving cash (note 20)                                    |                                    | 2,076  |        | 3,933                   |        | 1,823                   |        |  
|                                                                      |                                    |       
|Exploration                                                           |                                    | 384    |        | 301                     |        | 429                     |        |  
|                                                                     
|                                                                      |                                    | 2,868  |        | 3,576                   |        | 5,131                   |        |  
|                                                                      |                                    |       
|Changes in non-cash working capital (note 20)                         |                                    | 402    |        | (362                    | )      | (9                      | )      |  
|                                                                     
|Cash provided by continuing operations                                |                                    | 3,270  |        | 3,214                   |        | 5,122                   |        |  
|                                                                      |                                    |       
|Cash provided by discontinued operations                              |                                    | 190    |        | 385                     |        | 1,032                   |        |  
|                                                                     
|Cash provided by operating activities                                 |                                    | 3,460  |        | 3,599                   |        | 6,154                   |        |  
|                                                                     
|Investing                                                             |                                    |        |        |                         |        |                         |        |  
|Capital expenditures                                                  |                                    |        |        |                         |        |                         |        |  
|                                                                      |                                    |       
|                                                                      | Exploration, development and other |        | (4,034 | )                       | (3,729 | )                       | (4,460 | )
|                                                                      |                                    |       
|                                                                      | Corporate acquisitions (note 4)    |        | (189   | )                       |       |                         |       |  
|                                                                      |                                    |       
|                                                                      | Property acquisitions (note 4)     |        | (1,364 | )                       | (310   | )                       | (436   | )
|                                                                      |                                    |       
|Proceeds of resource property dispositions                            |                                    | 308    |        | 200                     |        | 47                      |        |  
|                                                                      |                                    |       
|Acquisition deposits (note 4)                                         |                                    | (656   | )      |                        |        |                        |        |  
|                                                                      |                                    |       
|Changes in non-cash working capital                                   |                                    | 265    |        | (18                     | )      | 244                     |        |  
|                                                                      |                                    |       
|Discontinued operations, net of capital expenditures                  |                                    | 1,936  |        | 1,990                   |        | (369                    | )      |  
|                                                                     
|Cash used in investing activities                                     |                                    | (3,734 | )      | (1,867                  | )      | (4,974                  | )      |  
|                                                                     
|Financing                                                             |                                    |        |        |                         |        |                         |        |  
|                                                                      |                                    |       
|Long-term debt repaid                                                 |                                    | (11    | )      | (970                    | )      | (3,869                  | )      |  
|                                                                      |                                    |       
|Long-term debt issued (note 10)                                       |                                    | 600    |        | 1,261                   |        | 2,425                   |        |  
|                                                                      |                                    |       
|Common shares issued (note 13)                                        |                                    | 57     |        | 2                       |        | 1                       |        |  
|                                                                      |                                    |       
|Common shares purchased                                               |                                    | (78    | )      | (1                      | )      | (68                     | )      |  
|                                                                      |                                    |       
|Common share dividends                                                |                                    | (254   | )      | (229                    | )      | (204                    | )      |  
|                                                                      |                                    |       
|Deferred credits and other                                            |                                    | (3     | )      | (10                     | )      | 8                       |        |  
|                                                                      |                                    |       
|Changes in non-cash working capital                                   |                                    | (2     | )      | 4                       |        | (14                     | )      |  
|                                                                     
|Cash provided by (used in) financing activities                       |                                    | 309    |        | 57                      |        | (1,721                  | )      |  
|                                                                     
|Effect of translation on foreign currency cash and cash equivalents   |                                    | (59    | )      | (133                    | )      | 32                      |        |  
|                                                                     
|Net increase (decrease) in cash and cash equivalents                  |                                    | (24    | )      | 1,656                   |        | (509                    | )      |  
|                                                                      |                                    |       
|Cash and cash equivalents net of bank indebtedness, beginning of year |                                    | 1,668  |        | 12                      |        | 521                     |        |  
|                                                                     
|Cash and cash equivalents net of bank indebtedness, end of year       |                                    | 1,644  |        | 1,668                   |        | 12                      |        |  
|                                                                     
|Cash and cash equivalents (note 21)                                   |                                    | 1,646  |        | 1,690                   |        | 91                      |        |  
|                                                                      |                                    |       
|Cash and cash equivalents reclassified to discontinued operations     |                                    |       |        | 14                      |        | 2                       |        |  
|                                                                      |                                    |       
|Bank indebtedness                                                     |                                    | (2     | )      | (36                     | )      | (81                     | )      |  
|                                                                     
|Cash and cash equivalents net of bank indebtedness, end of year       |                                    | 1,644  |        | 1,668                   |        | 12                      |        |  
|                                                                     

See accompanying notes.

TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS7

---





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 of America (US)
is presented in note 25.

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

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) Accounts Receivable

Accounts receivable are recorded based on the Company's revenue recognition policy. The allowance for doubtful accounts is management's best estimate
of accounts receivable balances that may not be collectible, and is reviewed quarterly.

c) Inventories

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

d) Property, Plant and Equipment (PP&E)

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 which 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 when events occur that indicate the carrying value of properties may not be recoverable from future cash flows. 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.

Repairs
and maintenance costs are charged as an expense when incurred.

Well
injection costs incurred to stimulate depleted wells are charged as an expense when incurred. Certain stimulation costs which increase production and reserves, extending beyond one year, are
deferred in PP&E as development costs, and depleted using the unit of production method.

e) 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. Depletion rates
are updated annually unless there is a material change in circumstances, in which case they would be updated more frequently. Material changes in year-end reserves are reflected in the
fourth quarter depletion rate.

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

8TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS

---



depletion
until the reserves are developed. To the extent a property has nil proved reserves, development costs are charged immediately as DD&A expense.

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.

Costs
associated with significant development projects are not depleted until the asset is substantially complete and ready for its intended use. Unproved land acquisition costs that are individually
material are not amortized, but are assessed for impairment and transferred to depletable costs as proved reserves are recognized. Unproved land acquisition costs that are individually immaterial are
amortized on a straight-line basis over the average lease term. 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 United Kingdom (UK) and Scandinavia are depreciated using the unit of production method based on the
related fields.

See
the discussion concerning 'Measurement Uncertainty and Use of Estimates' in note 1(u).

f) 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. Any difference between the recorded ARO and the actual retirement costs incurred is recorded as a gain or
loss in the settlement period.

g) 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.

h) 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.

i) Petroleum Revenue Tax (PRT)

UK 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.

j) Foreign Currency Translation

Talisman's functional currency is the US$.

The
Company's self-sustaining operations in the UK (and, prior to January 1, 2010 in Canada and Norway) were translated from UK£, C$ and NOK respectively into US$ using
the current rate method whereby assets and liabilities were translated at year-end exchange rates, while revenues and expenses were converted using average rates for the period. Gains and
losses on

TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS9

---



translation
to US$ relating to self-sustaining operations were deferred and included in a separate component of shareholders' equity described as accumulated other comprehensive loss. As a
result of a reorganization of the Company's operations, changes in the composition of revenue and costs and changes in intercompany loan arrangements, management has determined that the functional
currency of the Company's UK, Canada and Norway operations is more closely linked to the US$. Accordingly, effective January 1, 2010 for Canada and Norway and January 1, 2011 for the UK,
these operations have been accounted for as US$ functional currency entities. As a result, foreign currency translation adjustments remain in accumulated other comprehensive loss until Talisman
reduces its net investment in those subsidiaries. Following the change in the functional currency of the UK operations, the debt denominated in UK£ will no longer be designated as a
hedge of Talisman's net investment in the UK and, accordingly, future foreign exchange gains and losses will be recorded in the Consolidated Statement of Income.

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 rate for the year. 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$ reporting currency are included in accumulated other comprehensive loss. Effective from the first quarter of 2011, the
Company will be reporting its financial results in US$.

k) Employee Benefit Plans

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 employee retirement ages. 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 over 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.

l) 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 assets and liabilities are recognized
in the Consolidated Balance Sheet when the Company becomes a party to the contractual requirements of the instrument. 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 loss, net of tax.

10TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS

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

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, 2010 are disclosed in note 15.

Canadian
Institute of Chartered Accountants (CICA) handbook section 3855Financial Instruments  Recognition and
Measurementrequires 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 ended 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 separate recognition measurement provisions of this standard.

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 loss and recognized in net income concurrently with the anticipated transaction. If it is probable that the transaction designated as being hedged 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
loss, net of tax, with any ineffective portion being recognized immediately in net income. Gains and losses are recovered from other comprehensive loss 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 loss. These gains and
losses are recovered from other comprehensive loss and recognized in net income if the net investment is reduced.

The
Company enters into physical commodity contracts in the normal course of business, including contracts with fixed terms. The natural gas sales contracts outstanding at December 31, 2010 are
disclosed in note 16. The Company's production is

TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS11

---



expected
to be sufficient to deliver all required volumes under these contracts. No amounts are recognized in the Consolidated Financial Statements related to these contracts until such time as the
associated volumes are delivered.

m) Comprehensive Income (Loss) and Equity

The Consolidated Statements of Comprehensive Income (Loss) reflect net income and the changes in accumulated other comprehensive loss in the year.
Changes in accumulated
other comprehensive loss are composed of changes in the fair value of financial instruments designated as hedges, to the extent they are effective, gains and losses recovered from other comprehensive
loss and recognized in net income, foreign currency translation gains or losses arising from the translation of the Company's self-sustaining foreign operations or reductions in the net
investments therein and translation from the Company's functional currency to its presentation currency.

n) 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 and those reported for income tax purposes. 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. The Company recognizes 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.
For those tax positions meeting the more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is greater than 50%
likely of being realized on settlement with the taxing authority.

To
the extent that interest and penalties are assessed by taxing authorities on any underpayment of income tax, these amounts have been accrued and are classified as a component of income taxes on the
Consolidated Statements of Income.

Certain
of the Company's contractual arrangements in foreign jurisdictions stipulate that income taxes 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.

o) 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 and natural gas
sales and records a receivable from a joint interest participant if a participant sells more than its proportionate share of crude oil or natural gas 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 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.

A
significant portion of the Company's operations outside North America, the UK and Scandinavia are governed by Production Sharing Contracts (PSCs). Under PSCs, revenues are derived from cost recovery
oil and gas and profit oil and gas. Generally, cost recovery oil and gas allows the Company to recover its capital and production costs and, as appropriate, the costs carried by the Company on behalf
of national oil companies from production. Profit oil is allocated to the host government and contract parties in accordance with their respective equity interests.

Gross
sales as reported represents the Company's share of revenues from the sale of crude oil, natural gas and liquids and is presented before royalty payments to governments and other mineral
interest owners.

12TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS

---



All
taxes collected from customers that are remitted to governments are excluded from revenues.

p) Leases

Leases that transfer substantially all of the benefits and risks of ownership to Talisman are accounted for as capital leases and recorded as PP&E,
together with an offsetting liability. All other leases are accounted for as operating leases and the lease costs are expensed as incurred.

q) Stock-Based Compensation

During 2010, Talisman had stock option plans, cash unit plans, performance share unit (PSU) plans, a deferred share unit plan and a restricted share
unit plan, which are described in note 13. The PSU plans must be settled in shares. The cash unit, deferred share unit and restricted share unit plans must be settled in cash. The stock option
plans may be settled in cash at the option of the holder and, consequently, they 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, which are included in general and administrative expenses. For the PSU plans, the Company determines the fair value of the units on the date of grant using the share
price on that date and recognizes the fair value of the units over the vesting period as compensation expense and contributed surplus. Net income is adjusted by reducing the compensation expense in
periods containing forfeitures of unvested options and units, and by changes in the degree to which the predetermined performance measures are achieved.

r) Goodwill

Goodwill represents the excess purchase price over the fair value of identifiable assets and liabilities acquired in business combinations. Goodwill
is not amortized but is subject to impairment reviews in the fourth quarter of each year, or more frequently as economic events dictate, based on the fair value of the reporting units. The impairment
test requires that goodwill be allocated to reporting units. Talisman has determined its reporting units by aggregating components having similar economic characteristics and/or which are in similar
geographic locations. These reporting units correspond with the segments described in note 24. 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, 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.

s) 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 to acquire common shares.

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

t) 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.

TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS13

---



u) Measurement Uncertainty and Use of Estimates

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 year. 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 assumptions impact the fair value of the existing ARO liability, a corresponding
adjustment is made to the oil and gas assets balance.

The
values of pension assets and obligations and the amount of the net benefit plan expense charged to net income depend on 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 and third party inputs. These estimates are subject to change with fluctuations in commodity prices, interest rates, foreign
currency exchange rates and estimates of non-performance risk.

v) Comparative Information

Certain comparative information provided in the notes to the Consolidated Financial Statements has been reclassified to conform to the presentation
adopted in the current year.

2. Changes in Accounting Policies

a) Extractive Activities  Oil and
Gas

In the fourth quarter of 2009, Talisman adopted prospectively the US standardExtractive
Activities  Oil and Gaswhereby yearly average commodity prices are used for purposes of calculating reserves. Previously, reserves had
been calculated by reference to year-end commodity prices. Since, 2009 yearly average commodity prices were higher than 2008 year-end prices. Talisman recorded an
upward price revision of 77.1 million barrels of oil equivalent (mmboe) to its reserves in the fourth quarter of 2009 and revised its DD&A rates accordingly.

b) Goodwill and Intangible Assets

Effective January 1, 2009, Talisman adopted the CICA recommendations relating to the recognition, measurement and disclosure of Goodwill and Intangible Assets(section 3064).
The adoption of these recommendations had no impact on Talisman.

c) Financial Instruments Presentation and Disclosure

In 2009, the CICA revised section 3862Financial
Instruments  Disclosureto include a hierarchy concept in measuring financial instruments, a requirement to provide disclosure concerning
the fair value measurements of assets and liabilities for each hierarchy level and amendments to the liquidity disclosure requirements. Since Talisman previously used a hierarchy concept in measuring
financial instruments and provided such disclosure in its Consolidated Financial Statements, this amendment had no impact on Talisman.

14TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS

---





Effective January 1, 2008, Talisman adopted the CICA recommendations relating toFinancial
Instruments  Disclosure(section 3862) andFinancial
Instruments  Presentation(section 3863). The disclosure required by section 3862 concerning the nature and extent of the
risks associated with financial instruments, and how those risks are managed, is presented in note 15. As permitted, comparative information for the disclosure required by section 3862
has not been provided. The adoption of section 3863 had no impact on Talisman, since the new standard carried forward the existing presentation requirements.

d) Credit Risk and the Fair Value of Financial Assets and Liabilities

Effective December 31, 2008, Talisman adopted retrospectively the recommendations of Emerging Issues Committee abstract 173 relating to
the fair value of financial assets and liabilities, which was issued in January 2009, without restatement of prior periods. The abstract requires that an entity's own credit risk and the credit
risk of the counterparty are taken into account in determining the fair value of financial assets and liabilities, including derivative instruments, for presentation and disclosure purposes. The
adoption of the abstract did not have a material impact on Talisman.

e) Inventories

Effective January 1, 2008, Talisman adopted retrospectively the CICA recommendations relating to Inventories(section 3031). The standard provides additional guidance
concerning measurement, classification and disclosure and allows the
reversal of writedowns to net realizable value when there is a change in the circumstances giving rise to the impairment. On adopting these recommendations, the Company reclassified inventory that is
expected to be capitalized when consumed from other assets to PP&E.

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 income from discontinued operations on the Consolidated Statements of Income. Comparative period balances have
been restated.

Income
from discontinued operations reported on the Consolidated Statements of Income is composed of the following:

|                                                        |                                          | Years ended December 31
|------------------------------------------------------- | ---------------------------------------- | -----------------------
|                                                        |                                          | North America          
|                                                        |                                          | 2010                   
|                                                       
|Revenue                                                 |                                          |                        
|                                                        |                                          |                        
|                                                        | Gross sales                              |                        
|                                                        |                                          |                        
|                                                        | Royalties                                |                        
|                                                       
|Revenue, net of royalties                               |                                          | 270                    
|                                                        |                                          |                        
|Expenses                                                |                                          |                        
|                                                        |                                          |                        
|                                                        | Operating, marketing and general         |                        
|                                                        |                                          |                        
|                                                        | Interest                                 |                        
|                                                        |                                          |                        
|                                                        | Dry hole                                 |                        
|                                                        |                                          |                        
|                                                        | Depreciation, depletion and amortization |                        
|                                                       
|Income (loss) from discontinued operations before taxes |                                          | 98                     
|                                                        |                                          |                        
|                                                        | Taxes                                    |                        
|                                                        |                                          |                        
|                                                        | Gain (loss) on disposition, net of tax   |                        
|                                                       
|Income (loss) from discontinued operations              |                                          | 246                    
|                                                       

TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS15

---



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

|                   |                                    | At December 31
|------------------ | ---------------------------------- | --------------
|                   |                                    | North America 
|                   |                                    | 2010          
|                  
|Assets             |                                    |               
|                   |                                    |               
|                   | Current assets                     |               
|                   |                                    |               
|                   | Property, plant and equipment, net |               
|                   |                                    |               
|                   | Goodwill                           |               
|                  
|Total assets1      |                                    |              
|                  
|Liabilities        |                                    |               
|                   |                                    |               
|                   | Current liabilities                |               
|                   |                                    |               
|                   | Asset retirement obligations       |               
|                   |                                    |               
|                   | Future income taxes                |               
|                  
|Total liabilities1 |                                    |              
|                  

North America

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

In
2009, Talisman completed the sale of oil and gas producing assets in Western Canada for proceeds of $1.2 billion, resulting in a gain of $456 million, net of tax of
$110 million. Talisman also completed the sale of certain of its midstream assets in Western Canada for proceeds of $297 million, resulting in a gain of $55 million, net of tax of
$19 million.

In
2008, Talisman completed the sale of gas producing assets in Western Canada for proceeds of $247 million, resulting in a gain of $119 million, net of tax of $40 million.

UK

In 2009, Talisman completed the sale of its assets in the Netherlands for proceeds of $596 million, resulting in a gain of
$471 million, net of tax of $nil. Talisman also received $17 million of contingent consideration relating to an agreement entered into in 2007 to sell assets in the UK, resulting in a
gain of $11 million, net of tax of $6 million.

In
2008, Talisman completed the sale of oil and gas properties resulting in an after tax writedown of $32 million and recorded a positive after tax closing adjustment of $36 million in
respect of oil and gas properties sold in 2007 and 2006.

Scandinavia

In 2009, Talisman completed the sale of a 10% share in the Yme field offshore development and three exploration licences for proceeds of
$113 million, resulting in a gain of $6 million, net of tax of $nil. After tax writedowns of $8 million had previously been recorded in each of 2008 and 2009.

In
2008, Talisman completed the sale of assets in Denmark for proceeds of $95 million, resulting in an after tax writedown of these assets of $46 million.

Other

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

16TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS

---



In
2009, Talisman completed the sale of assets in Trinidad and Tobago for proceeds of $278 million, resulting in a gain of $93 million, net of tax of $nil.

4. Acquisitions

Corporate Acquisitions

Jambi Merang

In 2010, Talisman acquired 100% of the share capital of Hess (Indonesia-Jambi Merang) Limited, a company which owns a 25% interest in the Jambi Merang Production Sharing
Contract, for cash consideration of $189 million. This acquisition, which facilitates Talisman's strategy to increase its presence in Indonesia, was accounted for using the purchase method and
the final allocation of the purchase price to the assets and liabilities acquired is as follows:

|Fair value of net assets acquired |  | Southeast Asia |   | 
|--------------------------------- |  | -------------- | - | 
|                                 
|Property, plant and equipment     |  | 187            |   | 
|                                  |  |               
|Goodwill                          |  | 45             |   | 
|                                  |  |               
|Working capital                   |  | 2              |   | 
|                                  |  |               
|Future income tax                 |  | (45            | ) | 
|                                 
|                                  |  | 189            |   | 
|                                 

BP Exploration Company (Colombia) Limited

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

Property Acquisitions

Eagle Ford

In May 2010, Talisman completed the acquisition of 37,000 net acres of land in the Eagle Ford shale play in south Texas for $364 million in cash. In a
subsequent transaction which closed in December 2010, Talisman and a subsidiary of Statoil entered into an agreement to acquire an additional 97,000 net acres of liquids-rich
properties in the Eagle Ford shale play as well as an equity interest in a gas processing facility for cash consideration to Talisman of $684 million. The preliminary allocation of the purchase
price to the assets and liabilities acquired by Talisman is as follows:

|Fair value of net assets acquired |  | North America | 
|--------------------------------- |  | ------------- | 
|                                 
|Property, plant and equipment     |  | 1,035         | 
|                                  |  |              
|Investments                       |  | 13            | 
|                                 
|                                  |  | 1,048         | 
|                                 

In a related transaction Statoil purchased a 50% working interest in Talisman's existing 37,000 net acres in the Eagle Ford for $186 million,
which was recorded as a disposition at cost. Talisman and Statoil have created a joint venture across the Eagle Ford shale play in which Talisman has a 50% interest, and with Talisman as the initial
operator.

As
a result of these transactions, Talisman holds approximately 78,000 net acres, predominantly in the liquids-rich area of the play. This transaction is consistent with Talisman's
intent to become a leading, returns-focused shale producer in North America.

TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS17

---



Norwegian exploration licences

In 2010, Talisman acquired a 35% working interest in the PL378 Grosbeak discovery and a 20% interest in the PL375 Beta discovery for cash consideration of
$196 million. The preliminary allocation of the purchase price to the assets and liabilities acquired is as follows:

|Fair value of net assets acquired |  | Scandinavia |   | 
|--------------------------------- |  | ----------- | - | 
|                                 
|Property, plant and equipment     |  | 767         |   | 
|                                  |  |            
|Future income tax                 |  | (571        | ) | 
|                                 
|                                  |  | 196         |   | 
|                                 

Papua New Guinea (PNG)

In 2009, Talisman completed a number of strategic acquisitions in order to expand its exploration position in PNG, including:

The
substance of these transactions was the acquisition of property.

The
final allocation of the purchase price to the assets and liabilities acquired was as follows:

|Fair value of net assets acquired |  | Southeast Asia |   | 
|--------------------------------- |  | -------------- | - | 
|                                 
|Property, plant and equipment     |  | 340            |   | 
|                                  |  |               
|Working capital                   |  | (6             | ) | 
|                                  |  |               
|Future income tax                 |  | (81            | ) | 
|                                 
|                                  |  | 253            |   | 
|                                 

RSX Energy Inc. (RSX)

In 2008, Talisman acquired all of the outstanding shares of RSX, a public company with natural gas assets located in the Outer Foothills and Peace River areas of northern
Alberta. The shares were acquired for cash consideration of $95 million and the assumption of $6 million of long-term debt. The Company acquired RSX in order to expand its
undeveloped land base in the Hinton area of Alberta. The substance of the transaction was the acquisition of property.

The
transaction was accounted for using the purchase method and the final allocation of the purchase price to the assets and liabilities acquired was as follows:

|Fair value of net assets acquired |  | North America |   | 
|--------------------------------- |  | ------------- | - | 
|                                 
|Property, plant and equipment     |  | 131           |   | 
|                                  |  |              
|Asset retirement obligations      |  | (2            | ) | 
|                                  |  |              
|Working capital                   |  | (7            | ) | 
|                                  |  |              
|Future income tax                 |  | (21           | ) | 
|                                 
|                                  |  | 101           |   | 
|                                 

The results of RSX are included on the Consolidated Statements of Income with effect from the date of acquisition in the first quarter of 2008.

18TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS

---



Kurdistan region of northern Iraq

In 2009, Talisman acquired a 55% working interest in Block K9 in the Kurdistan region of northern Iraq for $29 million, plus additional payments which are
dependent upon the level of estimated reserves. The Company acquired this working interest to increase its exposure to new plays and reservoirs in the Kurdistan region of northern Iraq.

In
2008, Talisman acquired a 40% working interest in Block K44 in the Kurdistan region of northern Iraq for a total cost of $252 million, plus a three-well commitment. The
Company also entered into a seismic services agreement at a cost of $20 million related to Block K39 for a period of two years. In 2010, Talisman agreed to enter into a PSC as operator
of Block K39.

The
final allocation of the purchase price to the assets and liabilities attributable to Talisman's interests in Block K39 and Block K44 was as follows:

|Fair value of net assets acquired |  | Other |   | 
|--------------------------------- |  | ----- | - | 
|                                 
|Property, plant and equipment     |  | 429   |   | 
|                                  |  |      
|Future income tax                 |  | (157  | ) | 
|                                 
|                                  |  | 272   |   | 
|                                 

Other acquisitions

In 2010, Talisman completed minor oil and gas property acquisitions in North America, Southeast Asia and the rest of the world for $120 million in cash.

In
2009, Talisman completed minor oil and gas property acquisitions in North America for $28 million in cash.

In
2008, Talisman completed minor oil and gas property acquisitions in North America for a total cost of $71 million, composed of cash of $69 million and properties exchanged of
$2 million.

Goodwill

Changes in the carrying amount of the Company's goodwill are as follows:

|                             |  | 2010  |   | 2009  |   | 
|---------------------------- |  | ----- | - | ----- | - | 
|                            
|Balance at January 11        |  | 1,176 |   | 1,187 |   | 
|                             |  |      
|Acquisition (see above)      |  | 45    |   |      |   | 
|                             |  |      
|Foreign currency translation |  | (71   | ) | (11   | ) | 
|                            
|Balance at December 311      |  | 1,150 |   | 1,176 |   | 
|                            

Goodwill has no tax basis.

5. Accounts Receivable

|December 31                                  |  | 2010  |   | 2009  |   | 
|-------------------------------------------- |  | ----- | - | ----- | - | 
|                                            
|Trade receivables                            |  | 1,242 |   | 1,225 |   | 
|                                             |  |      
|Fair value of derivative contracts (note 15) |  | 118   |   | 30    |   | 
|                                             |  |      
|Note receivable (note 15)                    |  | 41    |   |      |   | 
|                                             |  |      
|Allowance for doubtful accounts              |  | (2    | ) | (2    | ) | 
|                                            
|Total1                                       |  | 1,399 |   | 1,253 |   | 
|                                            

TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS19

---



6. Inventories

|December 31            |  | 2010 |  | 2009 | 
|---------------------- |  | ---- |  | ---- | 
|                      
|Materials and supplies |  | 67   |  | 75   | 
|                       |  |     
|Product                |  | 76   |  | 69   | 
|                      
|Total1                 |  | 143  |  | 144  | 
|                      

7. Other Assets

|December 31                                  |  | 2010 |  | 2009 | 
|-------------------------------------------- |  | ---- |  | ---- | 
|                                            
|Accrued pension asset (note 23)              |  | 56   |  | 29   | 
|                                             |  |     
|Fair value of derivative contracts (note 15) |  | 24   |  | 42   | 
|                                             |  |     
|Investments                                  |  | 120  |  | 36   | 
|                                             |  |     
|Note receivable (note 15)                    |  |     |  | 43   | 
|                                             |  |     
|Asset retirement sinking fund (note 9)       |  | 30   |  | 15   | 
|                                             |  |     
|Acquisition deposits                         |  | 627  |  |     | 
|                                             |  |     
|Other                                        |  | 4    |  | 5    | 
|                                            
|Total                                        |  | 861  |  | 170  | 
|                                            

8. Property, Plant and Equipment, Net

|December 31, 2010  |  | Cost   |  | Accumulated
DD&A |   | Net book
value1 | 
|------------------ |  | ------ |  | ---------------- | - | --------------- | 
|                  
|Oil and gas assets |  | 30,429 |  | (11,823          | ) | 18,606          | 
|                   |  |       
|Corporate assets   |  | 644    |  | (446             | ) | 198             | 
|                  
|                   |  | 31,073 |  | (12,269          | ) | 18,804          | 
|                  

|
|

|December 31, 2009  |  | Cost   |  | Accumulated
DD&A |   | Net book
value1 | 
|------------------ |  | ------ |  | ---------------- | - | --------------- | 
|                  
|Oil and gas assets |  | 26,940 |  | (10,702          | ) | 16,238          | 
|                   |  |       
|Corporate assets   |  | 590    |  | (397             | ) | 193             | 
|                  
|                   |  | 27,530 |  | (11,099          | ) | 16,431          | 
|                  

Included in PP&E are capitalized interest costs of $99 million (2009  $43 million) relating to major
projects under construction and development. During the year ended December 31, 2010, interest costs of $83 million (2009  $43 million;
2008  $60 million) were capitalized.

In
2008, the Company recorded additional DD&A expense in its UK and Scandinavia segments of $410 million and $90 million, respectively, in respect of properties having no proved reserves
at year-end prices.

In
line with the Company's practice of adjusting DD&A expense in the fourth quarter using year-end reserves and updated depletable costs, an incremental DD&A expense of $84 million
was booked in the fourth quarter of 2008 to reflect principally price related declines in year-end reserves. For 2009, the impact of adjusting the DD&A expense in the fourth quarter was
not significant as an upward price revision of 77.1 mmboe was offset by a higher depletable base and a change in production mix. For 2010, the impact of adjusting the DD&A expense in the fourth
quarter was a decrease of $28 million.

20TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS

---



As
described in note 2(a), the methodology for calculating reserves changed in 2009 to using average prices. Had year-end prices been used to calculate reserves, this would not have
had a significant impact on the 2009 loss from continuing operations.

In
2010, impairment expense of $118 million was recorded (2009  $70 million; 2008  $4 million), which
arose from writing off exploration acquisition costs in North America, Scandinavia and the rest of the world for $27 million, $66 million and $25 million, respectively. The
impairment charge is recorded in other expenses on the Consolidated Statements of Income (note 18).

Non-Depleted Capital

Included in PP&E are the following costs that were not subject to DD&A:

|December 31                                                           |                | 2010  |       | 2009  |      
|--------------------------------------------------------------------- | -------------- | ----- | ----- | ----- | -----
|                                                                     
|Undeveloped land                                                      |                |       |       |       |      
|                                                                      |                |      
|                                                                      | North America  |       | 1,751 |       | 1,112
|                                                                      |                |      
|                                                                      | Southeast Asia |       | 371   |       | 333  
|                                                                      |                |      
|                                                                      | Other          |       | 543   |       | 489  
|                                                                      |                |      
|Acquired unproved reserve costs associated with producing fields1     |                |       |       |       |      
|                                                                      |                |      
|                                                                      | UK             |       | 46    |       | 133  
|                                                                      |                |      
|                                                                      | Southeast Asia |       | 126   |       |     
|                                                                      |                |      
|Acquired unproved reserve costs not associated with producing fields1 |                |       |       |       |      
|                                                                      |                |      
|                                                                      | UK             |       | 102   |       | 111  
|                                                                      |                |      
|                                                                      | Scandinavia    |       | 806   |       | 100  
|                                                                      |                |      
|                                                                      | Southeast Asia |       | 53    |       | 51   
|                                                                      |                |      
|                                                                      | Other          |       | 14    |       | 14   
|                                                                      |                |      
|Exploration costs2                                                    |                | 996   |       | 798   |      
|                                                                      |                |      
|Development projects3                                                 |                |       |       |       |      
|                                                                      |                |      
|                                                                      | North America  |       | 21    |       | 178  
|                                                                      |                |      
|                                                                      | UK             |       | 218   |       | 445  
|                                                                      |                |      
|                                                                      | Scandinavia    |       | 864   |       | 613  
|                                                                      |                |      
|                                                                      | Southeast Asia |       | 332   |       | 240  
|                                                                      |                |      
|                                                                      | Other          |       | 114   |       | 56   
|                                                                     
|Total                                                                 |                | 6,357 |       | 4,673 |      
|                                                                     

TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS21

---





Exploration Costs

The following table provides details of the changes in the balance of exploration costs:

|               |  | December 31,
2009 |  | Reclassified to
depletable and
development projects |   | Expensed to
dry hole1 |   | Spent during
the year1 |  | December 31,
2010 | 
|-------------- |  | ----------------- |  | --------------------------------------------------- | - | --------------------- | - | ---------------------- |  | ----------------- | 
|              
|North America  |  | 194               |  | (27                                                 | ) | (9                    | ) | 60                     |  | 218               | 
|               |  |                  
|UK             |  | 200               |  |                                                    |   | (9                    | ) | 41                     |  | 232               | 
|               |  |                  
|Scandinavia    |  | 43                |  | (7                                                  | ) | (3                    | ) | 45                     |  | 78                | 
|               |  |                  
|Southeast Asia |  | 234               |  | (17                                                 | ) |                      |   | 76                     |  | 293               | 
|               |  |                  
|Other          |  | 127               |  |                                                    |   | (1                    | ) | 49                     |  | 175               | 
|              
|               |  | 798               |  | (51                                                 | ) | (22                   | ) | 271                    |  | 996               | 
|              

|
|

|               |  | December 31,
2008 |  | Reclassified to
depletable and
development projects |   | Expensed to
dry hole1 |   | Spent during
the year1 |  | December 31,
2009 | 
|-------------- |  | ----------------- |  | --------------------------------------------------- | - | --------------------- | - | ---------------------- |  | ----------------- | 
|              
|North America  |  | 548               |  | (241                                                | ) | (212                  | ) | 99                     |  | 194               | 
|               |  |                  
|UK             |  | 100               |  |                                                    |   | (21                   | ) | 121                    |  | 200               | 
|               |  |                  
|Scandinavia    |  | 15                |  | (4                                                  | ) | (4                    | ) | 36                     |  | 43                | 
|               |  |                  
|Southeast Asia |  | 394               |  |                                                    |   | (166                  | ) | 6                      |  | 234               | 
|               |  |                  
|Other          |  | 64                |  |                                                    |   | (26                   | ) | 89                     |  | 127               | 
|              
|               |  | 1,121             |  | (245                                                | ) | (429                  | ) | 351                    |  | 798               | 
|              

|
|

|               |  | December 31,
2007 |  | Reclassified to
depletable and
development projects |   | Expensed to
dry hole1 |   | Spent during
the year1 |  | December 31,
2008 | 
|-------------- |  | ----------------- |  | --------------------------------------------------- | - | --------------------- | - | ---------------------- |  | ----------------- | 
|              
|North America  |  | 492               |  | (182                                                | ) | (142                  | ) | 380                    |  | 548               | 
|               |  |                  
|UK             |  | 139               |  | (5                                                  | ) | (42                   | ) | 8                      |  | 100               | 
|               |  |                  
|Scandinavia    |  | 16                |  |                                                    |   | (3                    | ) | 2                      |  | 15                | 
|               |  |                  
|Southeast Asia |  | 123               |  | (3                                                  | ) |                      |   | 274                    |  | 394               | 
|               |  |                  
|Other          |  | 42                |  | (27                                                 | ) | (5                    | ) | 54                     |  | 64                | 
|              
|               |  | 812               |  | (217                                                | ) | (192                  | ) | 718                    |  | 1,121             | 
|              

Costs relating to wells drilled prior to 2010 continue to be capitalized, since management's ongoing assessment includes further planned activity. The number of
wells drilled prior to 2010 and related costs are as follows:

|               |  | Years     |  | Number of
wells |  | Cost | 
|-------------- |  | --------- |  | --------------- |  | ---- | 
|              
|North America  |  | 2006-2009 |  | 14              |  | 134  | 
|               |  |          
|UK             |  | 2007-2009 |  | 12              |  | 206  | 
|               |  |          
|Scandinavia    |  | 2008-2009 |  | 4               |  | 70   | 
|               |  |          
|Southeast Asia |  | 2007-2009 |  | 13              |  | 231  | 
|               |  |          
|Other          |  | 2008-2009 |  | 6               |  | 136  | 
|              
|               |  |           |  | 49              |  | 777  | 
|              

22TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS

---



North America wells drilled prior to 2010 are in the process of being evaluated or are awaiting completion of the construction of infrastructure. The remaining
wells relate to fields where either further appraisal drilling is ongoing or development options are being assessed.

9. Asset Retirement Obligations (ARO)

At December 31, 2010, the estimated total undiscounted ARO associated with oil and gas properties and facilities was $4.5 billion
(2009  $4.5 billion). The majority of the payments to settle these ARO will occur over a period of 35 years and will be funded from the general
resources of the Company as they arise. The ARO have been discounted using a weighted average credit-adjusted risk free rate of 6.6% (2009  6.6%). Total
accretion for the year ended December 31, 2010 of $126 million (2009  $117 million;
2008  $103 million) has been included in DD&A expense on the Consolidated Statements of Income.

Changes
in carrying amounts of the Company's ARO associated with its PP&E are as follows:

|                                     |  | 2010  |   | 2009  |   | 
|------------------------------------ |  | ----- | - | ----- | - | 
|                                    
|ARO liability at January 1           |  | 2,146 |   | 1,907 |   | 
|                                     |  |      
|Liabilities incurred during the year |  | 51    |   | 50    |   | 
|                                     |  |      
|Liabilities settled during the year  |  | (37   | ) | (50   | ) | 
|                                     |  |      
|Accretion expense                    |  | 126   |   | 117   |   | 
|                                     |  |      
|Revisions in estimated cash flows    |  | 146   |   | 218   |   | 
|                                     |  |      
|Foreign currency translation         |  | (162  | ) | (96   | ) | 
|                                    
|ARO liability at December 311,2      |  | 2,270 |   | 2,146 |   | 
|                                    

Revisions in estimated cash flows occurring in 2010 related to UK obligations and were the result of revisions to estimated abandonment dates resulting from
changes in oil price assumptions.

The
Company provided letters of credit at January 1, 2011 in an amount of $814 million as security for the costs of future dismantlement, site restoration and abandonment obligations in
the UK.

The
Company has assets of $30 million that represent secured funding for its obligations in Southeast Asia (2009  $15 million).

TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS23

---



10. Long-Term Debt

|December 31                       |                                                    | 2010  |     | 2009  |     | 
|--------------------------------- | -------------------------------------------------- | ----- | --- | ----- | --- | 
|                                 
|Tangguh Project Financing         |                                                    | 106   |     | 106   |     | 
|                                  |                                                    |      
|Debentures and Notes (Unsecured)1 |                                                    |       |     |       |     | 
|                                  |                                                    |      
|                                  | 6.89% notes (US$10 million), Series B, due 2010    |       |    |       | 10  | 
|                                  |                                                    |      
|                                  | 4.44% medium term notes (C$350 million), due 20112 |       | 350 |       | 350 | 
|                                  |                                                    |      
|                                  | 8.25% notes (US$50 million), due 2014              |       | 50  |       | 52  | 
|                                  |                                                    |      
|                                  | 5.125% notes (US$375 million), due 20153           |       | 373 |       | 392 | 
|                                  |                                                    |      
|                                  | 8.50% notes (US$150 million), due 2016             |       | 149 |       | 157 | 
|                                  |                                                    |      
|                                  | 6.625% notes (UK£250 million), due 2017            |       | 388 |       | 423 | 
|                                  |                                                    |      
|                                  | 7.75% notes (US$700 million), due 2019             |       | 696 |       | 733 | 
|                                  |                                                    |      
|                                  | 3.75% notes (US$600 million), due 2021             |       | 597 |       |    | 
|                                  |                                                    |      
|                                  | 7.25% debentures (US$300 million), due 2027        |       | 298 |       | 314 | 
|                                  |                                                    |      
|                                  | 5.75% notes (US$125 million), due 2035             |       | 124 |       | 131 | 
|                                  |                                                    |      
|                                  | 5.85% notes (US$500 million), due 2037             |       | 497 |       | 524 | 
|                                  |                                                    |      
|                                  | 6.25% notes (US$600 million), due 2038             |       | 597 |       | 628 | 
|                                 
|Gross debt                        |                                                    | 4,225 |     | 3,820 |     | 
|                                  |                                                    |      
|Prepaid financing costs           |                                                    | (44   | )   | (40   | )   | 
|                                 
|                                  |                                                    | 4,181 |     | 3,780 |     | 
|                                  |                                                    |      
|Less: current portion             |                                                    | (357  | )   | (10   | )   | 
|                                 
|Long-term debt                    |                                                    | 3,824 |     | 3,770 |     | 
|                                 

Bank Credit Facilities

At December 31, 2010, Talisman had unsecured credit facilities totaling $4 billion, consisting of facilities of $3.85 billion
(Facility No. 1) and $150 million (Facility No. 2). The maturity dates are November 26, 2014 for Facility No. 1 and September 30, 2012 for
Facility No. 2, 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. All facilities must be repaid on their maturity dates.

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
$1 billion are available in the form of letters of credit. Borrowings under Facility No. 2 are available in the form of prime loans, C$ or US$ bankers' acceptances, US$ base rate loans,
LIBOR-based loans or letters of credit.

At
December 31, 2010, the Company had not drawn against its available bank lines of credit.

Tangguh Project Financing

In connection with the acquisition of its interest in Tangguh, Talisman became a participant in a series of project financing facilities, the
Company's share of which is up to US$107 million. $106 million was outstanding under these facilities at December 31, 2010
(2009  $106 million), which is secured by Talisman's interest in the Tangguh LNG Project, having a net book value of $204 million. Draws under
these facilities bear interest at LIBOR plus 0.19% through to LIBOR plus 0.33% per annum and will mature in 2021.

24TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS

---



Debentures and Notes

In 2010, Talisman completed a US$600 million offering of 3.75% notes due February 2021. Interest on the notes is payable
semi-annually.

In
2009, Talisman completed a private placement of US$50 million 8.25% Series A Senior Notes due March 2014 and US$150 million 8.50% Series B Senior Notes due
March 2016. Interest on both notes is payable quarterly.

In
2009, Talisman completed a US$700 million offering of 7.75% notes due June 2019. Interest on the notes is payable semi-annually.

Repayment Schedule

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

|Year               |  |       | 
|------------------ |  | ----- | 
|                  
|2011               |  | 357   | 
|                   |  |      
|2012               |  | 7     | 
|                   |  |      
|2013               |  | 8     | 
|                   |  |      
|2014               |  | 59    | 
|                   |  |      
|2015               |  | 384   | 
|                   |  |      
|Subsequent to 2015 |  | 3,410 | 
|                  
|Gross debt         |  | 4,225 | 
|                  

11. Other Long-Term Obligations

|December 31                                                            |  | 2010 |  | 2009 | 
|---------------------------------------------------------------------- |  | ---- |  | ---- | 
|                                                                      
|Accrued pension and other post-employment benefits liability (note 23) |  | 64   |  | 28   | 
|                                                                       |  |     
|Fair value of derivative contracts (note 15)                           |  |     |  | 7    | 
|                                                                       |  |     
|Discounted obligations under capital leases                            |  | 75   |  | 94   | 
|                                                                       |  |     
|Long-term portion of stock-based compensation liability (note 13)      |  | 44   |  | 27   | 
|                                                                       |  |     
|Other                                                                  |  | 29   |  | 12   | 
|                                                                      
|Total                                                                  |  | 212  |  | 168  | 
|                                                                      

In 2005, the Company entered into a leasing arrangement for the modification, refitting and use of a Floating Storage Offloading (FSO) vessel for use at the
South Angsi development in Malaysia. An element of the leasing arrangement has been defined by the Company as a capital lease. The future minimum lease payments are US$5 million for each of the
next five years and US$3 million for the remainder of the lease. The imputed rate of interest on the lease is 6%, and the lease expires in 2016. Of the total discounted liability of
$24 million (2009  $28 million), $5 million (2009  $5 million) is included in accounts payable
and accrued liabilities.

In
2009, the Company entered into a leasing arrangement for the modification, refitting and use of a FSO vessel for use at the Northern Fields development in Malaysia. An element of the leasing
arrangement has been defined by the Company as a capital lease. The future minimum lease payments are US$13 million for each of the next five years and US$40 million for the remainder of
the lease. The imputed rate of interest on the lease is 10%, and the lease expires in 2019. Of the total discounted liability of $69 million
(2009  $85 million), $13 million (2009  $14 million) is included in accounts payable and accrued
liabilities.

TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS25

---



12. Capital Disclosures

Talisman's objective in managing capital is to retain access to capital markets, ensure its ability to meet all financial obligations and meet its operational and strategic
objectives.

Talisman's
capital structure consists of shareholders' equity and long-term debt (including the current portion). The Company makes adjustments to its capital structure based on changes in
economic conditions and its planned requirements. Talisman has the ability to adjust its capital structure by issuing new equity or debt, selling assets to reduce debt, controlling the amount it
returns to shareholders and making adjustments to its capital expenditure program.

Talisman
manages its balance sheet with reference to its liquidity and a debt-to-cash flow ratio. The main factors in assessing the Company's liquidity are cash flow, cash
provided by and used in investing activities and available bank credit facilities. The debt-to-cash flow ratio is calculated using gross debt divided by cash flow for
the year.

The
debt-to-cash flow ratio at December 31, 2010 and 2009 was as follows:

|                     |  | 2010   |  | 2009   | 
|-------------------- |  | ------ |  | ------ | 
|                    
|Gross debt (note 10) |  | 4,225  |  | 3,820  | 
|                     |  |       
|Cash flow            |  | 3,058  |  | 3,961  | 
|                     |  |       
|Debt-to-cash flow    |  | 1.38:1 |  | 0.96:1 | 
|                    

The calculation of cash flow is as follows:

|                                      |  | 2010  |   | 2009  | 
|------------------------------------- |  | ----- | - | ----- | 
|                                     
|Cash provided by operating activities |  | 3,460 |   | 3,599 | 
|                                      |  |      
|Changes in non-cash working capital   |  | (402  | ) | 362   | 
|                                     
|Cash flow                             |  | 3,058 |   | 3,961 | 
|                                     

Talisman's debt-to-cash flow increased from 0.96:1 at December 31, 2009 to 1.38:1 at December 31, 2010 as a
result of the issuance of US$600 million of 3.75% notes and the impact of the timing of oil liftings on changes in non-cash operating working capital.

Talisman
is in compliance with all of its debt covenants. The Company's principal financial covenant under Facility No.1 is a debt-to-cash flow ratio of 3.5:1,
calculated quarterly on a trailing twelve month basis.

26TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS

---



13. Share Capital and Stock-Based Compensation

Authorized

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.

Issued

|Continuity of common shares                                  |  | 2010          |   | 2009   |   | 2008         
|------------------------------------------------------------ |  | ------------- | - | ------ | - | -------------
|                                                            
|                                                             |  | Shares        |   | Amount |   | Shares       
|                                                            
|Balance, beginning of year                                   |  | 1,014,876,564 |   | 2,374  |   | 1,014,708,249
|                                                             |  |              
|Issued on exercise of stock options                          |  | 4,835,056     |   | 97     |   | 168,315      
|                                                             |  |              
|Shares purchased and held in trust for PSU plans (see below) |  | (4,482,681    | ) | (82    | ) |             
|                                                             |  |              
|Shares released from trust for 2008 PSU plan (see below)     |  | 4,062,000     |   | 68     |   |             
|                                                            
|Balance, end of year                                         |  | 1,019,290,939 |   | 2,457  |   | 1,014,876,564
|                                                            

During 2010, Talisman declared a dividend of $0.25 per share (2009  $0.225 per share;
2008  $0.20 per share) for an aggregate dividend of $254 million (2009  $229 million;
2008  $204 million).

Subsequent
to December 31, 2010, 3,186,294 stock options were exercised for shares.

No
preferred shares have been issued.

Normal Course Issuer Bid

In December 2010, Talisman renewed its normal course issuer bid, pursuant to which the Company may repurchase through the facilities of the
Toronto Stock Exchange and New York
Stock Exchange up to 51,068,705 of its common shares (representing 5% of the common shares outstanding at November 29, 2010) during the 12-month period commencing
December 15, 2010 and ending December 14, 2011.

During
the years ended December 31, 2010, 2009 and 2008, Talisman did not repurchase any common shares of the Company under its normal course issuer bid.

Stock Option Plans

Talisman has stock option plans that govern the granting of 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 underlying the stock option. Options granted under the
plans are generally exercisable after three years and expire 10 years after the grant date. Option exercise prices approximate the market price for the common shares on the date the options
are granted.

TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS27

---



|Continuity of stock options                                                      |                              | 2010              |            | 2009                       |       | 2008              |           
|-------------------------------------------------------------------------------- | ---------------------------- | ----------------- | ---------- | -------------------------- | ----- | ----------------- | ----------
|                                                                                
|                                                                                 |                              | Number
of options |            | Average
exercise
price ($) |       | Number
of options |           
|                                                                                
|Outstanding at January 1                                                         |                              | 69,489,526        |            | 15.22                      |       | 64,877,521        |           
|                                                                                 |                              |                  
|                                                                                 | Granted                      |                   | 7,743,117  |                            | 17.42 |                   | 12,023,390
|                                                                                 |                              |                  
|                                                                                 | Exercised for common shares  |                   | (4,835,056 | )                          | 11.75 |                   | (168,315  
|                                                                                 |                              |                  
|                                                                                 | Surrendered for cash payment |                   | (6,254,804 | )                          | 12.59 |                   | (4,887,191
|                                                                                 |                              |                  
|                                                                                 | Forfeited                    |                   | (3,183,560 | )                          | 17.81 |                   | (2,355,879
|                                                                                
|Outstanding at December 31                                                       |                              | 62,959,223        |            | 15.89                      |       | 69,489,526        |           
|                                                                                
|Exercisable at December 31                                                       |                              | 35,790,358        |            | 15.59                      |       | 33,825,777        |           
|                                                                                
|Options available for future grants pursuant to the Company's Stock Option Plans |                              | 42,653,842        |            |                            |       | 40,928,730        |           
|                                                                                

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

|December 31, 2010            |  | Outstanding options |  | Exercisable options                 | 
|---------------------------- |  | ------------------- |  | ----------------------------------- | 
|                            
|Range of exercise prices ($) |  | Number
of options   |  | Weighted average
exercise price ($) | 
|                            
|5.88 - 5.99                  |  | 8,775               |  | 5.88                                | 
|                             |  |                    
|6.00 - 8.99                  |  | 7,189,173           |  | 7.29                                | 
|                             |  |                    
|9.00 - 11.99                 |  | 1,446,734           |  | 11.38                               | 
|                             |  |                    
|12.00 - 14.99                |  | 16,808,877          |  | 13.58                               | 
|                             |  |                    
|15.00 - 17.99                |  | 7,271,203           |  | 17.23                               | 
|                             |  |                    
|18.00 - 22.54                |  | 30,234,461          |  | 19.11                               | 
|                            
|5.88 - 22.54                 |  | 62,959,223          |  | 15.89                               | 
|                            

The mark-to-market liability for the stock option plans at December 31, 2010 was $344 million
(2009  $268 million), of which $301 million (2009  $242 million) is included in accounts payable and
accrued liabilities on the Consolidated Balance Sheets.

Subsequent
to December 31, 2010, 157,486 stock options were surrendered for cash, 3,186,294 were exercised for shares, none were granted and 182,081 were forfeited, with
59,433,362 outstanding at February 22, 2011.

Cash Unit Plans

In addition to the Company's stock option plans, certain of Talisman's subsidiaries issue stock appreciation rights under the cash unit plans. 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.

28TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS

---



|Continuity of cash units   |           | 2010            |           | 2009                       |       | 2008            |          
|-------------------------- | --------- | --------------- | --------- | -------------------------- | ----- | --------------- | ---------
|                          
|                           |           | Number
of units |           | Average
exercise
price ($) |       | Number
of units |          
|                          
|Outstanding at January 1   |           | 10,078,102      |           | 16.42                      |       | 9,723,082       |          
|                           |           |                
|                           | Granted   |                 | 1,170,920 |                            | 17.38 |                 | 1,403,650
|                           |           |                
|                           | Exercised |                 | (826,175  | )                          | 14.39 |                 | (732,565 
|                           |           |                
|                           | Forfeited |                 | (310,055  | )                          | 17.49 |                 | (316,065 
|                          
|Outstanding at December 31 |           | 10,112,792      |           | 16.64                      |       | 10,078,102      |          
|                          
|Exercisable at December 31 |           | 6,180,730       |           | 16.83                      |       | 4,806,867       |          
|                          

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

|December 31, 2010            |  | Outstanding units |  | Exercisable units                   | 
|---------------------------- |  | ----------------- |  | ----------------------------------- | 
|                            
|Range of exercise prices ($) |  | Number
of units   |  | Weighted average
exercise price ($) | 
|                            
|6.60 - 8.99                  |  | 854,140           |  | 7.51                                | 
|                             |  |                  
|9.00 - 11.99                 |  | 123,653           |  | 10.77                               | 
|                             |  |                  
|12.00 - 14.99                |  | 2,417,800         |  | 13.65                               | 
|                             |  |                  
|15.00 - 17.99                |  | 1,217,658         |  | 17.21                               | 
|                             |  |                  
|18.00 - 20.41                |  | 5,499,541         |  | 19.38                               | 
|                            
|6.60 - 20.41                 |  | 10,112,792        |  | 16.64                               | 
|                            

The mark-to-market liability for the cash unit plans at December 31, 2010 was $48 million
(2009  $28 million), of which $47 million (2009  $27 million) is included in accounts payable and
accrued liabilities on the Consolidated Balance Sheets.

Subsequent
to December 31, 2010, 537,030 cash units were exercised, none were granted and 72,832 were forfeited, with 9,502,930 outstanding at
February 22, 2011.

Long-Term Performance Share Unit (PSU) Plan

In 2009, the Company implemented a long-term PSU plan that allows for the granting of PSUs to employees. During 2010,
3,768,840 PSUs were granted pursuant to this plan which vest on December 31, 2012 (2009  5,791,165 PSUs were granted which vest on
December 31, 2011) to varying degrees (0-150%) subject to predetermined performance measures being achieved. Each PSU represents the right, subject to performance, to receive one
common share of the Company.

|Continuity of long-term PSU plan |           | 2010            |            | 2009            |           |  
|-------------------------------- | --------- | --------------- | ---------- | --------------- | --------- | -
|                                
|                                 |           | Number of
units |            | Number of
units |           |  
|                                
|Outstanding at January 1         |           | 5,520,158       |            |                |           |  
|                                 |           |                
|                                 | Granted   |                 | 3,768,840  |                 | 5,791,165 |  
|                                 |           |                
|                                 | Forfeited |                 | (1,115,236 | )               | (271,007  | )
|                                
|Outstanding at December 31       |           | 8,173,762       |            | 5,520,158       |           |  
|                                

To satisfy the Company's obligations to deliver common shares to settle the PSUs, Talisman has arranged for a third party trustee to hold common shares which
were purchased on the open market. During 2010, the Company purchased

TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS29

---



4,482,681 common
shares on the open market for $82 million. For accounting purposes, the cost of the purchase of the common shares held in trust has been accounted for as a reduction in
outstanding common shares, and the trust has been consolidated in accordance with Accounting Guideline 15 since it meets the definition of a variable interest entity and the Company is the
primary beneficiary of the trust. The Company is not exposed to fluctuations in the stock price in respect of the shares held in trust. Additional purchases of common shares to satisfy the Company's
obligations are contemplated.

During
the year, the Company recorded stock-based compensation of $40 million (2009  $17 million), including capitalized expense of
$5 million (2009  $2 million), relating to its long-term PSU plan, with a corresponding increase in contributed surplus.

Subsequent
to December 31, 2010, no long-term PSUs were granted and 47,156 were forfeited, with 8,126,606 outstanding at February 22, 2011. During this period,
the Company funded the purchase of a further 368,000 common shares on the open market for $8 million to settle the PSUs.

2008 PSU Plan

In 2008, Talisman implemented a PSU plan pursuant to which 4,158,860 PSUs were granted. These PSUs vested on January 31, 2010 subject
to predetermined performance measures being achieved. Based on the Company's performance relative to these predetermined performance measures, the Board of Directors approved the vesting of 90% of the
PSUs granted.

To
satisfy the Company's obligation to deliver common shares to settle the PSUs, the Company established a trust that purchased 4,062,000 common shares on the open market for $68 million
in 2008. These shares were released from trust when the PSUs vested in 2010.

During
the year, the Company recorded stock-based compensation recovery of $3 million (2009  $43 million expense;
2008  $20 million expense) relating to its 2008 PSU plan, with a corresponding change in contributed surplus.

Deferred Share Unit (DSU) Plan

Talisman issues DSUs to directors in lieu of cash compensation. Each 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. At December 31, 2010, there were 330,448
(2009  396,550) units outstanding. The mark-to-market liability of $7 million
(2009  $8 million) is included in accounts payable and accrued liabilities on the Consolidated Balance Sheets. Expense of $nil
(2009  $4 million) related to the DSUs is recognized in general and administrative expenses on the Consolidated Statements of Income.

Restricted Share Unit (RSU) Plan

Talisman has a 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. At December 31, 2010, there were 462,133
(2009  342,730) units outstanding (including dividend equivalent RSUs). The mark-to-market liability of $5 million
(2009  $3 million) is included in accounts payable and accrued liabilities on the Consolidated Balance Sheets.

Stock-Based Compensation

For the year ended December 31, 2010, the Company recorded stock-based compensation expense of $201 million
(2009  $290 million expense; 2008  $73 million recovery) in respect of the plans described above as follows:
stock options  $145 million expense (2009  $207 million expense;
2008  $92 million recovery), cash units  $22 million expense
(2009  $22 million expense; 2008  $1 million recovery), 2008 PSU
plan  $3 million recovery (2009  $43 million expense;
2008  $20 million expense), long-term PSU plan  $35 million expense
(2009  $15 million expense) and RSUs  $2 million expense
(2009  $3 million expense; 2008  $nil).

30TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS

---





During the year, the Company paid cash of $55 million (2009  $52 million; 2008  $211 million) to
employees in settlement of fully accrued option liabilities for options exercised. In addition, the Company capitalized stock-based compensation expense of $29 million
(2009  $42 million; 2008  $6 million).

Of
the combined mark-to-market liability for stock option, cash unit, DSU and RSU plans of $404 million
(2009  $307 million), $360 million (2009  $280 million) is included in accounts payable and accrued
liabilities on the Consolidated Balance Sheets and $44 million (2009  $27 million) is included in other long-term obligations.

14. Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss are as follows:

|                                                                     |                                                   | 2010   |     | 2009 |     | 2008 |     |  
|-------------------------------------------------------------------- | ------------------------------------------------- | ------ | --- | ---- | --- | ---- | --- | -
|                                                                    
|Accumulated other comprehensive loss at beginning of year            |                                                   |        |     |      |     |      |     |  
|                                                                     |                                                   |       
|Derivative financial instruments designated as cash flow hedges      |                                                   |       |     | 1    |     | (16  | )   |  
|                                                                     |                                                   |       
|Foreign currency translation adjustments                             |                                                   | (590   | )   | (273 | )   | (173 | )   |  
|                                                                    
|                                                                     |                                                   | (590   | )   | (272 | )   | (189 | )   |  
|                                                                    
|Other comprehensive loss for the year                                |                                                   |        |     |      |     |      |     |  
|                                                                     |                                                   |       
|Derivative financial instruments designated as cash flow hedges      |                                                   |        |     |      |     |      |     |  
|                                                                     |                                                   |       
|                                                                     | Unrealized gains (losses) arising during the year |        | 14  |      | 39  |      | (50 | )
|                                                                     |                                                   |       
|                                                                     | Realized losses (gains) recognized in net income  |        | (12 | )    | (40 | )    | 67  |  
|                                                                     |                                                   |       
|Foreign currency translation adjustments                             |                                                   | (625   | )   | (317 | )   | (100 | )   |  
|                                                                     |                                                   |       
|Transfer of accumulated foreign currency gain to net income (note 3) |                                                   | (465   | )   |     |     |     |     |  
|                                                                    
|                                                                     |                                                   | (1,088 | )   | (318 | )   | (83  | )   |  
|                                                                    
|Accumulated other comprehensive loss at end of year                  |                                                   |        |     |      |     |      |     |  
|                                                                     |                                                   |       
|Derivative financial instruments designated as cash flow hedges      |                                                   | 2      |     |     |     | 1    |     |  
|                                                                     |                                                   |       
|Foreign currency translation adjustments                             |                                                   | (1,680 | )   | (590 | )   | (273 | )   |  
|                                                                    
|                                                                     |                                                   | (1,678 | )   | (590 | )   | (272 | )   |  
|                                                                    

15. Financial Instruments

Talisman's financial assets and liabilities at December 31, 2010 are composed of cash and cash equivalents, accounts receivable, note receivable, investments, bank
indebtedness, accounts payable and accrued liabilities, long-term debt and risk management assets and liabilities arising from the use of derivative financial instruments.

The
Company is exposed to financial risks arising from its financial assets and liabilities. The financial risks include market risk related to foreign exchange rates, interest rates and commodity
prices, credit risk and liquidity risk.

Fair Value of Financial Assets and Liabilities

The fair values of cash and cash equivalents, accounts receivable (excluding the fair value of derivative contracts), bank indebtedness, and accounts
payable and accrued liabilities (excluding the fair value of derivative contracts) approximate their carrying values due to the short-term maturity of those instruments. The note
receivable is classified as a held-for-trading financial instrument and presented at fair value calculated using discounted cash flows, and the Black-Scholes model is used to
value the conversion feature. Unobservable inputs utilized to determine the fair value of the note receivable include the weighted average cost of capital and volatility of the common shares of the
counterparty.

Borrowings
under bank credit facilities are short-term in nature and are market rate based, thus, carrying value approximates fair value. The fair value of public debentures and notes is
based on market quotations, which reflect the discounted present value of the principal and interest payments using the effective yield for instruments having the same term and risk characteristics.
The fair values of private notes are based on estimations provided by third parties. The fair value of Talisman's floating rate debt is determined by discounting future estimated coupon payments at
the current market interest rate. The fair

TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS31

---



value
of Talisman's gross long-term debt at December 31 was $4.6 billion (2009  $4 billion), while the carrying value was
$4.2 billion (2009  $3.8 billion).

Risk
management assets and liabilities are recorded at their estimated fair values. To estimate fair value, the Company uses quoted market prices when available, or models that utilize observable
market data. In addition to market information, the Company incorporates transaction specific details that market participants would utilize in a fair value measurement, including the impact of
non-performance risk. The Company's non-performance risk is determined based on third party quotes for debt instruments with maturity dates that are similar, or in close
approximation to, the maturity dates of the corresponding financial instrument. The Company's liabilities have decreased by $2 million as a result of incorporating non-performance
risk. The Company characterizes inputs used in determining fair value using a hierarchy that prioritizes inputs depending on the degree to which they are observable. The three levels of the fair value
hierarchy are as follows:

In
forming estimates, the Company utilizes the most observable inputs available for valuation purposes. If a fair value measurement reflects inputs of different levels within the hierarchy, the
measurement is categorized based upon the lowest level of input that is significant to the fair value measurement. The valuation of over the counter financial swaps and collars is based on similar
transactions observable in active markets or industry standard models that primarily rely on market observable inputs. Substantially all of the assumptions for industry standard models are observable
in active markets throughout the full term of the instrument. These are categorized as level 2.

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. Cash payments or receipts are
based on discounted cash flow analysis using current market rates and prices. Fair values for commodity price derivatives are based on discounted cash flow analysis using current market rates and
prices and option pricing models using forward pricing curves and implied volatility, as appropriate, which are compared to quotes received from financial institutions for reasonability.

32TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS

---



The
following table presents the Company's material assets and liabilities measured at fair value for each hierarchy level as at December 31, 2010:

|                     |  | Level 1
Inputs |  | Level 2
Inputs |  | Level 3
Inputs |  | Total
Fair Value | 
|-------------------- |  | -------------- |  | -------------- |  | -------------- |  | ---------------- | 
|                    
|Assets               |  |                |  |                |  |                |  |                  | 
|                     |  |               
|Interest rate swaps  |  |               |  | 37             |  |               |  | 37               | 
|                     |  |               
|Cross currency swaps |  |               |  | 46             |  |               |  | 46               | 
|                     |  |               
|Commodity collars    |  |               |  | 48             |  |               |  | 48               | 
|                     |  |               
|Commodity swaps      |  |               |  | 11             |  |               |  | 11               | 
|                     |  |               
|Note receivable      |  |               |  |               |  | 41             |  | 41               | 
|                    
|                     |  |               |  | 142            |  | 41             |  | 183              | 
|                    
|Liabilities          |  |                |  |                |  |                |  |                  | 
|                     |  |               
|Commodity collars    |  |               |  | 105            |  |               |  | 105              | 
|                     |  |               
|Commodity swaps      |  |               |  | 11             |  |               |  | 11               | 
|                    
|                     |  |               |  | 116            |  |               |  | 116              | 
|                    

The following table sets forth a reconciliation of changes in the fair value of the assets classified as level 3 in the fair value hierarchy:

|                       |                                        | 2010 |    | 2009 |   
|---------------------- | -------------------------------------- | ---- | -- | ---- | --
|                      
|Balance at January 1   |                                        | 43   |    | 31   |   
|                       |                                        |     
|                       | Realized and unrealized gains (losses) |      | (2 | )    | 12
|                      
|Balance at December 31 |                                        | 41   |    | 43   |   
|                      

Risk Management Assets, Liabilities, Gains and Losses

|Derivative Instrument       |  | Balance Sheet Caption                    |  | 2010 |  | 2009 | 
|--------------------------- |  | ---------------------------------------- |  | ---- |  | ---- | 
|                           
|Assets                      |  |                                          |  |      |  |      | 
|                            |  |                                         
|Interest rate swaps         |  | Accounts receivable                      |  | 13   |  | 13   | 
|                            |  |                                         
|Interest rate swaps         |  | Other assets                             |  | 24   |  | 14   | 
|                            |  |                                         
|Cross currency swaps        |  | Accounts receivable                      |  | 46   |  |     | 
|                            |  |                                         
|Cross currency swaps        |  | Other assets                             |  |     |  | 28   | 
|                            |  |                                         
|Commodity contracts         |  | Accounts receivable                      |  | 59   |  | 17   | 
|                           
|Risk management assets      |  |                                          |  | 142  |  | 72   | 
|                           
|Liabilities                 |  |                                          |  |      |  |      | 
|                            |  |                                         
|Cross currency swaps        |  | Accounts payable and accrued liabilities |  |     |  | 1    | 
|                            |  |                                         
|Commodity contracts         |  | Accounts payable and accrued liabilities |  | 116  |  | 275  | 
|                            |  |                                         
|Commodity contracts         |  | Other long-term obligations              |  |     |  | 7    | 
|                           
|Risk management liabilities |  |                                          |  | 116  |  | 283  | 
|                           

During the year, the Company recorded a gain of $102 million (2009  $412 million loss;
2008  $1,664 million gain) in respect of the note receivable, the fixed-to-floating interest rate swap and commodity derivative
instruments designated as held-for-trading financial instruments, including a realized loss of $176 million
(2009  $989 million gain; 2008  $442 million gain), which is included in cash provided by operating
activities.

TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS33

---



Currency Risk

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

Talisman
manages its foreign exchange exposure in a number of ways. By denominating most of its borrowings in US$, the Company is able to reduce some of its economic exposure to currency fluctuations.
Talisman also manages its translation exposure by generally matching internal borrowings with its subsidiaries' functional currencies. The Company purchases foreign currencies, mostly at spot value,
to meet its current foreign currency obligations as they come due.

Talisman
enters into derivative instruments from time to time to mitigate its currency risk. At December 31, 2010, the Company had cross currency interest rate swap contracts that effectively
swap the 4.44% C$350 million medium term notes repaid in January 2011 into US$304 million at an interest rate of 5.05%. These contracts have been designated as a cash flow hedge.
The effective portion of the changes in the fair value of the cross currency interest rate swaps is recognized initially in other comprehensive loss and is reclassified to foreign exchange gains or
losses as foreign exchange translation gains or losses on the hedged debt are recorded. For the year ended December 31, 2010, the net decrease in other comprehensive loss resulting from these
contracts was $2 million. The changes in the hedged item and hedging item attributable to foreign exchange are included in net income when incurred. Since the hedge was effective, the net
effect of these entries had no impact on net income.

In
order to reduce Talisman's exposure to exchange rate fluctuations, the Company has designated loans denominated in the foreign currencies of its self-sustaining operations as effective
net investment hedges. For the year ended December 31, 2010, gains of $22 million have been included in other comprehensive loss. These losses are attributable to the translation of
Talisman's UK£250 million denominated debt.

In
respect of financial instruments existing at December 31, 2010, a 1% strengthening of the US$ against the other currencies noted above, with all other variables assumed constant, would have
resulted in an increase of $7 million in net income and $3 million in other comprehensive loss in the year ended December 31, 2010. A similar weakening of the US$ would have had
the opposite impact.

Interest Rate Risk

Talisman is exposed to interest rate risk principally by virtue of its borrowings. Borrowing in floating rates exposes Talisman to
short-term movements in interest rates. Borrowing in fixed rates exposes Talisman to mark-to-market interest rate risk as well as reset risk (i.e. at debt
maturity). Risk management activities aim to manage the mix of fixed-to-floating debt to best manage the trade-off between longer term interest rate reset risk and
shorter term volatility in interest rates.

In
order to mitigate its exposure to interest rate changes, Talisman enters into interest rate swaps from time to time to manage the ratio of fixed rate debt to floating rate debt. At
December 31, 2010, the Company had fixed-to-floating interest rate swap contracts with a total notional amount of US$300 million that expire on May 15,
2015. During the year ended December 31, 2010, the fair value of the fixed-to-floating interest rate swaps increased by $10 million. The Company no longer
designated the swap as a hedge starting in the fourth quarter of 2008.

In
respect of financial instruments existing at December 31, 2010, a 1% increase in interest rates would have $nil impact on net income and $nil impact on other comprehensive loss in the year
ended December 31, 2010. This result was achieved because the impact that a 1% increase in interest rates has on cash and cash equivalents and the note receivable was offset with the impact
that a 1% increase in interest rates has on the Company's interest rate swap. These items may not offset in future periods.

34TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS

---



Credit Risk

Talisman is exposed to credit risk, which is the risk that a customer or counterparty will fail to perform an obligation or settle a liability,
resulting in financial loss to the Company. Talisman manages exposure to credit risk by adopting credit risk guidelines approved by the Board of Directors that limit transactions according to
counterparty creditworthiness. The Company routinely assesses the financial strength of its joint participants and customers, in accordance with the credit risk guidelines. Talisman's credit policy
requires collateral to be sought from counterparties considered to present a material risk of non-payment, which would include entities internally assessed as high risk or those with
ratings below investment grade. Collateral received from customers at December 31, 2010 included $223 million of letters of credit.

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

Derivative
counterparty exposure within accounts receivable increased during 2010 due principally to the increase in the fair value of natural gas commodity derivatives entered into during 2010
resulting from the reduction in the gas price. The Company diversifies its derivative counterparty exposure.

The
Company also has credit risk arising from cash and cash equivalents held with banks and financial institutions. The Company's policy allows it to deposit cash balances at financial institutions
subject to a sliding scale limit, depending on creditworthiness.

The
maximum credit exposure associated with financial assets is the carrying values.

Liquidity Risk

Talisman is exposed to liquidity risk, which is the risk that the Company may be unable to generate or obtain sufficient cash to meet its commitments
as they come due. Talisman mitigates this risk through its management of cash, debt, committed credit capacity and its capital program.

Talisman
maintains appropriate undrawn capacity in its revolving credit facilities to meet short-term fluctuations from forecasted results. Talisman manages its liquidity requirements by
use of both short-term and long-term cash forecasts, and by maintaining appropriate undrawn capacity under committed bank lines.

The
majority of the Company's debt matures subsequent to 2014, with $357 million maturing in 2011.

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

Except
for derivatives that mature as noted below, long-term debt that matures as outlined in note 10 and other long-term obligations detailed in note 11,
all of the Company's financial liabilities are due within one year.

Commodity Price Risk

Talisman is exposed to commodity price risk since its revenues are dependent on the price of crude oil, natural gas, and natural gas liquids.
Talisman enters into derivative instruments from time to time to mitigate commodity price risk volatility under guidelines approved by the Board of Directors. The Company may hedge a portion of its
future production to protect cash flows to allow it to meet its strategic objectives.

During
2010 and 2009, no gains or losses arose as a result of commodity derivative instruments designated as hedges, all such hedges having expired, and, consequently, there was no impact on recorded
sales. In 2008, realized losses related to commodity derivative instruments designated as hedges resulted in a decrease of recorded sales of $28 million.

TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS35

---



The
Company had the following commodity price derivative contracts not designated as hedges outstanding at December 31, 2010:

|Fixed price swaps |  | Term         |  | mcf/d  |  | C$/mcf |  | Fair value |   | 
|----------------- |  | ------------ |  | ------ |  | ------ |  | ---------- | - | 
|                 
|ICE index         |  | Jan-Mar 2011 |  | 17,824 |  | 6.45   |  | (6         | ) | 
|                  |  |             
|ICE index         |  | Apr-Jun 2011 |  | 16,886 |  | 5.89   |  | (5         | ) | 
|                 
|                  |  |              |  |        |  |        |  | (11        | ) | 
|                 

|
|

|Fixed price swaps |  | Term         |  | mcf/d  |  | US$/mcf |  | Fair value | 
|----------------- |  | ------------ |  | ------ |  | ------- |  | ---------- | 
|                 
|NYMEX index       |  | Jan-Dec 2011 |  | 23,734 |  | 6.12    |  | 11         | 
|                 

|
|

|Two-way collars       |  | Term         |  | bbls/d |  | Floor/ceiling
US$/bbl |  | Fair value |   | 
|--------------------- |  | ------------ |  | ------ |  | --------------------- |  | ---------- | - | 
|                     
|Dated Brent oil index |  | Jan-Jun 2011 |  | 20,000 |  | 80.00/92.41           |  | (18        | ) | 
|                      |  |             
|Dated Brent oil index |  | Jan-Dec 2011 |  | 21,000 |  | 80.00/91.27           |  | (49        | ) | 
|                      |  |             
|Dated Brent oil index |  | Jan-Dec 2011 |  | 20,000 |  | 84.00/97.57           |  | (20        | ) | 
|                      |  |             
|WTI                   |  | Jan-Dec 2011 |  | 9,000  |  | 80.00/92.00           |  | (18        | ) | 
|                     
|                      |  |              |  |        |  |                       |  | (105       | ) | 
|                     

|
|

|Two-way collars |  | Term         |  | mcf/d  |  | Floor/ceiling
US$/mcf |  | Fair value | 
|--------------- |  | ------------ |  | ------ |  | --------------------- |  | ---------- | 
|               
|NYMEX index     |  | Jan-Jun 2011 |  | 95,000 |  | 5.27/6.66             |  | 12         | 
|                |  |             
|NYMEX index     |  | Jan-Dec 2011 |  | 71,200 |  | 6.14/6.59             |  | 36         | 
|               
|                |  |              |  |        |  |                       |  | 48         | 
|               

36TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS

---



In respect of outstanding financial instruments and assuming forward commodity prices in existence at December 31, 2010, an increase of US$1/bbl in the
price of oil and $0.10/mcf in the price of natural gas would have reduced the net fair value of commodity derivatives, thereby resulting in a decrease in net income of approximately $13 million
for the year ended December 31, 2010. A similar decrease in commodity prices would result in an increase in net income of approximately $15 million for the year ended December 31,
2010. However, net income would also be impacted by the effect of the change in the commodity price on underlying transactions and taxes.

16. Contingencies and Commitments

Contingencies

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

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

Estimated Future Minimum Commitments1

During the year, Talisman incurred rental expense of $593 million (2009  $782 million;
2008  $768 million) in respect of its operating leases.

The
Company's estimated future commitments at December 31, 2010 for 2011 and beyond are as follows:

|                                           |  | 2011  |  | 2012 |  | 2013 |  | 2014 |  | 2015 |  | Subsequent
to 2015 |  | Total | 
|------------------------------------------ |  | ----- |  | ---- |  | ---- |  | ---- |  | ---- |  | ------------------ |  | ----- | 
|                                          
|Office leases                              |  | 43    |  | 36   |  | 35   |  | 35   |  | 12   |  | 43                 |  | 204   | 
|                                           |  |      
|Vessel leases                              |  | 251   |  | 102  |  | 96   |  | 87   |  | 87   |  | 12                 |  | 635   | 
|                                           |  |      
|Transportation and processing commitments2 |  | 158   |  | 150  |  | 127  |  | 116  |  | 111  |  | 679                |  | 1,341 | 
|                                           |  |      
|Minimum work commitments                   |  | 442   |  | 230  |  | 117  |  | 57   |  | 20   |  |                   |  | 866   | 
|                                           |  |      
|Abandonment obligations                    |  | 18    |  | 23   |  | 30   |  | 25   |  | 161  |  | 4,219              |  | 4,476 | 
|                                           |  |      
|Other service contracts3                   |  | 525   |  | 172  |  | 49   |  | 48   |  | 42   |  | 17                 |  | 853   | 
|                                          
|Total                                      |  | 1,437 |  | 713  |  | 454  |  | 368  |  | 433  |  | 4,970              |  | 8,375 | 
|                                          

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

TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS37

---





Talisman's estimated total undiscounted future ARO at December 31, 2010 was $4.5 billion (2009  $4.5 billion), approximately 65% of which
relates to Talisman's UK operations. At December 31, 2010, Talisman had accrued $2.3 billion (2009  $2.1 billion) of this liability. The
Company had provided letters of credit at January 1, 2011 in an amount of $1.3 billion, of which $814 million were provided as security for the costs of future dismantlement, site
restoration and abandonment obligations in the UK. The remaining outstanding letters of credit relate primarily 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 has approximately $218 million of abandonment letters of credit in place from January 1, 2011 until December 31, 2011 in respect of assets held by
third parties.

Talisman
leases certain of its ocean-going vessels and corporate offices, all of which, with the exception of the leasing arrangements described in note 11, are accounted for as operating
leases. In addition to the minimum lease payments, Talisman has ongoing operating commitments associated with the vessels.

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.

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. The Company anticipates having sufficient future production to meet these fixed price sales contract commitments. The Company had the following physical
commodity contracts outstanding at December 31, 2010:

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

Long-Term Sales Contracts

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

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

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

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

38TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS

---



17. Other Revenue

|Years ended December 31               |  | 2010 |  | 2009 |  | 2008 | 
|------------------------------------- |  | ---- |  | ---- |  | ---- | 
|                                     
|Pipeline and custom treating tariffs1 |  | 77   |  | 85   |  | 90   | 
|                                      |  |     
|Investment income                     |  | 11   |  | 11   |  | 14   | 
|                                      |  |     
|Marketing income                      |  | 22   |  | 19   |  | 8    | 
|                                     
|Total                                 |  | 110  |  | 115  |  | 112  | 
|                                     

18. Other Expenses, Net

|Years ended December 31       |  | 2010 |   | 2009 |   | 2008 |   | 
|----------------------------- |  | ---- | - | ---- | - | ---- | - | 
|                             
|Net gain on asset disposals   |  | (59  | ) | (37  | ) | (66  | ) | 
|                              |  |     
|Foreign exchange loss (gain)  |  | 92   |   | (15  | ) | (165 | ) | 
|                              |  |     
|Property impairments (note 8) |  | 118  |   | 70   |   | 4    |   | 
|                              |  |     
|Restructuring2                |  |     |   | 18   |   |     |   | 
|                              |  |     
|Inventory writedown           |  | 7    |   | 15   |   | 1    |   | 
|                              |  |     
|Bad debt expense (recovery)   |  |     |   | (18  | ) | 18   |   | 
|                              |  |     
|Miscellaneous interest        |  | 24   |   | 18   |   | 1    |   | 
|                              |  |     
|Other1                        |  | 12   |   | (4   | ) | 28   |   | 
|                             
|Total                         |  | 194  |   | 47   |   | (179 | ) | 
|                             

19. Taxes

Income Taxes

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

|Years ended December 31       |                | 2010  |      | 2009 |      | 2008  |      |  
|----------------------------- | -------------- | ----- | ---- | ---- | ---- | ----- | ---- | -
|                             
|Current income tax (recovery) |                |       |      |      |      |       |      |  
|                              |                |      
|                              | North America  |       | 9    |      | 182  |       | (148 | )
|                              |                |      
|                              | UK             |       | 336  |      | 189  |       | 756  |  
|                              |                |      
|                              | Scandinavia    |       | 324  |      | 51   |       | 243  |  
|                              |                |      
|                              | Southeast Asia |       | 306  |      | 243  |       | 353  |  
|                              |                |      
|                              | Other          |       | 57   |      | 66   |       | 78   |  
|                             
|                              |                | 1,032 |      | 731  |      | 1,282 |      |  
|                             
|Future income tax (recovery)  |                |       |      |      |      |       |      |  
|                              |                |      
|                              | North America  |       | (161 | )    | (451 | )     | 494  |  
|                              |                |      
|                              | UK             |       | (15  | )    | (109 | )     | (194 | )
|                              |                |      
|                              | Scandinavia    |       | (64  | )    | 6    |       | (85  | )
|                              |                |      
|                              | Southeast Asia |       | (16  | )    | (100 | )     | (27  | )
|                              |                |      
|                              | Other          |       | (16  | )    | (24  | )     | (23  | )
|                             
|                              |                | (272  | )    | (678 | )    | 165   |      |  
|                             
|Total1                        |                | 760   |      | 53   |      | 1,447 |      |  
|                             

TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS39

---



The components of the net future tax liability at December 31 are as follows:

|                          |                               | 2010  |       | 2009  |      
|------------------------- | ----------------------------- | ----- | ----- | ----- | -----
|                         
|Future tax liabilities    |                               |       |       |       |      
|                          |                               |      
|                          | Property, plant and equipment |       | 5,086 |       | 4,689
|                          |                               |      
|                          | Other                         |       | 262   |       | 186  
|                         
|                          |                               | 5,348 |       | 4,875 |      
|                         
|Future tax assets         |                               |       |       |       |      
|                          |                               |      
|                          | Asset retirement obligations  |       | 1,133 |       | 1,070
|                          |                               |      
|                          | Other                         |       | 411   |       | 258  
|                         
|                          |                               | 1,544 |       | 1,328 |      
|                         
|Net future tax liability1 |                               | 3,804 |       | 3,547 |      
|                         

The net future tax liability at December 31 is presented in the balance sheet as follows:

|                       |  | 2010  |   | 2009  |   | 
|---------------------- |  | ----- | - | ----- | - | 
|                      
|Future tax liabilities |  | 3,974 |   | 3,667 |   | 
|                       |  |      
|Future tax assets      |  | (170  | ) | (120  | ) | 
|                      
|                       |  | 3,804 |   | 3,547 |   | 
|                      

Income taxes vary from the amount that would be computed by applying the Canadian statutory income tax rate of 28.26% for the year ended December 31,
2010 (2009  29.26%; 2008  29.79%) to income from continuing operations as follows:

|Years ended December 31                                |                                                                | 2010   |      | 2009   |     | 2008   |     |  
|------------------------------------------------------ | -------------------------------------------------------------- | ------ | ---- | ------ | --- | ------ | --- | -
|                                                      
|Income (loss) from continuing operations before taxes  |                                                                | 1,299  |      | (497   | )   | 4,502  |     |  
|                                                      
|Statutory income tax rate                              |                                                                | 28.26% |      | 29.26% |     | 29.79% |     |  
|                                                       |                                                                |       
|Income taxes calculated at the Canadian statutory rate |                                                                | 367    |      | (145   | )   | 1,341  |     |  
|                                                       |                                                                |       
|Increase (decrease) in income taxes resulting from:    |                                                                |        |      |        |     |        |     |  
|                                                       |                                                                |       
|                                                       | Non-taxable expense (income)                                   |        | (177 | )      | 21  |        | (51 | )
|                                                       |                                                                |       
|                                                       | Tax on items not included in income from continuing operations |        | 130  |        | 60  |        | (81 | )
|                                                       |                                                                |       
|                                                       | Deductible PRT expense                                         |        | (57  | )      | (51 | )      | (81 | )
|                                                       |                                                                |       
|                                                       | Difference between future and statutory tax rates              |        | 13   |        | 45  |        | (85 | )
|                                                       |                                                                |       
|                                                       | Higher foreign tax rates                                       |        | 484  |        | 179 |        | 523 |  
|                                                       |                                                                |       
|                                                       | Uplift tax benefit                                             |        | (74  | )      | (70 | )      | (53 | )
|                                                       |                                                                |       
|                                                       | Stock-based compensation                                       |        | 84   |        |    |        |    |  
|                                                       |                                                                |       
|                                                       | Unrecognized tax benefit                                       |        | 30   |        | 8   |        |    |  
|                                                       |                                                                |       
|                                                       | Other                                                          |        | (40  | )      | 6   |        | (66 | )
|                                                      
|Income taxes                                           |                                                                | 760    |      | 53     |     | 1,447  |     |  
|                                                      

At December 31, 2010, Talisman had unused non-capital tax losses of $1 billion
(2009  $428 million; 2008  $102 million). The majority of these losses arose in the US and expire between
2028 and 2030.

40TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS

---



Changes
in the Company's unrecognized tax benefit are as follows:

|                                        |                                                        | 2010 |     | 2009 |     |  
|--------------------------------------- | ------------------------------------------------------ | ---- | --- | ---- | --- | -
|                                       
|Unrecognized tax benefit at January 1   |                                                        | 33   |     | 67   |     |  
|                                        |                                                        |     
|                                        | Increases due to prior period tax positions            |      | 30  |      | 14  |  
|                                        |                                                        |     
|                                        | Decreases due to prior period tax positions            |      |    |      | (55 | )
|                                        |                                                        |     
|                                        | Increases due to settlement with taxation authorities  |      |    |      | 8   |  
|                                        |                                                        |     
|                                        | Decreases due to settlements with taxation authorities |      | (14 | )    | (1  | )
|                                       
|Unrecognized tax benefit at December 31 |                                                        | 49   |     | 33   |     |  
|                                       

Talisman's entire unrecognized tax benefit as at December 31, 2010 and December 31, 2009, if recognized, would affect the Company's effective
tax rate.

Of
the decreases due to prior period tax positions of $55 million in 2009, $49 million was the result of the Company conceding a tax position as a result of an unfavourable court
decision involving another taxpayer in a similar transaction.

No
significant change in the total unrecognized tax benefit is expected in 2011.

The
total amount of interest and penalties included in income tax expense during the year ended December 31, 2010 was $2 million
(2009  $1 million; 2008  $2 million). The total amount of accrued interest and penalties was
$2 million at December 31, 2010 (2009  $nil).

Talisman's
open tax years by jurisdiction are as follows:

|Jurisdiction |  | Tax years subject to examination | 
|------------ |  | -------------------------------- | 
|            
|Canada       |  | 1987 and later                   | 
|             |  |                                 
|US           |  | 2005 and later                   | 
|             |  |                                 
|UK           |  | 2005 and later                   | 
|             |  |                                 
|Norway       |  | 2003 and later                   | 
|             |  |                                 
|Malaysia     |  | 2004 and later                   | 
|             |  |                                 
|Indonesia    |  | 2005 and later                   | 
|             |  |                                 
|Vietnam      |  | 2005 and later                   | 
|            

As a matter of course, Talisman is audited regularly by federal and foreign taxing authorities, but does not anticipate adjustments arising from these audits
that would materially affect its financial position, results of operations or cash flows.

Petroleum Revenue Tax (PRT)

PRT expense relates primarily to the UK and is comprised of current tax expense of $127 million
(2009  $65 million; 2008  $83 million) and future tax expense of $4 million
(2009  $43 million; 2008  $93 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.

TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS41

---



20. Supplemental Cash Flow Information

Items Not Involving Cash

|Years ended December 31                                             |  | 2010  |   | 2009  |   | 2008   |   | 
|------------------------------------------------------------------- |  | ----- | - | ----- | - | ------ | - | 
|                                                                   
|Depreciation, depletion and amortization                            |  | 2,164 |   | 2,360 |   | 2,606  |   | 
|                                                                    |  |      
|Dry hole                                                            |  | 123   |   | 539   |   | 442    |   | 
|                                                                    |  |      
|Net gain on asset disposals                                         |  | (59   | ) | (37   | ) | (66    | ) | 
|                                                                    |  |      
|Stock-based compensation expense (recovery)                         |  | 146   |   | 238   |   | (284   | ) | 
|                                                                    |  |      
|Future income taxes and deferred PRT (recovery)                     |  | (268  | ) | (635  | ) | 257    |   | 
|                                                                    |  |      
|Unrealized (gains) losses on held-for-trading financial instruments |  | (278  | ) | 1,401 |   | (1,222 | ) | 
|                                                                    |  |      
|Other                                                               |  | 248   |   | 67    |   | 90     |   | 
|                                                                   
|                                                                    |  | 2,076 |   | 3,933 |   | 1,823  |   | 
|                                                                   

Changes in Non-Cash Operating Working Capital

|Years ended December 31                   |  | 2010 |   | 2009 |   | 2008 |   | 
|----------------------------------------- |  | ---- | - | ---- | - | ---- | - | 
|                                         
|Accounts receivable                       |  | (20  | ) | (71  | ) | 3    |   | 
|                                          |  |     
|Inventories                               |  | (15  | ) | (17  | ) | (43  | ) | 
|                                          |  |     
|Prepaid expenses                          |  | (11  | ) | 3    |   | (5   | ) | 
|                                          |  |     
|Asset retirement obligations expenditures |  | (18  | ) | (33  | ) | (57  | ) | 
|                                          |  |     
|Accounts payable and accrued liabilities  |  | 302  |   | (117 | ) | (11  | ) | 
|                                          |  |     
|Income and other taxes payable            |  | 164  |   | (127 | ) | 104  |   | 
|                                         
|Net source (use) of cash                  |  | 402  |   | (362 | ) | (9   | ) | 
|                                         

Other Cash Flow Information

|Years ended December 31                          |  | 2010 |  | 2009 |  | 2008  | 
|------------------------------------------------ |  | ---- |  | ---- |  | ----- | 
|                                                
|Cash interest paid (net of capitalized interest) |  | 182  |  | 215  |  | 162   | 
|                                                
|Cash income taxes paid                           |  | 882  |  | 920  |  | 1,385 | 
|                                                

21. Cash and Cash Equivalents

Of the cash and cash equivalents balance of $1.6 billion, arising largely from the disposition of assets described in note 3, $440 million has been
invested in bank deposits and the remainder in highly rated marketable securities with maturities of less than three months. At December 31, 2010, $63 million was held in escrow in
connection with the December 2010 Eagle Ford transaction described in note 4.

22. Weighted Average Number of Common Shares Outstanding  Basic and Diluted

|(millions)                                                     |  | 2010  |  | 2009  |  | 2008  | 
|-------------------------------------------------------------- |  | ----- |  | ----- |  | ----- | 
|                                                              
|Weighted average number of common shares outstanding  basic   |  | 1,018 |  | 1,015 |  | 1,017 | 
|                                                               |  |      
|Dilution effect of stock options                               |  | 19    |  |      |  | 17    | 
|                                                              
|Weighted average number of common shares outstanding  diluted |  | 1,037 |  | 1,015 |  | 1,034 | 
|                                                              

Outstanding stock options are the only instruments that are dilutive to net income per share.

42TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS

---



In
2010, 28,301,853 (2008  26,985,720) stock options that were anti-dilutive were excluded from the computation of diluted net income per share. As a
result of the loss from continuing operations, the effect of outstanding stock options on per share amounts was anti-dilutive in 2009.

23. Employee Benefits

The Company sponsors both defined benefit and defined contribution pension arrangements covering most employees. The Company also provides non-pension
post-retirement benefits to some of its retirees.

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 55% of the accrued benefit obligation at
December 31, 2010, will increase at the rate of inflation. Although the Company has no commitment to provide for increases related to inflation on its Canadian defined benefit pension plans,
the benefits have increased annually by approximately one-half of the rate of inflation since 2003.

Talisman
uses actuarial reports prepared by independent actuaries on the defined benefit pension plans for funding and accounting purposes. The Company uses a December 31 measurement date to
value its benefit plan assets and obligations. The most recent actuarial valuations of the Canadian registered defined benefit pension plans for funding purposes was at December 31, 2009, with
the next valuations at December 31, 2012. The most recent actuarial valuation of the UK pension scheme for funding purposes was at March 31, 2009, with the next valuation at
March 31, 2012.

Actuarial Assumptions

The following significant actuarial assumptions were employed to determine the net benefit expense and the accrued benefit obligations for the
defined benefit pension plans:

|                                                     |  | 2010 |  | 2009 |  | 2008 | 
|---------------------------------------------------- |  | ---- |  | ---- |  | ---- | 
|                                                    
|Accrued benefit obligation                           |  |      |  |      |  |      | 
|                                                     |  |     
|Discount rate (%)                                    |  | 5.2  |  | 5.8  |  | 6.5  | 
|                                                     |  |     
|Rate of compensation increase (%)                    |  | 4.8  |  | 4.9  |  | 4.6  | 
|                                                     |  |     
|Benefit expense                                      |  |      |  |      |  |      | 
|                                                     |  |     
|Discount rate (%)                                    |  | 5.8  |  | 6.5  |  | 5.5  | 
|                                                     |  |     
|Expected long-term rate of return on plan assets (%) |  | 6.1  |  | 5.8  |  | 6.6  | 
|                                                     |  |     
|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     |  | 2036 |  | 2036 |  | 2036 | 
|                                                    

The discount rate assumptions used to determine pension and non-pension post-retirement benefits obligations and expense reflect the
prevailing rates available on high-quality, fixed-income debt instruments.

The
expected long-term rate of return on plan assets is established by developing a forward-looking, long-term return assumption for each asset class, taking into account
factors such as the expected real return for the specific asset class and inflation. A single, long-term rate of return is then calculated as the weighted average of the target asset
allocation and the long-term return assumption for each asset class.

Investment Policies

The Canadian registered defined benefit pension plans' investment policy provides a framework for managing the plan assets, without undue risk of
capital loss and with a reasonable expectation of a rate of return or appreciation in value. Investment managers must manage the plan assets to reasonably track the return of the appropriate index.
Equity investments are passively managed to replicate the S&P/TSX Index, the S&P 500 Index and the MSCI EAFE Index. Foreign equity investments

TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS43

---



are
hedged to the Canadian dollar. Investments in bonds and debentures are managed passively to replicate the DEX Long Term Bond Index and are limited to those meeting minimum credit ratings.

The
UK pension scheme's investment policy is designed to spread risks across a range of different sources. This is achieved through asset diversification so as to limit the impact of any single risk.
Asset classes considered for the UK pension scheme's investments are UK government and corporate bonds, UK equities and international equities. Plan assets are actively managed, with investment
managers maintaining the target asset allocation, described below, within a 5% tolerance range.

Plan Assets

The approximate target allocation percentage for the Canadian registered defined benefit pension plans that account for 31% of total plan assets is
50% equities and 50% bonds. The approximate target allocation for the UK pension scheme that accounts for 57% of total plan assets is 45% UK equities, 35% international equities and 20% UK bonds. Plan
assets do not include any common shares of Talisman, other than through equity pooled funds.

The
allocation of defined benefit pension plan assets (excluding assets held in refundable tax accounts for the Canadian non-registered defined benefit pension plans) is as follows:

|                      |  | 2010 |  | 2009 |  | 2008 | 
|--------------------- |  | ---- |  | ---- |  | ---- | 
|                     
|Equity securities (%) |  | 64   |  | 60   |  | 58   | 
|                      |  |     
|Fixed income (%)      |  | 30   |  | 32   |  | 32   | 
|                      |  |     
|Cash (%)              |  | 4    |  | 6    |  | 8    | 
|                      |  |     
|Real estate (%)       |  | 2    |  | 2    |  | 2    | 
|                     
|                      |  | 100  |  | 100  |  | 100  | 
|                     

The Company characterizes inputs used in determining fair value using a hierarchy that prioritizes inputs depending on the degree to which they are observable.
Refer to note 15 for details concerning the three levels of the fair value hierarchy.

The
fair values of defined benefit pension plan assets (excluding assets held in refundable tax accounts for the Canadian non-registered defined benefit pension plans) at
December 31, 2010 by asset category are as follows:

|              |                                     | Level 1
inputs |   | Level 2
inputs |     | Level 3
inputs |   | Total fair
value |    
|------------- | ----------------------------------- | -------------- | - | -------------- | --- | -------------- | - | ---------------- | ---
|             
|Cash          |                                     | 9              |   |               |     |               |   | 9                |    
|              |                                     |               
|Pooled Funds: |                                     |                |   |                |     |                |   |                  |    
|              |                                     |               
|              | Canadian companies                  |                |  |                | 8   |                |  |                  | 8  
|              |                                     |               
|              | US companies                        |                |  |                | 40  |                |  |                  | 40 
|              |                                     |               
|              | International companies             |                |  |                | 110 |                |  |                  | 110
|              |                                     |               
|              | Corporate bonds                     |                |  |                | 74  |                |  |                  | 74 
|              |                                     |               
|              | International government securities |                |  |                | 9   |                |  |                  | 9  
|              |                                     |               
|              | Real estate                         |                |  |                |    |                | 5 |                  | 5  
|             
|              |                                     | 9              |   | 241            |     | 5              |   | 255              |    
|             

44TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS

---



Net Benefit Expense

The net benefit expense for the pension plans is as follows:

|Years ended December 31                                          |  | 2010 |   | 2009 |   | 2008 |   | 
|---------------------------------------------------------------- |  | ---- | - | ---- | - | ---- | - | 
|                                                                
|Current service cost  defined benefit                           |  | 24   |   | 20   |   | 22   |   | 
|                                                                 |  |     
|Interest cost                                                    |  | 18   |   | 16   |   | 15   |   | 
|                                                                 |  |     
|Actual return on plan assets                                     |  | (29  | ) | (24  | ) | 37   |   | 
|                                                                 |  |     
|Actuarial loss (gain) on accrued benefit obligation              |  | 29   |   | 42   |   | (39  | ) | 
|                                                                
|Costs arising during the year                                    |  | 42   |   | 54   |   | 35   |   | 
|                                                                 |  |     
|Differences between costs arising and recognized during the year |  |      |   |      |   |      |   | 
|                                                                 |  |     
|Return on plan assets                                            |  | 15   |   | 13   |   | (52  | ) | 
|                                                                 |  |     
|Actuarial loss (gain)                                            |  | (16  | ) | (35  | ) | 44   |   | 
|                                                                 |  |     
|Prior service benefit                                            |  | 1    |   | 1    |   | 1    |   | 
|                                                                 |  |     
|Amortization of net transitional item                            |  |     |   | (1   | ) | (1   | ) | 
|                                                                
|Defined benefit plan expense                                     |  | 42   |   | 32   |   | 27   |   | 
|                                                                 |  |     
|Defined contribution plan expense                                |  | 13   |   | 14   |   | 13   |   | 
|                                                                
|Net benefit expense                                              |  | 55   |   | 46   |   | 40   |   | 
|                                                                

The net benefit expense for the defined benefit pension plan 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(k).

The
net benefit expense for non-pension post-retirement benefits for the year ended December 31, 2010 was $1 million
(2009  $1 million).

TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS45

---



Obligation and Funded Status

Information about the defined benefit pension plans is as follows:

|                                                         |  | 2010                                   |   | 2009                                   |   |         
|-------------------------------------------------------- |  | -------------------------------------- | - | -------------------------------------- | - | --------
|                                                         |  | Pension plans grouped
by funded status |   | Pension plans grouped
by funded status |   |         
|                                                         |  | Surplus1                               |   | Deficit1                               |   | Surplus1
|                                                        
|Accrued benefit obligation                               |  |                                        |   |                                        |   |         
|                                                         |  |                                       
|Accrued benefit obligation, beginning of year            |  | 60                                     |   | 238                                    |   | 54      
|                                                         |  |                                       
|Transition of plans from a deficit to a surplus position |  | 126                                    |   | (126                                   | ) |        
|                                                         |  |                                       
|Current service cost                                     |  | 15                                     |   | 9                                      |   |        
|                                                         |  |                                       
|Interest cost                                            |  | 12                                     |   | 6                                      |   | 4       
|                                                         |  |                                       
|Actuarial loss                                           |  | 13                                     |   | 16                                     |   | 6       
|                                                         |  |                                       
|Plan participants' contributions                         |  | 1                                      |   |                                       |   |        
|                                                         |  |                                       
|Benefits paid                                            |  | (6                                     | ) | (5                                     | ) | (4      
|                                                         |  |                                       
|Foreign currency translation                             |  | (13                                    | ) | (2                                     | ) |        
|                                                         |  |                                       
|Other                                                    |  |                                       |   | 1                                      |   |        
|                                                        
|Accrued benefit obligation, end of year                  |  | 208                                    |   | 137                                    |   | 60      
|                                                        
|Plan assets                                              |  |                                        |   |                                        |   |         
|                                                         |  |                                       
|Fair value of plan assets, beginning of year             |  | 65                                     |   | 153                                    |   | 59      
|                                                         |  |                                       
|Transition of plans from a deficit to a surplus position |  | 117                                    |   | (117                                   | ) |        
|                                                         |  |                                       
|Actual return on plan assets                             |  | 27                                     |   | 2                                      |   | 9       
|                                                         |  |                                       
|Employer contributions                                   |  | 19                                     |   | 12                                     |   | 1       
|                                                         |  |                                       
|Plan participants' contributions                         |  | 1                                      |   |                                       |   |        
|                                                         |  |                                       
|Benefits paid                                            |  | (6                                     | ) | (5                                     | ) | (4      
|                                                         |  |                                       
|Expenses                                                 |  |                                       |   | (1                                     | ) |        
|                                                         |  |                                       
|Foreign currency translation                             |  | (11                                    | ) | (1                                     | ) |        
|                                                        
|Fair value of plan assets, end of year                   |  | 212                                    |   | 43                                     |   | 65      
|                                                        
|Funded status  surplus (deficit)2                       |  | 4                                      |   | (94                                    | ) | 5       
|                                                         |  |                                       
|Unamortized net actuarial loss                           |  | 49                                     |   | 39                                     |   | 24      
|                                                         |  |                                       
|Unamortized prior service cost                           |  | 3                                      |   | 1                                      |   |        
|                                                         |  |                                       
|Unamortized net transitional item                        |  |                                       |   | 1                                      |   |        
|                                                        
|Net accrued benefit asset (liability)                    |  | 56                                     |   | (53                                    | ) | 29      
|                                                        

The projected future benefit payments for the defined benefit pension plans are as follows:

| |  | 2011 |  | 2012 |  | 2013 |  | 2014 |  | 2015 |  | 2016-2020 | 
| |  | ---- |  | ---- |  | ---- |  | ---- |  | ---- |  | --------- | 
|
| |  | 12   |  | 12   |  | 12   |  | 13   |  | 14   |  | 87        | 
|

During 2011, the Company expects to make contributions of $30 million to its defined benefit pension plans.

46TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS

---



At
December 31, 2010, the accrued benefit obligation for non-pension post-retirement benefits was $11 million
(2009  $11 million). Non-pension post-retirement benefits include medical, dental and life insurance benefits for current and
future retirees. The effect of a 1% change in the assumed health care cost trend rates on the accrued benefit obligation and the net benefit expense would be immaterial.

24. Segmented Information

Talisman's activities are conducted in five geographic segments: North America, UK, Scandinavia, Southeast Asia, and Other. The North America segment includes operations in
Canada and the US. The Southeast Asia segment includes operations in Indonesia, Malaysia, Vietnam and Australia and exploration activities in Papua New Guinea. The Other segment includes
operations in Algeria and exploration activities in Peru, Colombia and the Kurdistan region of northern Iraq. All activities relate to the exploration, development, production and transportation of
oil, liquids and natural gas. Effective January 1, 2011, the composition of the Company's segments has changed such that the activities in the UK and Scandinavia will be reported as a single
'North Sea' segment since, in management's judgment, the assets in those locations now share similar economic characteristics. Prior periods will be restated accordingly in the first interim filing
subsequent to the change.

TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS47

---







|                                                      |  | North America1 |   | UK    |   | Scandinavia
|----------------------------------------------------- |  | -------------- | - | ----- | - | -----------
|(millions of C$)                                      |  | 2010           |   | 2009  |   | 2008       
|                                                     
|Revenue                                               |  |                |   |       |   |            
|                                                      |  |               
|Gross sales                                           |  | 1,650          |   | 1,394 |   | 2,630      
|                                                      |  |               
|Hedging loss                                          |  |               |   |      |   |           
|                                                      |  |               
|Royalties                                             |  | 188            |   | 156   |   | 429        
|                                                     
|Net sales                                             |  | 1,462          |   | 1,238 |   | 2,201      
|                                                      |  |               
|Other                                                 |  | 88             |   | 93    |   | 84         
|                                                     
|Total revenue                                         |  | 1,550          |   | 1,331 |   | 2,285      
|                                                     
|Segmented expenses                                    |  |                |   |       |   |            
|                                                      |  |               
|Operating                                             |  | 424            |   | 403   |   | 389        
|                                                      |  |               
|Transportation                                        |  | 61             |   | 59    |   | 68         
|                                                      |  |               
|DD&A                                                  |  | 764            |   | 748   |   | 768        
|                                                      |  |               
|Dry hole expense (recovery)                           |  | (4             | ) | 134   |   | 219        
|                                                      |  |               
|Exploration                                           |  | 40             |   | 84    |   | 165        
|                                                      |  |               
|Other                                                 |  | (5             | ) | (21   | ) | (86        
|                                                     
|Total segmented expenses                              |  | 1,280          |   | 1,407 |   | 1,523      
|                                                     
|Segmented income (loss) before taxes                  |  | 270            |   | (76   | ) | 762        
|                                                     
|Non-segmented expenses                                |  |                |   |       |   |            
|                                                      |  |               
|General and administrative                            |  |                |   |       |   |            
|                                                      |  |               
|Interest on long-term debt                            |  |                |   |       |   |            
|                                                      |  |               
|Stock-based compensation (recovery)                   |  |                |   |       |   |            
|                                                      |  |               
|Currency translation                                  |  |                |   |       |   |            
|                                                      |  |               
|(Gain) loss on held-for-trading financial instruments |  |                |   |       |   |            
|                                                     
|Total non-segmented expenses                          |  |                |   |       |   |            
|                                                     
|Income (loss) from continuing operations before taxes |  |                |   |       |   |            
|                                                     
|Capital expenditure                                   |  |                |   |       |   |            
|                                                      |  |               
|Exploration                                           |  | 285            |   | 1,189 |   | 1,320      
|                                                      |  |               
|Development                                           |  | 1,506          |   | 264   |   | 542        
|                                                      |  |               
|Midstream                                             |  | 3              |   | 26    |   | 41         
|                                                     
|Exploration and development                           |  | 1,794          |   | 1,479 |   | 1,903      
|                                                     
|Property acquisitions                                 |  |                |   |       |   |            
|                                                      |  |               
|Proceeds on dispositions                              |  |                |   |       |   |            
|                                                      |  |               
|Other non-segmented                                   |  |                |   |       |   |            
|                                                     
|Net capital expenditures                              |  |                |   |       |   |            
|                                                     
|Property, plant and equipment                         |  | 7,721          |   | 6,155 |   | 6,041      
|                                                      |  |               
|Goodwill                                              |  | 140            |   | 149   |   | 150        
|                                                      |  |               
|Other                                                 |  | 1,546          |   | 594   |   | 792        
|                                                      |  |               
|Discontinued operations                               |  |               |   | 2,585 |   | 3,316      
|                                                     
|Segmented assets                                      |  | 9,407          |   | 9,483 |   | 10,299     
|                                                      |  |               
|Non-segmented assets                                  |  |                |   |       |   |            
|                                                     
|Total assets                                          |  |                |   |       |   |            
|                                                     

|
|

| |  |  |  |  |  |  |  |  |  | 1 | North America                 |  | 2010  |  | 2009  |  | 2008  | 
| |  |  |  |  |  |  |  |  |  | - | ----------------------------- |  | ----- |  | ----- |  | ----- | 
| |  |  |  |  |  |  |  |  |  |   |                              
| |  |  |  |  |  |  |  |  |  |   | Canada                        |  | 1,231 |  | 1,210 |  | 2,058 | 
| |  |  |  |  |  |  |  |  |  |   |                               |  |      
| |  |  |  |  |  |  |  |  |  |   | US                            |  | 319   |  | 121   |  | 227   | 
| |  |  |  |  |  |  |  |  |  |   |                              
| |  |  |  |  |  |  |  |  |  |   | Total revenue                 |  | 1,550 |  | 1,331 |  | 2,285 | 
| |  |  |  |  |  |  |  |  |  |   |                              
| |  |  |  |  |  |  |  |  |  |   | Canada                        |  | 4,991 |  | 4,993 |  | 5,240 | 
| |  |  |  |  |  |  |  |  |  |   |                               |  |      
| |  |  |  |  |  |  |  |  |  |   | US                            |  | 2,730 |  | 1,162 |  | 801   | 
| |  |  |  |  |  |  |  |  |  |   |                              
| |  |  |  |  |  |  |  |  |  |   | Property, plant and equipment |  | 7,721 |  | 6,155 |  | 6,041 | 
| |  |  |  |  |  |  |  |  |  |   |                              
| |  |  |  |  |  |  |  |  |  |   |                               |  |       |  |       |  |       | 

48TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS

---







|                                                      |  | Southeast Asia2 |  | Other3 |  | Total
|----------------------------------------------------- |  | --------------- |  | ------ |  | -----
|(millions of C$)                                      |  | 2010            |  | 2009   |  | 2008 
|                                                     
|Revenue                                               |  |                 |  |        |  |      
|                                                      |  |                
|Gross sales                                           |  | 2,379           |  | 1,995  |  | 2,479
|                                                      |  |                
|Hedging loss                                          |  |                |  |       |  |     
|                                                      |  |                
|Royalties                                             |  | 858             |  | 675    |  | 1,066
|                                                     
|Net sales                                             |  | 1,521           |  | 1,320  |  | 1,413
|                                                      |  |                
|Other                                                 |  | 1               |  |       |  |     
|                                                     
|Total revenue                                         |  | 1,522           |  | 1,320  |  | 1,413
|                                                     
|Segmented expenses                                    |  |                 |  |        |  |      
|                                                      |  |                
|Operating                                             |  | 288             |  | 255    |  | 195  
|                                                      |  |                
|Transportation                                        |  | 61              |  | 55     |  | 48   
|                                                      |  |                
|DD&A                                                  |  | 318             |  | 382    |  | 254  
|                                                      |  |                
|Dry hole expense (recovery)                           |  | 31              |  | 253    |  | 13   
|                                                      |  |                
|Exploration                                           |  | 118             |  | 75     |  | 84   
|                                                      |  |                
|Other                                                 |  | 21              |  | 9      |  | 29   
|                                                     
|Total segmented expenses                              |  | 837             |  | 1,029  |  | 623  
|                                                     
|Segmented income (loss) before taxes                  |  | 685             |  | 291    |  | 790  
|                                                     
|Non-segmented expenses                                |  |                 |  |        |  |      
|                                                      |  |                
|General and administrative                            |  |                 |  |        |  |      
|                                                      |  |                
|Interest on long-term debt                            |  |                 |  |        |  |      
|                                                      |  |                
|Stock-based compensation (recovery)                   |  |                 |  |        |  |      
|                                                      |  |                
|Currency translation                                  |  |                 |  |        |  |      
|                                                      |  |                
|(Gain) loss on held-for-trading financial instruments |  |                 |  |        |  |      
|                                                     
|Total non-segmented expenses                          |  |                 |  |        |  |      
|                                                     
|Income (loss) from continuing operations before taxes |  |                 |  |        |  |      
|                                                     
|Capital expenditure                                   |  |                 |  |        |  |      
|                                                      |  |                
|Exploration                                           |  | 242             |  | 233    |  | 318  
|                                                      |  |                
|Development                                           |  | 324             |  | 444    |  | 459  
|                                                      |  |                
|Midstream                                             |  |                |  |       |  |     
|                                                     
|Exploration and development                           |  | 566             |  | 677    |  | 777  
|                                                     
|Property acquisitions                                 |  |                 |  |        |  |      
|                                                      |  |                
|Proceeds on dispositions                              |  |                 |  |        |  |      
|                                                      |  |                
|Other non-segmented                                   |  |                 |  |        |  |      
|                                                     
|Net capital expenditures                              |  |                 |  |        |  |      
|                                                     
|Property, plant and equipment                         |  | 3,076           |  | 2,864  |  | 2,984
|                                                      |  |                
|Goodwill                                              |  | 148             |  | 110    |  | 129  
|                                                      |  |                
|Other                                                 |  | 622             |  | 427    |  | 304  
|                                                      |  |                
|Discontinued operations                               |  |                |  |       |  |     
|                                                     
|Segmented assets                                      |  | 3,846           |  | 3,401  |  | 3,417
|                                                      |  |                
|Non-segmented assets                                  |  |                 |  |        |  |      
|                                                     
|Total assets                                          |  |                 |  |        |  |      
|                                                     

|
|

2
Southeast Asia

2010

2009

2008Indonesia

865

693

863Malaysia

496

400

424Vietnam

53

101

33Australia

108

126

93Total revenue

1,522

1,320

1,413Indonesia

1,081

906

990Malaysia

1,067

1,171

1,291Vietnam

278

241

456Papua New Guinea

426

337

Australia

224

209

247Property, plant and equipment

3,076

2,864

2,984


|
|

3
Other

2010

2009

2008Algeria

194

219

219Total revenue

194

219

219Algeria

249

193

221Kurdistan

595

512

529Other

148

118

64Property, plant and equipment

992

823

814


TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS49

---





25. 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. Comparative
US GAAP amounts have been restated as a result of the restatement of comparative Canadian GAAP amounts for operations classified as discontinued in 2010 (see note 3).

Balance Sheet Items in Accordance with US GAAP

|                                           |                                      |         |           | 2010          |        | 2009    |        |                        
|------------------------------------------ | ------------------------------------ | ------- | --------- | ------------- | ------ | ------- | ------ | -----------------------
|December 31 (millions of C$)               |                                      | Notes   |           | Canadian
GAAP |        | US
GAAP |        | Canadian
GAAP          
|                                          
|                                           |                                      |         |           |               |        |         |        | (restated 
see note 3)
|Current assets                             |                                      |         |           | 3,208         |        | 3,208   |        | 3,154                  
|                                           |                                      |        
|Property, plant and equipment              |                                      | 1, 2, 3 |           | 18,804        |        | 18,907  |        | 16,431                 
|                                           |                                      |        
|Other non-current assets                   |                                      | 4, 8, 9 |           | 2,181         |        | 2,130   |        | 4,033                  
|                                          
|Total assets                               |                                      |         |           | 24,193        |        | 24,245  |        | 23,618                 
|                                          
|Current liabilities                        |                                      | 8, 9    |           | 3,401         |        | 3,675   |        | 2,601                  
|                                           |                                      |        
|Long-term debt                             |                                      |         |           | 3,824         |        | 3,824   |        | 3,770                  
|                                           |                                      |        
|Deferred income taxes                      |                                      | 2       |           | 3,974         |        | 3,866   |        | 3,599                  
|                                           |                                      |        
|Other non-current liabilities              |                                      | 8, 9    |           | 2,515         |        | 2,572   |        | 2,537                  
|                                          
|Total liabilities                          |                                      |         |           | 13,714        |        | 13,937  |        | 12,507                 
|                                          
|Shareholders' equity                       |                                      |         |           |               |        |         |        |                        
|                                           |                                      |        
|                                           | Common shares                        |         |           |               | 2,457  |         | 2,457  |                        
|                                           |                                      |        
|                                           | Contributed surplus                  |         | 5         |               | 132    |         | 149    |                        
|                                           |                                      |        
|                                           | Retained earnings                    |         | 1-5, 8, 9 |               | 9,568  |         | 8,948  |                        
|                                           |                                      |        
|                                           | Accumulated other comprehensive loss |         | 8, 10     |               | (1,678 | )       | (1,246 | )                      
|                                          
|Total liabilities and shareholders' equity |                                      |         |           | 24,193        |        | 24,245  |        | 23,618                 
|                                          

50TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS

---





Net Income in Accordance with US GAAP

|Years ended December 31 (millions of C$) |                                             | Notes |         | 2010 |       | 2009                    |       | 2008                    |      |  
|---------------------------------------- | ------------------------------------------- | ----- | ------- | ---- | ----- | ----------------------- | ----- | ----------------------- | ---- | -
|                                        
|                                         |                                             |       |         |      |       | (restated 
see note 3) |       | (restated 
see note 3) |      |  
|Net income  Canadian GAAP               |                                             |       |         | 648  |       | 437                     |       | 3,519                   |      |  
|                                         |                                             |      
|                                         | Depreciation, depletion and amortization    |       | 1, 2, 3 |      | (15   | )                       | (16   | )                       | (19  | )
|                                         |                                             |      
|                                         | (Loss) gain on derivative instruments       |       | 4       |      | 23    |                         | (2    | )                       | 39   |  
|                                         |                                             |      
|                                         | Deferred income taxes                       |       | 2       |      | (15   | )                       | 44    |                         | (21  | )
|                                         |                                             |      
|                                         | Stock-based compensation                    |       | 9       |      | 11    |                         | (163  | )                       | (5   | )
|                                         |                                             |      
|                                         | Interest on long-term debt                  |       | 4       |      |      |                         | (3    | )                       | (3   | )
|                                         |                                             |      
|                                         | Loss on disposal of discontinued operations |       | 2, 10   |      | (494  | )                       | (25   | )                       |     |  
|                                        
|                                         |                                             |       |         | (490 | )     | (165                    | )     | (9                      | )    |  
|                                        
|Net income  US GAAP                     |                                             |       |         | 158  |       | 272                     |       | 3,510                   |      |  
|                                        
|Per common share amounts US GAAP (C$)    |                                             |       |         |      |       |                         |       |                         |      |  
|                                         |                                             |      
|Basic                                    |                                             |       |         |      |       |                         |       |                         |      |  
|                                         |                                             |      
|                                         | Income (loss) from continuing operations    |       |         |      | 0.40  |                         | (0.78 | )                       | 2.82 |  
|                                         |                                             |      
|                                         | Income (loss) from discontinued operations  |       |         |      | (0.25 | )                       | 1.05  |                         | 0.63 |  
|                                        
|                                         | Net income                                  |       |         |      | 0.15  |                         | 0.27  |                         | 3.45 |  
|                                        
|Diluted                                  |                                             |       |         |      |       |                         |       |                         |      |  
|                                         |                                             |      
|                                         | Income (loss) from continuing operations    |       |         |      | 0.40  |                         | (0.78 | )                       | 2.78 |  
|                                         |                                             |      
|                                         | Income (loss) from discontinued operations  |       |         |      | (0.25 | )                       | 1.05  |                         | 0.62 |  
|                                        
|                                         | Net income                                  |       |         |      | 0.15  |                         | 0.25  |                         | 3.40 |  
|                                        

Comprehensive Income (Loss) in Accordance with
US GAAP

|Years ended December 31 (millions of C$)             |  | Notes |  | 2010 |   | 2009 |   | 2008  |   | 
|---------------------------------------------------- |  | ----- |  | ---- | - | ---- | - | ----- | - | 
|                                                    
|Net income  US GAAP                                 |  |       |  | 158  |   | 272  |   | 3,510 |   | 
|                                                     |  |      
|Foreign currency translation adjustments             |  |       |  | (604 | ) | (317 | ) | (100  | ) | 
|                                                     |  |      
|Employee benefits, net of tax                        |  | 8     |  |     |   | (21  | ) | (3    | ) | 
|                                                     |  |      
|Change in fair value of cash flow hedges, net of tax |  |       |  | 2    |   | (1   | ) | 17    |   | 
|                                                    
|Other comprehensive loss  US GAAP                   |  |       |  | (602 | ) | (339 | ) | (86   | ) | 
|                                                    
|Comprehensive income (loss)  US GAAP                |  |       |  | (444 | ) | (67  | ) | 3,424 |   | 
|                                                    

TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS51

---



Statement of Cash Flow Items in Accordance with
US GAAP

|Years ended December 31 (millions of C$)                            |                                                 | Notes |   | 2010  |        | 2009  |        | 2008 |        |  
|------------------------------------------------------------------- | ----------------------------------------------- | ----- | - | ----- | ------ | ----- | ------ | ---- | ------ | -
|                                                                   
|Operating                                                           |                                                 |       |   |       |        |       |        |      |        |  
|                                                                    |                                                 |      
|                                                                    | Cash provided by operating activities           |       | 6 |       | 3,076  |       | 3,298  |      | 5,725  |  
|                                                                    |                                                 |      
|Investing                                                           |                                                 |       |   |       |        |       |        |      |        |  
|                                                                    |                                                 |      
|                                                                    | Cash used in investing activities               |       | 6 |       | (3,350 | )     | (1,566 | )    | (4,545 | )
|                                                                    |                                                 |      
|Financing                                                           |                                                 |       |   |       |        |       |        |      |        |  
|                                                                    |                                                 |      
|                                                                    | Cash provided by (used in) financing activities |       | 7 |       | 275    |       | 12     |      | (1,655 | )
|                                                                    |                                                 |      
|Effect of translation on foreign currency cash and cash equivalents |                                                 |       |   | (59   | )      | (133  | )      | 32   |        |  
|                                                                   
|Net increase (decrease) in cash and cash equivalents                |                                                 |       |   | (58   | )      | 1,611 |        | (443 | )      |  
|                                                                    |                                                 |      
|Cash and cash equivalents, beginning of year                        |                                                 | 7     |   | 1,704 |        | 93    |        | 536  |        |  
|                                                                   
|Cash and cash equivalents, end of year                              |                                                 | 7     |   | 1,646 |        | 1,704 |        | 93   |        |  
|                                                                   

GAAP Differences

25.1)Gains 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 have created differences in the carrying value of these properties and results in differences in DD&A in subsequent years.

25.2)Income 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 PP&E. As a result of the implementation method, further differences in DD&A expense and the net gain on dispositions of discontinued operations 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.

25.3)Impairments:In 2004, the Company adopted a Canadian standard that
eliminated a US GAAP reconciling item in respect to impairments on a go forward basis. Under both US and Canadian GAAP, PP&E must be assessed for potential impairments. Under US GAAP,
and effective under Canadian GAAP in 2004, 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.

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

Effective
January 1, 2001, the Company adopted a new US standard, 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 sheet at fair value. The
standard requires that changes in the derivative instrument's fair value be recognized currently in net income unless specific hedge accounting criteria are met.

52TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS

---



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 sheet at their fair value with the change in their fair value recognized in net income. Subsequent to January 1, 2004 and prior to January 1, 2007, management designated
commodity derivative financial instruments as hedges for US GAAP purposes and, accordingly, the changes in their fair value are recognized in other comprehensive
loss with any ineffective portion recognized in net income. 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 arose after that date.

25.5)Appropriation 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.

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

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

25.8)Employee Future Benefits:In 2006, the Company adopted recognition and
disclosure provisions of a new US standard,Employers' Accounting for Defined Benefit Pension and Other Post-Retirement
Plans.This standard 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 (loss). Deferred actuarial losses, past service costs and the net transitional item are presented on the balance sheet in
accumulated other comprehensive loss and charged to comprehensive income (loss). In order to record the difference between the funded positions of the plans and the carrying value under Canadian GAAP,
other assets have decreased by $51 million (2009  $25 million), other long-term liabilities have increased by $41 million
(2009  $67 million) and deferred tax assets have been reduced by $23 million (2009  $23 million),
with the balance of $69 million (2009  $69 million) recorded in accumulated other comprehensive loss. Also under this standard, 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.

Amounts
in accumulated other comprehensive loss are as follows:

|(millions of C$)                                           |  | Surplus |   | Deficit |   | Total |   | 
|---------------------------------------------------------- |  | ------- | - | ------- | - | ----- | - | 
|                                                          
|Amounts not yet reflected in the net periodic benefit cost |  |         |   |         |   |       |   | 
|                                                           |  |        
|Net transitional item                                      |  |        |   | (1      | ) | (1    | ) | 
|                                                           |  |        
|Past service costs                                         |  | (3      | ) | (1      | ) | (4    | ) | 
|                                                           |  |        
|Net actuarial loss                                         |  | (48     | ) | (39     | ) | (87   | ) | 
|                                                           |  |        
|Deferred taxes                                             |  | 13      |   | 10      |   | 23    |   | 
|                                                          
|Included in accumulated other comprehensive loss           |  | (38     | ) | (31     | ) | (69   | ) | 
|                                                          

The accumulated benefit obligation, which includes no allowance for future salary levels, was $263 million at December 31, 2010
(2009  $233 million).

The
amounts in accumulated other comprehensive loss 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
$nil, net actuarial losses of $8 million and past service costs of $1 million.

TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS53

---



Had
the pension liability been recorded in accordance with US GAAP, current liabilities would increase by $4 million and other long-term liabilities would decrease by
$4 million.

25.9)Stock-Based Compensation:Effective January 1, 2006, the Company
adopted a new US standard, as amended,Share-Based Payments, subsequent to which its stock-based compensation plans are classified as liability
instruments under US GAAP. Prior to 2006, there was no GAAP difference and 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 the new standard, as amended, 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. A description of the Company's stock-based compensation plans is provided in note 13.

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

|                               |  | 2010 |  | 2009 | 
|------------------------------ |  | ---- |  | ---- | 
|                              
|Expected volatility            |  | 46%  |  | 47%  | 
|                               |  |     
|Risk free interest rate        |  | 2.4% |  | 2.8% | 
|                               |  |     
|Expected term (years)          |  | 4.9  |  | 5.0  | 
|                               |  |     
|Expected forfeiture rate       |  | 8.6% |  | 8.1% | 
|                               |  |     
|Expected annual dividend yield |  | 1.0% |  | 1.0% | 
|                              

The expected volatility is based on the historical volatility of the Company's common shares over a 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 the Company's expectation for future payments.

For
the year ended December 31, 2010, the total stock-based compensation expense under US GAAP was $190 million (2009  $453 million
expense; 2008  $68 million recovery), of which $81 million (2009  $105 million;
2008  $20 million recovery) is allocated to operating expenses, $80 million (2009  $188 million;
2008  $43 million recovery) is allocated to general and administrative expenses and $29 million
(2009  $160 million; 2008  $5 million recovery) is allocated to exploration expenses. The stock-based
compensation expense net of tax was $138 million (2009  $338 million; 2008  $48 million recovery).

The
total number of options and cash units expected to vest as at December 31, 2010 was 66.5 million, with a weighted average remaining contractual life of 6.4 years, a weighted
average exercise price of $15.74 and an aggregate intrinsic value of $425 million.

54TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS

---



The
following is a summary of unvested stock-based compensation activity:

|                              |                   | Stock Options |             | Average
exercise price ($) |       | Cash Units |            | Average
exercise price ($) |      
|----------------------------- | ----------------- | ------------- | ----------- | -------------------------- | ----- | ---------- | ---------- | -------------------------- | -----
|                             
|Unvested at December 31, 2008 |                   | 34,742,032    |             | 18.90                      |       | 6,227,221  |            | 19.39                      |      
|                              |                   |              
|                              | Granted           |               | 12,023,390  |                            | 13.37 |            | 1,403,650  |                            | 13.23
|                              |                   |              
|                              | Vested            |               | (9,364,247  | )                          | 19.31 |            | (2,161,929 | )                          | 19.50
|                              |                   |              
|                              | Forfeited/expired |               | (1,737,426  | )                          | 16.20 |            | (197,707   | )                          | 18.44
|                             
|Unvested at December 31, 2009 |                   | 35,663,749    |             | 17.06                      |       | 5,271,235  |            | 17.63                      |      
|                              |                   |              
|                              | Granted           |               | 7,743,117   |                            | 17.42 |            | 1,170,920  |                            | 17.38
|                              |                   |              
|                              | Vested            |               | (14,483,880 | )                          | 18.83 |            | (2,327,884 | )                          | 19.72
|                              |                   |              
|                              | Forfeited/expired |               | (1,754,121  | )                          | 16.19 |            | (182,209   | )                          | 16.09
|                             
|Unvested at December 31, 2010 |                   | 27,168,865    |             | 16.28                      |       | 3,932,062  |            | 16.33                      |      
|                             

At December 31, 2010, there was unrecognized compensation expense of $100 million
(2009  $143 million; 2008  $54 million), which the Company expects to recognize over a weighted average
period of 2.0 years (2009  2.2 years).

25.10)Accumulated Other Comprehensive Loss:Accumulated other comprehensive
loss refers to revenues, expenses, gains and losses that are recorded as an element of shareholders' equity but are excluded from net income. The Company's accumulated other comprehensive loss is
comprised of: (a) adjustments that result from translation of the Company's foreign entity financial statements from their functional currencies to US dollars and the translation of US dollars
consolidated financial statements to the Company's presentation currency of C$; (b) eligible gains and losses on derivative financial instruments that are part of qualifying cash flow hedges;
and (c) adjustments related to the funded status of the Company's benefit plans.

In
2010, Talisman completed the sale of oil and gas producing properties in North America (note 3). Under Canadian GAAP, the net investment in the Company's Canadian self-sustaining
operations has been reduced as a result of these disposal transactions and a capital distribution to the parent from the subsidiary that held the assets sold and, accordingly, $465 million of
non-taxable foreign exchange gains previously accumulated in other comprehensive loss were included in the carrying value of the assets used to determine the gain on disposal.
US GAAP permits this accounting treatment only in the event of a complete or substantially complete liquidation of the investment in the foreign entity. Since the disposal of assets did not
constitute a substantially complete liquidation of the net investment in the Company's Canadian self-sustaining operations, no foreign exchange gains were included in the carrying value of
the assets to determine the gain on disposal for US GAAP reporting purposes.

TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS55

---



The
components of accumulated other comprehensive loss for the years ended December 31, 2010, 2009 and 2008 are as follows:

|(millions of C$)                                                  |  | Foreign
Currency
Translation
Adjustment |   | Fair Value of
Derivatives |   | Pension and
Post-Retirement
Benefit Plans |   | Total  |   | 
|----------------------------------------------------------------- |  | --------------------------------------- | - | ------------------------- | - | ----------------------------------------- | - | ------ | - | 
|                                                                 
|Balance at December 31, 2007                                      |  | (173                                    | ) | (1                        | ) | (45                                       | ) | (219   | ) | 
|                                                                  |  |                                        
|Change in foreign currency translation adjustment                 |  | (100                                    | ) |                          |   |                                          |   | (100   | ) | 
|                                                                  |  |                                        
|Change in fair value of derivatives (net of tax of $(13) million) |  |                                        |   | 17                        |   |                                          |   | 17     |   | 
|                                                                  |  |                                        
|Employee benefits (net of tax of $1 million)                      |  |                                        |   |                          |   | (3                                        | ) | (3     | ) | 
|                                                                 
|Balance at December 31, 2008                                      |  | (273                                    | ) | 16                        |   | (48                                       | ) | (305   | ) | 
|                                                                  |  |                                        
|Change in foreign currency translation adjustment                 |  | (317                                    | ) |                          |   |                                          |   | (317   | ) | 
|                                                                  |  |                                        
|Change in fair value of derivatives (net of tax of $1 million)    |  |                                        |   | (1                        | ) |                                          |   | (1     | ) | 
|                                                                  |  |                                        
|Employee benefits (net of tax of $7 million)                      |  |                                        |   |                          |   | (21                                       | ) | (21    | ) | 
|                                                                 
|Balance at December 31, 2009                                      |  | (590                                    | ) | 15                        |   | (69                                       | ) | (644   | ) | 
|                                                                  |  |                                        
|Change in foreign currency translation adjustment                 |  | (604                                    | ) |                          |   |                                          |   | (604   | ) | 
|                                                                  |  |                                        
|Change in fair value of derivatives (net of tax of $1 million)    |  |                                        |   | 2                         |   |                                          |   | 2      |   | 
|                                                                  |  |                                        
|Employee benefits (net of tax of $nil)                            |  |                                        |   |                          |   |                                          |   |       |   | 
|                                                                 
|Balance at December 31, 2010                                      |  | (1,194                                  | ) | 17                        |   | (69                                       | ) | (1,246 | ) | 
|                                                                 

25.11)Additional Information:    The
Company has a financing structure whereby subsidiaries have US$1.3 billion drawn on bank facilities that have been offset against equal amounts of cash deposited by another subsidiary with the
same bank under a right of offset agreement. The Company intends to offset these amounts at maturity.

US Accounting Pronouncements

Effective 2011, Talisman will be reporting under IFRS without reconciliation to US GAAP. Consequently, changes in US GAAP that would
ordinarily have been applicable to the Company are not presented below.

a) Extractive Activities  Oil and Gas

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

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

b) Subsequent Events

In 2009, the FASB issuedSubsequent Events. The new standard reflects the existing principles of current subsequent event
accounting guidance. The adoption of this standard did not have a material impact on the Company's results or financial position.

c) Fair Value Measurement

In 2010, the FASB issued an amendment toFair Value Measurement and Disclosure. The new standard requires entities to disclose
separately significant transfers in and out of level 1 and level 2 fair value measurements. Additionally, entities are

56TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS

---



required
to present separately information about purchases, sales, issuances and settlements of level 3 fair value measurements. This adoption of this amendment did not have a material impact
on the Company's results or financial position.

In
2008, Talisman adoptedFair Value Measurements, which defines fair value and establishes a framework for measuring fair value and increases
disclosure concerning fair value measurements. The adoption ofFair Value Measurementsdid not have a material impact on Talisman's results or financial
position. The disclosure required by this standard is provided in note 15.

In
2009, the FASB issued recommendations, which amendFair Value Measurementsby providing additional guidance clarifying the measurement of liabilities
at fair value. When a quoted price in an active market for the identical liability is not available, the amendments require that the fair value of the liability be measured using one or more of the
listed valuation techniques that should maximize use of relevant observable inputs, and minimize the use of unobservable inputs. The adoption of this amendment did not have a material impact on
Talisman's results or financial position.

d) Derivative Instruments and Hedging Activities

In 2008, the FASB issuedDisclosures about Derivative Instruments and Hedging Activities, which requires enhanced disclosure
about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for, and how derivative instruments and related hedged items affect an
entity's financial position, financial performance and cash flows. The disclosure required by this standard is provided in note 15.

e) Employee Benefits

Effective December 31, 2006, Talisman adopted the recognition and disclosure provisions ofEmployers' Accounting for Defined Benefit Pension and
Other Post-Retirement Plans. The adoption of the measurement provisions of this standard during 2008 did not have an impact on the Company's results or financial
position.

In
2008, the FASB issuedEmployers' Disclosures about Post-Retirement Benefit Plans Assets, which requires additional disclosures explaining
how investment allocation decisions are made, the major categories of plan assets, inputs and valuation techniques used to measure fair value of plan assets and significant concentrations of risk
within the plan assets. The disclosure required by this standard is provided in note 23.

f) Business Combinations

In 2007, the FASB issuedBusiness Combinations, which requires recognition of the assets acquired, liabilities assumed and
non-controlling interest arising in a business combination at their fair values as of the acquisition date. In addition, the costs of acquisition must be expensed.

On
January 1, 2009, Talisman adopted this standard prospectively, which did not materially impact the Company's results of operations or financial position.

g) Accounting Standards Codification

In 2009, the FASB issuedThe FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles, which establishes the FASB Accounting Standards Codification as the sole source of authoritative US GAAP. Since the codification was not intended to change existing
US GAAP, its
adoption did not have an impact on Talisman's consolidated financial statements prepared in accordance with US GAAP.

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.

|US$ million (except as noted)           |  | 2010   |  | 2009   |  | 2008   | 
|--------------------------------------- |  | ------ |  | ------ |  | ------ | 
|                                       
|Total revenue1                          |  | 6,711  |  | 5,308  |  | 8,025  | 
|                                        |  |       
|Net income                              |  | 153    |  | 238    |  | 3,293  | 
|                                        |  |       
|Net income per common share (US$/share) |  | 0.15   |  | 0.23   |  | 3.24   | 
|                                       
|Average exchange rate (US$/C$)          |  | 0.9709 |  | 0.8757 |  | 0.9381 | 
|                                       

TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS57

---





Supplementary Oil and Gas Information

(unaudited)

The 2010 and 2009 supplemental data on the Company's oil and gas activities was prepared in accordance with the FASB standardExtractive
Activities  Oil & Gas. 2008 information was prepared in accordance with the predecessor standard SFAS No. 69: Disclosures About Oil and Gas Producing
Activities. Activities not directly associated with conventional crude oil and natural gas production are
excluded from all aspects of this supplementary oil and gas information. Comparable information prepared in accordance with Canadian disclosure requirements (National Instrument 51-101 of the Canadian
Securities Administrators) is contained in Appendix A of Talisman's Annual Information Form.

Supplementary
oil and gas information reflects activities from assets that are classified as both continuing operations and, until disposed of, discontinued operations for financial reporting
purposes. See note 3 to the Consolidated Financial Statements for details.

Results of Operations from Oil and Gas Producing Activities

|                                                      |  |                                          |   |                |   |       |   |                 |  |                 |  |           |   |        |   |       |  |       | 
|----------------------------------------------------- |  | ---------------------------------------- | - | -------------- | - | ----- | - | --------------- |  | --------------- |  | --------- | - | ------ | - | ----- |  | ----- | 
|Years ended December 31                               |  | North America2                           |   |                |   |       |   | Southeast Asia5 |  |                 |  |           |  
|(millions of C$)                                      |  | Canada                                   |   | US             |   | UK3   |   | Scandinavia4    |  | Indonesia       |  | Other SEA |   | Other6 |   | Total | 
|                                                     
|2010                                                  |  |                                          |   |                |   |       |   |                 |  |                 |  |           |   |        |   |       | 
|Net oil and gas revenue derived from proved reserves1 |  | 1,409                                    |   | 313            |   | 2,232 |   | 1,393           |  | 878             |  | 643       |   | 200    |   | 7,068 | 
|                                                      |  |                                          |   |               
|Less:                                                 |  | Production costs                         |   | 433            |   | 61    |   | 817             |  | 304             |  | 130       |   | 158    |   | 27    |  | 1,930 | 
|                                                      |  |                                          |   |               
|                                                      |  | Transportation                           |   | 50             |   | 11    |   | 34              |  | 64              |  | 61        |   |       |   | 7     |  | 227   | 
|                                                      |  |                                          |   |               
|                                                      |  | Exploration and dry hole expense         |   | 34             |   | 2     |   | 78              |  | 43              |  | 57        |   | 92     |   | 201   |  | 507   | 
|                                                      |  |                                          |   |               
|                                                      |  | Depreciation, depletion and amortization |   | 615            |   | 223   |   | 581             |  | 537             |  | 59        |   | 256    |   | 28    |  | 2,299 | 
|                                                      |  |                                          |   |               
|                                                      |  | Tax expense                              |   | 71             |   | 6     |   | 406             |  | 347             |  | 271       |   | 102    |   | 17    |  | 1,220 | 
|                                                     
|Results of operations                                 |  | 206                                      |   | 10             |   | 316   |   | 98              |  | 300             |  | 35        |   | (80    | ) | 885   | 
|                                                     
|2009                                                  |  |                                          |   |                |   |       |   |                 |  |                 |  |           |   |        |   |       |  |       | 
|Net oil and gas revenue derived from proved reserves1 |  | 1,667                                    |   | 126            |   | 2,183 |   | 986             |  | 700             |  | 620       |   | 265    |   | 6,547 | 
|                                                      |  |                                          |   |               
|Less:                                                 |  | Production costs                         |   | 555            |   | 30    |   | 872             |  | 285             |  | 104       |   | 151    |   | 48    |  | 2,045 | 
|                                                      |  |                                          |   |               
|                                                      |  | Transportation                           |   | 55             |   | 4     |   | 46              |  | 54              |  | 55        |   |       |   | 8     |  | 222   | 
|                                                      |  |                                          |   |               
|                                                      |  | Exploration and dry hole expense         |   | 222            |   | 53    |   | 48              |  | 92              |  | 26        |   | 302    |   | 142   |  | 885   | 
|                                                      |  |                                          |   |               
|                                                      |  | Depreciation, depletion and amortization |   | 894            |   | 151   |   | 837             |  | 411             |  | 51        |   | 331    |   | 48    |  | 2,723 | 
|                                                      |  |                                          |   |               
|                                                      |  | Tax expense (recovery)                   |   | (15            | ) | (43   | ) | 255             |  | 112             |  | 219       |   |       |   | 33    |  | 561   | 
|                                                     
|Results of operations                                 |  | (44                                      | ) | (69            | ) | 125   |   | 32              |  | 245             |  | (164      | ) | (14    | ) | 111   | 
|                                                     
|                                                      |  |                                          |   | North America2 |   | UK3   |   | Scandinavia4    |  | Southeast Asia5 |  | Other6    |   | Total  |  
|                                                     
|2008                                                  |  |                                          |   |                |   |       |   |                 |  |                 |  |           |   |        |   |       | 
|Net oil and gas revenue derived from proved reserves1 |  | 3,272                                    |   | 3,548          |   | 1,235 |   |                 |  | 1,413           |  | 418       |   | 9,886  |  
|                                                      |  |                                          |   |               
|Less:                                                 |  | Production costs                         |   | 594            |   | 1,009 |   | 280             |  |                 |  | 195       |   | 34     |   | 2,112 | 
|                                                      |  |                                          |   |               
|                                                      |  | Transportation                           |   | 68             |   | 52    |   | 35              |  |                 |  | 48        |   | 9      |   | 212   | 
|                                                      |  |                                          |   |               
|                                                      |  | Exploration and dry hole expense         |   | 444            |   | 148   |   | 141             |  |                 |  | 87        |   | 117    |   | 937   | 
|                                                      |  |                                          |   |               
|                                                      |  | Depreciation, depletion and amortization |   | 1,079          |   | 1,150 |   | 477             |  |                 |  | 251       |   | 61     |   | 3,018 | 
|                                                      |  |                                          |   |               
|                                                      |  | Tax expense                              |   | 270            |   | 658   |   | 224             |  |                 |  | 392       |   | 115    |   | 1,659 | 
|                                                     
|Results of operations                                 |  | 817                                      |   | 531            |   | 78    |   |                 |  | 440             |  | 82        |   | 1,948  |  
|                                                     

58TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS

---



Capitalized Costs Relating to Oil and Gas Activities

|                                |  |                                                      |  |                |  |        |  |                 |  |                 |  |           |  |        |  |        |  |        | 
|------------------------------- |  | ---------------------------------------------------- |  | -------------- |  | ------ |  | --------------- |  | --------------- |  | --------- |  | ------ |  | ------ |  | ------ | 
|Years ended December 31         |  | North America1                                       |  |                |  |        |  | Southeast Asia4 |  |                 |  |           | 
|(millions of C$)                |  | Canada                                               |  | US             |  | UK2    |  | Scandinavia3    |  | Indonesia       |  | Other SEA |  | Other5 |  | Total  | 
|                               
|2010                            |  |                                                      |  |                |  |        |  |                 |  |                 |  |           |  |        |  |        | 
|Proved properties               |  | 6,072                                                |  | 2,262          |  | 8,586  |  | 3,640           |  | 1,328           |  | 2,776     |  | 460    |  | 25,124 | 
|                                |  |                                                      |  |               
|Unproved properties             |  | 727                                                  |  | 1,210          |  | 352    |  | 868             |  | 189             |  | 610       |  | 674    |  | 4,630  | 
|                                |  |                                                      |  |               
|Incomplete wells and facilities |  | 23                                                   |  | 9              |  | 28     |  | 16              |  | 44              |  |          |  | 58     |  | 178    | 
|                               
|                                |  |                                                      |  | 6,822          |  | 3,481  |  | 8,966           |  | 4,524           |  | 1,561     |  | 3,386  |  | 1,192  |  | 29,932 | 
|                                |  |                                                      |  |               
|Less:                           |  | Accumulated depreciation, depletion and amortization |  | 2,391          |  | 761    |  | 4,615           |  | 1,852           |  | 523       |  | 1,352  |  | 204    |  | 11,698 | 
|                               
|Net capitalized costs           |  | 4,431                                                |  | 2,720          |  | 4,351  |  | 2,672           |  | 1,038           |  | 2,034     |  | 988    |  | 18,234 | 
|                               
|2009                            |  |                                                      |  |                |  |        |  |                 |  |                 |  |           |  |        |  |        | 
|Proved properties               |  | 10,933                                               |  | 1,351          |  | 8,603  |  | 3,313           |  | 1,275           |  | 2,635     |  | 410    |  | 28,520 | 
|                                |  |                                                      |  |               
|Unproved properties             |  | 856                                                  |  | 410            |  | 435    |  | 136             |  | 70              |  | 490       |  | 552    |  | 2,949  | 
|                                |  |                                                      |  |               
|Incomplete wells and facilities |  | 30                                                   |  | 10             |  | 9      |  | 7               |  | 2               |  | 56        |  | 78     |  | 192    | 
|                               
|                                |  |                                                      |  | 11,819         |  | 1,771  |  | 9,047           |  | 3,456           |  | 1,347     |  | 3,181  |  | 1,040  |  | 31,661 | 
|                                |  |                                                      |  |               
|Less:                           |  | Accumulated depreciation, depletion and amortization |  | 4,891          |  | 608    |  | 4,498           |  | 1,414           |  | 488       |  | 1,176  |  | 203    |  | 13,278 | 
|                               
|Net capitalized costs           |  | 6,928                                                |  | 1,163          |  | 4,549  |  | 2,042           |  | 859             |  | 2,005     |  | 837    |  | 18,383 | 
|                               
|                                |  |                                                      |  | North America1 |  | UK2    |  | Scandinavia3    |  | Southeast Asia4 |  | Other5    |  | Total  | 
|                               
|2008                            |  |                                                      |  |                |  |        |  |                 |  |                 |  |           |  |        |  |        | 
|Proved properties               |  |                                                      |  | 13,390         |  | 8,559  |  | 2,638           |  |                 |  | 3,934     |  | 731    |  | 29,252 | 
|                                |  |                                                      |  |               
|Unproved properties             |  | 774                                                  |  | 569            |  | 227    |  |                 |  | 522             |  | 650       |  | 2,742  | 
|                                |  |                                                      |  |               
|Incomplete wells and facilities |  | 218                                                  |  | 23             |  | 8      |  |                 |  | 71              |  | 42        |  | 362    | 
|                               
|                                |  |                                                      |  |                |  | 14,382 |  | 9,151           |  | 2,873           |  |           |  | 4,527  |  | 1,423  |  | 32,356 | 
|                                |  |                                                      |  |               
|Less:                           |  | Accumulated depreciation, depletion and amortization |  |                |  | 5,947  |  | 4,329           |  | 1,064           |  |           |  | 1,548  |  | 351    |  | 13,239 | 
|                               
|Net capitalized costs           |  | 8,435                                                |  | 4,822          |  | 1,809  |  |                 |  | 2,979           |  | 1,072     |  | 19,117 | 
|                               

TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS59

---



Costs Incurred in Oil and Gas Activities

|                           |  |                |   |                |   |       |  |                 |   |                 |  |           |  |        |  |       |  |       | 
|-------------------------- |  | -------------- | - | -------------- | - | ----- |  | --------------- | - | --------------- |  | --------- |  | ------ |  | ----- |  | ----- | 
|Years ended December 31    |  | North America1 |   |                |   |       |  | Southeast Asia4 |   |                 |  |           | 
|(millions of C$)           |  | Canada         |   | US             |   | UK2   |  | Scandinavia3    |   | Indonesia       |  | Other SEA |  | Other5 |  | Total | 
|                          
|2010                       |  |                |   |                |   |       |  |                 |   |                 |  |           |  |        |  |       | 
|Property acquisition costs |  |                |   |                |   |       |  |                 |   |                 |  |           |  |        |  |       | 
|                           |  | Proved         |   | 5              |   | 127   |  |                |   |                |  | 122       |  |       |  |      |  | 254   | 
|                           |  |                |   |               
|                           |  | Unproved       |   | 3              |   | 1,061 |  |                |   | 762             |  | 55        |  | 49     |  | 84    |  | 2,014 | 
|                           |  |                |   |               
|Exploration costs          |  | 186            |   | 19             |   | 96    |  | 89              |   | 73              |  | 167       |  | 260    |  | 890   | 
|                           |  |                |   |               
|Development costs          |  | 617            |   | 935            |   | 511   |  | 502             |   | 89              |  | 242       |  | 102    |  | 2,998 | 
|                           |  |                |   |               
|Asset retirement costs     |  | 54             |   | (8             | ) | 151   |  | (31             | ) | 6               |  | 10        |  | 5      |  | 187   | 
|                          
|Total costs incurred       |  | 865            |   | 2,134          |   | 758   |  | 1,322           |   | 345             |  | 468       |  | 451    |  | 6,343 | 
|                          
|2009                       |  |                |   |                |   |       |  |                 |   |                 |  |           |  |        |  |       | 
|Property acquisition costs |  |                |   |                |   |       |  |                 |   |                 |  |           |  |        |  |       | 
|                           |  | Proved         |   | 147            |   | 1     |  |                |   |                |  | 2         |  |       |  |      |  | 150   | 
|                           |  |                |   |               
|                           |  | Unproved       |   | 394            |   | 392   |  |                |   |                |  | 8         |  | 343    |  | 47    |  | 1,184 | 
|                           |  |                |   |               
|Exploration costs          |  | 339            |   | 188            |   | 149   |  | 157             |   | 28              |  | 195       |  | 217    |  | 1,273 | 
|                           |  |                |   |               
|Development costs          |  | 436            |   | 120            |   | 523   |  | 578             |   | 43              |  | 385       |  | 59     |  | 2,144 | 
|                           |  |                |   |               
|Asset retirement costs     |  | (17            | ) | 4              |   | 208   |  | 41              |   | 10              |  | 5         |  | 4      |  | 255   | 
|                          
|Total costs incurred       |  | 1,299          |   | 705            |   | 880   |  | 776             |   | 91              |  | 928       |  | 327    |  | 5,006 | 
|                          
|                           |  |                |   | North America1 |   | UK2   |  | Scandinavia3    |   | Southeast Asia4 |  | Other5    |  | Total  | 
|                          
|2008                       |  |                |   |                |   |       |  |                 |   |                 |  |           |  |        |  |       | 
|Property acquisition costs |  |                |   |                |   |       |  |                 |   |                 |  |           |  |        |  |       | 
|                           |  | Proved         |   | 71             |   |      |  |                |   |                 |  |          |  |       |  | 71    | 
|                           |  |                |   |               
|                           |  | Unproved       |   | 833            |   |      |  |                |   |                 |  | 6         |  | 430    |  | 1,269 | 
|                           |  |                |   |               
|Exploration costs          |  | 770            |   | 188            |   | 165   |  |                 |   | 303             |  | 159       |  | 1,585  | 
|                           |  |                |   |               
|Development costs          |  | 965            |   | 576            |   | 720   |  |                 |   | 452             |  | 33        |  | 2,746  | 
|                           |  |                |   |               
|Asset retirement costs     |  | 45             |   | 48             |   | 3     |  |                 |   | 9               |  | 1         |  | 106    | 
|                          
|Total costs incurred       |  | 2,684          |   | 812            |   | 888   |  |                 |   | 770             |  | 623       |  | 5,777  | 
|                          

60TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS

---



Standardized Measure of Discounted Future Net Cash Flows from Proved Reserves

Future net cash flows were calculated by applying the prescribed average annual prices to the Company's estimated future production of proved reserves and deducting estimates
of future development, asset retirement, production and transportation costs and income taxes. Future costs have been estimated based on existing economic and operating conditions. Future income taxes
have been estimated based on statutory tax rates enacted at year end. The present values of the estimated future cash flows were determined by applying a 10% discount rate prescribed by the Financial
Accounting Standards Board.

In
order to increase the comparability between companies, the standardized measure of discounted future net cash flows necessarily employs uniform assumptions that do not necessarily reflect
management's best
estimate of future events and anticipated outcomes. There are numerous uncertainties inherent in estimating quantities of proved reserves and projecting future rates of production and timing of
development expenditures. Accordingly, the Company does not believe that the standardized measure of discounted future net cash flows will be representative of actual future net cash flows and should
not be considered to represent the fair market value of the oil and gas properties. Actual future net cash flows will differ significantly from estimates due to, but not limited to,
the following:

TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS61

---



The
standardized measure of discounted future net cash flows was prepared using the following prices:

|                        |  |       |  |       |  |       | 
|----------------------- |  | ----- |  | ----- |  | ----- | 
|                        |  | 2010  |  | 2009  |  | 2008  | 
|                       
|Oil & liquids ($/bbl)   |  |       |  |       |  |       | 
|                        |  |      
|Canada (North America)1 |  | 64.49 |  | 55.74 |  | 37.11 | 
|                        |  |      
|US                      |  | 59.74 |  |      |  |      | 
|                        |  |      
|UK                      |  | 81.82 |  | 69.28 |  | 45.74 | 
|                        |  |      
|Scandinavia             |  | 81.03 |  | 68.62 |  | 44.64 | 
|                        |  |      
|Indonesia2              |  | 81.55 |  | 70.32 |  |      | 
|                        |  |      
|Southeast Asia          |  | 78.57 |  | 68.55 |  | 38.98 | 
|                        |  |      
|Other                   |  | 80.92 |  | 68.26 |  | 46.06 | 
|                       
|Total                   |  | 78.52 |  | 66.56 |  | 42.31 | 
|                       
|Natural gas ($/mcf)     |  |       |  |       |  |       | 
|                        |  |      
|Canada (North America)2 |  | 4.20  |  | 4.06  |  | 6.94  | 
|                        |  |      
|US                      |  | 4.79  |  | 4.54  |  |      | 
|                        |  |      
|UK                      |  | 4.74  |  | 4.23  |  | 10.36 | 
|                        |  |      
|Scandinavia             |  | 5.13  |  | 5.97  |  | 9.69  | 
|                        |  |      
|Indonesia2              |  | 6.85  |  | 5.50  |  |      | 
|                        |  |      
|Southeast Asia          |  | 5.85  |  | 5.11  |  | 3.47  | 
|                        |  |      
|Other                   |  |      |  | 7.30  |  | 1.72  | 
|                       
|Total                   |  | 5.41  |  | 4.74  |  | 5.36  | 
|                       

In order to derive the prices in the cash flow, the following benchmark prices and exchange rates were used:

|                      |  |        |  |        |  |        | 
|--------------------- |  | ------ |  | ------ |  | ------ | 
|                      |  | 2010   |  | 2009   |  | 2008   | 
|                     
|WTI (US$/bbl)         |  | 79.42  |  | 61.18  |  | 44.60  | 
|                      |  |       
|Dated Brent (US$/bbl) |  | 79.02  |  | 59.91  |  | 36.55  | 
|                      |  |       
|HH gas (US$/mmbtu)    |  | 4.37   |  | 3.82   |  | 5.71   | 
|                      |  |       
|AECO-C (C$/GJ)        |  | 3.82   |  | 3.58   |  | 6.02   | 
|                      |  |       
|US$/C$                |  | 0.9652 |  | 0.8687 |  | 0.8166 | 
|                      |  |       
|C$/UK£                |  | 1.6048 |  | 1.7907 |  | 1.7896 | 
|                     

62TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS

---





Discounted Future Net Cash Flows from Proved Reserves

|                                                            |                                  |               |        |        |        |         |         |                |        |           |        |            |        |       |      |         |         |  
|----------------------------------------------------------- | -------------------------------- | ------------- | ------ | ------ | ------ | ------- | ------- | -------------- | ------ | --------- | ------ | ---------- | ------ | ----- | ---- | ------- | ------- | -
|                                                            |                                  | North America |        |        |        |         |         | Southeast Asia |        |           |        |            |        |      
|Years ended December 31 (millions of C$)                    |                                  | Canada        |        | US     |        | UK      |         | Scandinavia    |        | Indonesia |        | Other SEA2 |        | Other |      | Total   |         |  
|                                                           
|2010                                                        |                                  |               |        |        |        |         |         |                |        |           |        |            |        |       |      |         |         |  
|                                                            |                                  |              
|Future cash inflows1                                        |                                  | 10,388        |        | 6,246  |        | 21,708  |         | 4,715          |        | 9,958     |        | 3,279      |        | 1,532 |      | 57,826  |         |  
|                                                            |                                  |              
|Future costs                                                |                                  |               |        |        |        |         |         |                |        |           |        |            |        |       |      |         |         |  
|                                                            |                                  |              
|                                                            | Transportation                   |               | (395   | )      | (195   | )       | (412    | )              | (172   | )         | (823   | )          |       |       | (50  | )       | (2,047  | )
|                                                            |                                  |              
|                                                            | Production                       |               | (3,938 | )      | (1,050 | )       | (11,434 | )              | (2,199 | )         | (1,143 | )          | (1,184 | )     | (278 | )       | (21,226 | )
|                                                            |                                  |              
|                                                            | Development and site restoration |               | (1,759 | )      | (1,335 | )       | (5,150  | )              | (883   | )         | (860   | )          | (491   | )     | (126 | )       | (10,604 | )
|                                                           
|Future costs                                                |                                  | (6,092        | )      | (2,580 | )      | (16,996 | )       | (3,254         | )      | (2,826    | )      | (1,675     | )      | (454  | )    | (33,877 | )       |  
|                                                           
|Future inflows before income taxes                          |                                  | 4,296         |        | 3,666  |        | 4,712   |         | 1,461          |        | 7,132     |        | 1,604      |        | 1,078 |      | 23,949  |         |  
|                                                            |                                  |              
|Future income & production revenue taxes                    |                                  | (1,039        | )      | (452   | )      | (2,888  | )       | (47            | )      | (2,947    | )      | (341       | )      | (359  | )    | (8,073  | )       |  
|                                                           
|Net cash flows                                              |                                  | 3,257         |        | 3,214  |        | 1,824   |         | 1,414          |        | 4,185     |        | 1,263      |        | 719   |      | 15,876  |         |  
|                                                           
|Less 10% annual discount for estimated timing of cash flows |                                  | (1,302        | )      | (1,647 | )      | (19     | )       | (210           | )      | (1,770    | )      | (230       | )      | (226  | )    | (5,404  | )       |  
|                                                           
|Discounted cash flows3                                      |                                  | 1,955         |        | 1,567  |        | 1,805   |         | 1,204          |        | 2,415     |        | 1,033      |        | 493   |      | 10,472  |         |  
|                                                           
|2009                                                        |                                  |               |        |        |        |         |         |                |        |           |        |            |        |       |      |         |         |  
|                                                            |                                  |              
|Future cash inflows1                                        |                                  | 13,357        |        | 2,581  |        | 18,534  |         | 4,390          |        | 8,322     |        | 3,231      |        | 1,456 |      | 51,871  |         |  
|                                                            |                                  |              
|Future costs                                                |                                  |               |        |        |        |         |         |                |        |           |        |            |        |       |      |         |         |  
|                                                            |                                  |              
|                                                            | Transportation                   |               | (473   | )      | (9     | )       | (370    | )              | (100   | )         | (837   | )          |       |       | (61  | )       | (1,850  | )
|                                                            |                                  |              
|                                                            | Production                       |               | (5,102 | )      | (563   | )       | (11,547 | )              | (2,138 | )         | (1,230 | )          | (1,211 | )     | (354 | )       | (22,145 | )
|                                                            |                                  |              
|                                                            | Development and site restoration |               | (2,340 | )      | (725   | )       | (5,487  | )              | (1,090 | )         | (658   | )          | (767   | )     | (229 | )       | (11,296 | )
|                                                           
|Future costs                                                |                                  | (7,915        | )      | (1,297 | )      | (17,404 | )       | (3,328         | )      | (2,725    | )      | (1,978     | )      | (644  | )    | (35,291 | )       |  
|                                                           
|Future inflows before income taxes                          |                                  | 5,442         |        | 1,284  |        | 1,130   |         | 1,062          |        | 5,597     |        | 1,253      |        | 812   |      | 16,580  |         |  
|                                                            |                                  |              
|Future income & production revenue taxes                    |                                  | (1,005        | )      |       |        | (511    | )       | 315            |        | (2,314    | )      | (153       | )      | (276  | )    | (3,944  | )       |  
|                                                           
|Net cash flows                                              |                                  | 4,437         |        | 1,284  |        | 619     |         | 1,377          |        | 3,283     |        | 1,100      |        | 536   |      | 12,636  |         |  
|                                                           
|Less 10% annual discount for estimated timing of cash flows |                                  | (1,923        | )      | (840   | )      | 434     |         | (254           | )      | (1,439    | )      | (225       | )      | (199  | )    | (4,446  | )       |  
|                                                           
|Discounted cash flows3                                      |                                  | 2,514         |        | 444    |        | 1,053   |         | 1,123          |        | 1,844     |        | 875        |        | 337   |      | 8,190   |         |  
|                                                           

|
|

|                                                            |                                  | North America2 |        | UK      |        | Scandinavia |        | Southeast Asia2 |        | Other |      | Total   |         |  
|----------------------------------------------------------- | -------------------------------- | -------------- | ------ | ------- | ------ | ----------- | ------ | --------------- | ------ | ----- | ---- | ------- | ------- | -
|                                                           
|2008                                                        |                                  |                |        |         |        |             |        |                 |        |       |      |         |         |  
|                                                            |                                  |               
|Future cash inflows1                                        |                                  | 20,889         |        | 10,840  |        | 3,513       |        | 7,635           |        | 1,600 |      | 44,477  |         |  
|                                                            |                                  |               
|Future costs                                                |                                  |                |        |         |        |             |        |                 |        |       |      |         |         |  
|                                                            |                                  |               
|                                                            | Transportation                   |                | (598   | )       | (686   | )           | (185   | )               | (686   | )     | (59  | )       | (2,214  | )
|                                                            |                                  |               
|                                                            | Production                       |                | (7,846 | )       | (5,897 | )           | (1,675 | )               | (2,431 | )     | (473 | )       | (18,322 | )
|                                                            |                                  |               
|                                                            | Development and site restoration |                | (3,255 | )       | (4,493 | )           | (1,170 | )               | (1,025 | )     | (274 | )       | (10,217 | )
|                                                           
|Future costs                                                |                                  | (11,699        | )      | (11,076 | )      | (3,030      | )      | (4,142          | )      | (806  | )    | (30,753 | )       |  
|                                                           
|Future inflows before income taxes                          |                                  | 9,190          |        | (236    | )      | 483         |        | 3,493           |        | 794   |      | 13,724  |         |  
|                                                            |                                  |               
|Future income & production revenue taxes                    |                                  | (1,765         | )      | 508     |        | 630         |        | (1,458          | )      | (374  | )    | (2,459  | )       |  
|                                                           
|Net cash flows                                              |                                  | 7,425          |        | 272     |        | 1,113       |        | 2,035           |        | 420   |      | 11,265  |         |  
|                                                           
|Less 10% annual discount for estimated timing of cash flows |                                  | (3,097         | )      | 212     |        | (250        | )      | (878            | )      | (135  | )    | (4,148  | )       |  
|                                                           
|Discounted cash flows3                                      |                                  | 4,328          |        | 484     |        | 863         |        | 1,157           |        | 285   |      | 7,117   |         |  
|                                                           

TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS63

---



Principal Sources of Changes in Discounted Cash Flows

|                                                             |  |        |   |        |   |         |   | 
|------------------------------------------------------------ |  | ------ | - | ------ | - | ------- | - | 
|Years ended December 31 (millions of C$)                     |  | 2010   |   | 2009   |   | 2008    |   | 
|                                                            
|Sales of oil and gas produced net of production costs        |  | (4,834 | ) | (4,280 | ) | (7,562  | ) | 
|                                                             |  |       
|Net change in prices                                         |  | 4,635  |   | 4,901  |   | (15,881 | ) | 
|                                                             |  |       
|Net change in transportation costs                           |  | (203   | ) | 223    |   | (73     | ) | 
|                                                             |  |       
|Net changes in production costs                              |  | 402    |   | (706   | ) | (1,049  | ) | 
|                                                             |  |       
|Net changes in future development and site restoration costs |  | (28    | ) | (710   | ) | (842    | ) | 
|                                                             |  |       
|Development costs incurred during year                       |  | 1,651  |   | 1,677  |   | 2,066   |   | 
|                                                             |  |       
|Extensions, discoveries and improved recovery                |  | 2,049  |   | 1,062  |   | 708     |   | 
|                                                             |  |       
|Revisions of previous reserves estimates                     |  | 700    |   | 406    |   | (141    | ) | 
|                                                             |  |       
|Net purchases                                                |  | 194    |   | 17     |   | 33      |   | 
|                                                             |  |       
|Net sales of reserves in place                               |  | (919   | ) | (807   | ) | (371    | ) | 
|                                                             |  |       
|Accretion of discount                                        |  | 1,132  |   | 832    |   | 2,839   |   | 
|                                                             |  |       
|Net change in taxes                                          |  | (2,526 | ) | (1,460 | ) | 9,930   |   | 
|                                                             |  |       
|Other                                                        |  | 29     |   | (82    | ) | 682     |   | 
|                                                            
|Net change                                                   |  | 2,282  |   | 1,073  |   | (9,661  | ) | 
|                                                            

64TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS

---



Continuity of Net Proved Reserves1

|                                      |  |         |   |         |   |        |   |             |   |           |   |                      |   |        |   |         |   | 
|------------------------------------- |  | ------- | - | ------- | - | ------ | - | ----------- | - | --------- | - | -------------------- | - | ------ | - | ------- | - | 
|                                      |  | Canada  |   | US      |   | UK     |   | Scandinavia |   | Indonesia |   | Other
Southeast
Asia |   | Other  |   | Total   |   | 
|                                     
|Oil and liquids(mmbbls)               |  |         |   |         |   |        |   |             |   |           |   |                      |   |        |   |         |   | 
|                                      |  |        
|Total proved                          |  |         |   |         |   |        |   |             |   |           |   |                      |   |        |   |         |   | 
|                                      |  |        
|Proved reserves at December 31, 2007  |  | 123.9   |   |        |   | 385.3  |   | 67.2        |   | 13.6      |   | 30.1                 |   | 27.6   |   | 647.7   |   | 
|                                      |  |        
|Discoveries, additions and extensions |  | 12.1    |   |        |   | 15.0   |   | 8.3         |   |          |   | (0.3                 | ) | (0.3   | ) | 34.8    |   | 
|                                      |  |        
|Purchase of reserves                  |  | 0.3     |   |        |   |       |   |            |   |          |   |                     |   |       |   | 0.3     |   | 
|                                      |  |        
|Sale of reserves                      |  | (0.3    | ) |        |   | (17.5  | ) | (1.6        | ) |          |   |                     |   |       |   | (19.4   | ) | 
|                                      |  |        
|Net revisions and transfers           |  | 7.4     |   |        |   | (133.2 | ) | (5.3        | ) | 4.2       |   | 2.0                  |   | 3.1    |   | (121.8  | ) | 
|                                      |  |        
|2008 Production                       |  | (11.9   | ) |        |   | (34.2  | ) | (12.0       | ) | (1.7      | ) | (4.7                 | ) | (4.1   | ) | (68.6   | ) | 
|                                     
|Proved reserves at December 31, 2008  |  | 131.5   |   |        |   | 215.4  |   | 56.6        |   | 16.1      |   | 27.1                 |   | 26.3   |   | 473.0   |   | 
|                                      |  |        
|Discoveries, additions and extensions |  | 4.0     |   |        |   | 5.2    |   | 1.1         |   | (0.5      | ) | 5.3                  |   | 6.5    |   | 21.6    |   | 
|                                      |  |        
|Purchase of reserves                  |  | 0.1     |   |        |   |       |   |            |   | 0.7       |   |                     |   |       |   | 0.8     |   | 
|                                      |  |        
|Sale of reserves                      |  | (39.0   | ) |        |   | (0.2   | ) | (4.0        | ) |          |   |                     |   | (3.7   | ) | (46.9   | ) | 
|                                      |  |        
|Net revisions and transfers           |  | 2.7     |   |        |   | 76.8   |   | 14.5        |   | (1.8      | ) | 3.8                  |   | (4.7   | ) | 91.3    |   | 
|                                      |  |        
|2009 Production                       |  | (9.9    | ) |        |   | (31.1  | ) | (12.3       | ) | (1.8      | ) | (7.6                 | ) | (3.4   | ) | (66.1   | ) | 
|                                     
|Proved reserves at December 31, 2009  |  | 89.4    |   |        |   | 266.1  |   | 55.9        |   | 12.7      |   | 28.6                 |   | 21.0   |   | 473.7   |   | 
|                                      |  |        
|Discoveries, additions and extensions |  | 4.7     |   | 2.5     |   | 6.8    |   | 9.7         |   | 1.4       |   | 2.5                  |   | 1.0    |   | 28.6    |   | 
|                                      |  |        
|Purchase of reserves                  |  |        |   | 0.9     |   |       |   |            |   | 1.5       |   |                     |   |       |   | 2.4     |   | 
|                                      |  |        
|Sale of reserves                      |  | (15.1   | ) | (0.2    | ) |       |   |            |   |          |   |                     |   | (0.5   | ) | (15.8   | ) | 
|                                      |  |        
|Net revisions and transfers           |  | (2.4    | ) | 0.1     |   | 18.0   |   | 1.8         |   | (0.8      | ) | 0.6                  |   | (0.2   | ) | 17.1    |   | 
|                                      |  |        
|2010 Production                       |  | (6.6    | ) | (0.1    | ) | (27.0  | ) | (14.2       | ) | (2.0      | ) | (6.1                 | ) | (2.4   | ) | (58.4   | ) | 
|                                     
|Proved reserves at December 31, 2010  |  | 70.0    |   | 3.2     |   | 263.9  |   | 53.2        |   | 12.8      |   | 25.6                 |   | 18.9   |   | 447.6   |   | 
|                                     
|Proved developed                      |  |         |   |         |   |        |   |             |   |           |   |                      |   |        |   |         |   | 
|                                      |  |        
|December 31, 2007                     |  | 118.9   |   |        |   | 342.6  |   | 25.6        |   | 10.7      |   | 18.9                 |   | 25.4   |   | 542.1   |   | 
|                                      |  |        
|December 31, 2008                     |  | 122.0   |   |        |   | 172.0  |   | 24.8        |   | 13.5      |   | 17.7                 |   | 20.2   |   | 370.2   |   | 
|                                      |  |        
|December 31, 2009                     |  | 82.1    |   |        |   | 196.0  |   | 26.1        |   | 11.0      |   | 21.2                 |   | 13.0   |   | 349.4   |   | 
|                                      |  |        
|December 31, 2010                     |  | 65.6    |   | 0.7     |   | 210.6  |   | 21.6        |   | 8.6       |   | 18.6                 |   | 9.8    |   | 335.5   |   | 
|                                     
|Natural gas(bcf)                      |  |         |   |         |   |        |   |             |   |           |   |                      |   |        |   |         |   | 
|                                      |  |        
|Total proved                          |  |         |   |         |   |        |   |             |   |           |   |                      |   |        |   |         |   | 
|                                      |  |        
|Proved reserves at December 31, 2007  |  | 2,087.1 |   | 109.0   |   | 100.2  |   | 78.9        |   | 1,359.0   |   | 245.5                |   | 223.3  |   | 4,203.0 |   | 
|                                      |  |        
|Discoveries, additions and extensions |  | 249.7   |   | 29.4    |   | 12.4   |   | 12.1        |   | (30.3     | ) | 20.2                 |   | 0.4    |   | 293.9   |   | 
|                                      |  |        
|Purchase of reserves                  |  | 11.9    |   | 2.4     |   |       |   |            |   |          |   |                     |   |       |   | 14.3    |   | 
|                                      |  |        
|Sale of reserves                      |  | (55.2   | ) |        |   |       |   |            |   |          |   |                     |   |       |   | (55.2   | ) | 
|                                      |  |        
|Net revisions and transfers           |  | 113.3   |   | 1.3     |   | (3.2   | ) | 17.8        |   | 143.0     |   | 42.8                 |   | (0.7   | ) | 314.3   |   | 
|                                      |  |        
|2008 Production                       |  | (237.6  | ) | (22.9   | ) | (13.8  | ) | (6.9        | ) | (64.0     | ) | (18.8                | ) | (0.2   | ) | (364.2  | ) | 
|                                     
|Proved reserves at December 31, 2008  |  | 2,169.2 |   | 119.2   |   | 95.6   |   | 101.9       |   | 1,407.7   |   | 289.7                |   | 222.8  |   | 4,406.1 |   | 
|                                      |  |        
|Discoveries, additions and extensions |  | 185.6   |   | 474.6   |   |       |   | (0.5        | ) | 62.8      |   | 25.3                 |   |       |   | 747.8   |   | 
|                                      |  |        
|Purchase of reserves                  |  | 14.2    |   |        |   |       |   |            |   | 7.5       |   |                     |   |       |   | 21.7    |   | 
|                                      |  |        
|Sale of reserves                      |  | (115.8  | ) | (1.4    | ) | (67.0  | ) |            |   |          |   |                     |   | (220.0 | ) | (404.2  | ) | 
|                                      |  |        
|Net revisions and transfers           |  | 28.2    |   |        |   | 2.9    |   | 12.7        |   | (19.5     | ) | (33.3                | ) | (1.0   | ) | (10.0   | ) | 
|                                      |  |        
|2009 Production                       |  | (238.4  | ) | (26.2   | ) | (7.0   | ) | (21.1       | ) | (84.4     | ) | (20.3                | ) | (0.1   | ) | (397.5  | ) | 
|                                     
|Proved reserves at December 31, 2009  |  | 2,043.0 |   | 566.2   |   | 24.5   |   | 93.0        |   | 1,374.1   |   | 261.4                |   | 1.7    |   | 4,363.9 |   | 
|                                      |  |        
|Discoveries, additions and extensions |  | 263.7   |   | 738.6   |   | 0.1    |   | 6.7         |   | 8.1       |   | (22.6                | ) |       |   | 994.6   |   | 
|                                      |  |        
|Purchase of reserves                  |  |        |   | 17.5    |   |       |   |            |   | 42.4      |   |                     |   |       |   | 59.9    |   | 
|                                      |  |        
|Sale of reserves                      |  | (772.5  | ) | (5.8    | ) |       |   |            |   |          |   |                     |   | (1.6   | ) | (779.9  | ) | 
|                                      |  |        
|Net revisions and transfers           |  | 11.2    |   | 10.3    |   | 4.9    |   | 12.1        |   | (57.2     | ) | 14.3                 |   | (0.1   | ) | (4.5    | ) | 
|                                      |  |        
|2010 Production                       |  | (190.9  | ) | (68.9   | ) | (5.7   | ) | (32.2       | ) | (98.2     | ) | (27.3                | ) |       |   | (423.2  | ) | 
|                                     
|Proved reserves at December 31, 2010  |  | 1,354.5 |   | 1,257.9 |   | 23.8   |   | 79.6        |   | 1,269.2   |   | 225.8                |   |       |   | 4,210.8 |   | 
|                                     
|Proved developed                      |  |         |   |         |   |        |   |             |   |           |   |                      |   |        |   |         |   | 
|                                      |  |        
|December 31, 2007                     |  | 1,725.0 |   | 95.7    |   | 86.7   |   | 7.0         |   | 811.1     |   | 44.4                 |   | 1.0    |   | 2,770.9 |   | 
|                                      |  |        
|December 31, 2008                     |  | 1,785.8 |   | 101.8   |   | 65.5   |   | 99.0        |   | 1,022.2   |   | 149.0                |   | 1.2    |   | 3,224.5 |   | 
|                                      |  |        
|December 31, 2009                     |  | 1,663.5 |   | 171.1   |   | 22.4   |   | 91.2        |   | 915.2     |   | 225.5                |   | 0.8    |   | 3,089.7 |   | 
|                                      |  |        
|December 31, 2010                     |  | 1,011.4 |   | 584.9   |   | 22.0   |   | 73.3        |   | 763.7     |   | 187.2                |   |       |   | 2,642.5 |   | 
|                                     

TALISMAN ENERGYCONSOLIDATED FINANCIAL
STATEMENTS65

---